<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1999
REGISTRATION NO. 333-73261
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
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>
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 ST. 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. / /
------------------------------
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 MAY 26, 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
3,333,000 SHARES
[LOGO]
NETRADIO CORPORATION
COMMON STOCK
------------------
This is the initial public offering of our common stock. We are offering
3,333,000 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 499,950
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.
------------------------
EVEREN SECURITIES, INC. LEGG MASON WOOD WALKER
INCORPORATED
, 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
Use of Proceeds......................................................................................... 17
Dividend Policy......................................................................................... 17
Capitalization.......................................................................................... 17
Dilution................................................................................................ 18
Selected Financial Data................................................................................. 19
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 20
Our Business............................................................................................ 25
Management.............................................................................................. 38
Related Party Transactions.............................................................................. 43
Principal Shareholders.................................................................................. 46
Description of Capital Stock............................................................................ 47
Shares Eligible for Future Sale......................................................................... 48
Underwriting............................................................................................ 50
Legal Matters........................................................................................... 52
Experts................................................................................................. 52
Where You Can Get More Information...................................................................... 52
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.
------------------------
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed.
Important factors that could cause our actual results to differ materially from
projections include, but are not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Our Business," as well as those discussed elsewhere in this
prospectus. We are not obligated to revise or update these forward-looking
statements to reflect new events or circumstances.
------------------------
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 DEALER'S 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
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 March 1999 1,138,933 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 March 1999 the average time a
visitor spent listening to any of our audio channels was approximately 18
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 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.
- 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.
4
<PAGE>
- CREATE STRONG COMMUNITIES OF SIMILAR INTERESTS 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
major record labels, RealNetworks, AT&T and cable Internet service
providers, 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 3,333,000 shares
Corporation................................
Common stock outstanding after the 9,805,500 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 May 25, 1999; however, it reflects ValueVision's
purchase of 550,000 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:
- 2,000,000 shares reserved for issuance upon the exercise of options under
our stock option plan, consisting, as of May 25, 1999, of: (a) 1,180,650
options outstanding at a weighted average exercise price of $2.88 per
share, (b) 22,500 additional options granted in May 1999 at an exercise
price equal to the initial public offering price, and (c) 796,850 shares
reserved for future issuance under the plan. Please see
"Management--Benefit Plans."
- 191,648 shares reserved for issuance upon the exercise of warrants. Please
see "Underwriting."
5
<PAGE>
SUMMARY FINANCIAL 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>
NET RADIO NEVADA NETRADIO
--------------------------- --------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 21, THREE MONTHS ENDED
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998 1998 1999
------------ ------------- ------------ ------------ ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product sales.............. $ -- $ -- $ -- $ 50 $ -- $ 96
Internet advertising....... -- -- -- 205 47 76
Miscellaneous.............. 321 168 163 -- -- --
------------ ----- ------------ ------------ ---------- ----------
Total net revenues....... 321 168 163 255 47 172
Gross profit................. 321 168 146 190 39 80
Loss from operations......... (2,261 ) (737 ) (1,955 ) (3,952 ) (764) (2,628)
Net loss..................... $ (2,254 ) $ (754 ) $ (1,987 ) $(3,977 ) $(771) $(2,640)
Loss per share--basic and
diluted.................... $ (.67 ) $ (.13) $ (.45)
Weighted average shares
outstanding(1)............. 5,899,167 5,887,500 5,922,500
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
PRO AS
FORMA(2) ADJUSTED(3)
----------- ------------
(IN
ACTUAL THOUSANDS)
-------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 72 $ 572 $ 37,423
Working capital (deficit)............... (648 ) (148 ) 36,703
Total assets............................ 2,958 3,458 39,742
Long term obligations, less current
portion............................... 6,947 1,712 1,712
Total shareholders' equity (deficit).... $(5,590) $ 145 36,429
</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 550,000 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 3,333,000 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 and reclassifying previously expensed 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 million. We had an accumulated
deficit of approximately $8.4 million during the period from March 21, 1997 to
March 31, 1999. At March 31, 1999, we owed approximately $6.8 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,
7
<PAGE>
- technical difficulties or system downtime,
- 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 Corp. 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
8
<PAGE>
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.
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:
- online music providers, such as broadcast.com, Spinner.com and Imagine
Radio.com, who broadcast music and information;
- online retail competitors, such as Amazon.com, N2K, CDNow, K-Tel and
getmusic.com, 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! Inc. recently announced its
intention to acquire broadcast.com inc, and Viacom Inc. entered into an
agreement to acquire Imagine Radio and committed to invest up to $150 million.
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
capability over the Internet. In the event that we do not successfully deploy
technology in a timely manner or an alternative technology emerges, we would
likely be required to expend significant resources to deploy that alternative
technology. This could materially damage our business during the period in which
we attempted such deployment. One recent technological development is MP3, which
generally permits a user to store and replay, either on a personal computer or
specially-designed MP3 device, music selected by the user. The acceptance of
this technology could dramatically change the structure and competitive dynamic
of the market for sales of pre-recorded music over the Internet because MP3
technology permits immediate downloading of music and eliminates product
shipping and handling. There can be no assurance that we will be able to respond
quickly, cost effectively or sufficiently to this or other technological
developments. Failing to effectively respond to technological developments could
materially damage our business.
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
9
<PAGE>
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.
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, Inc. 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
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<PAGE>
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.
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 largely depends on the efficient and uninterrupted operation of
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 ARMS-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."
11
<PAGE>
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.
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
12
<PAGE>
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, could require us to pay additional
licensing fees for our broadcasts. We believe, however, that our broadcasts are
exempt from such fees under this statute. No assurance, however, can be given
that our belief is correct, particularly because this law has not yet been
sufficiently interpreted. If this statute is interpreted in a manner adverse to
us, our business could be materially damaged.
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 three months ended March 31, 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 presets
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
13
<PAGE>
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 May 1, 1999, we expanded from 22 to 45
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 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, 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
14
<PAGE>
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 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 3 classes to serve
staggered 3-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 66% of our
outstanding common stock after this offering, 63% 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
After this offering, the 3,333,000 shares of our common stock sold in this
offering will be freely tradeable. Beginning 180 days after the date of this
offering, approximately 6,472,500 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 5,922,500 shares will be
subject to volume and other resale restrictions. With respect to our stock
option plan, outstanding options to purchase 386,616 shares will be vested on
December 1, 1999. 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."
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 IN FOREIGN JURISDICTIONS, OUR BUSINESS
COULD BE MATERIALLY DAMAGED
We only collect sales and other taxes 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. 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.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be $36,284,280, or
$41,863,722 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 and capital expenditures. 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 March 31, 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 550,000 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 1,202,250 shares of common stock
reserved for issuance upon exercise of options outstanding on March 31, 1999,
with a weighted average exercise price of $2.88 per share, and 797,750 shares of
common stock reserved for future grants under our stock option plan as of March
31, 1999. After March 31, 1999, we granted options to purchase an additional
22,500 shares of common stock at an exercise price equal to the initial public
offering price.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long term debt................................................................ $ 6,833 $ 1,598 $ 1,598
Capital lease obligations, less current portion............................... 114 114 114
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 5,922,500 shares
issued and outstanding, actual; 6,472,500 shares issued and outstanding,
pro forma; 9,805,500 shares issued and outstanding, pro forma as
adjusted.................................................................. 3,014 8,749 45,033
Accumulated deficit........................................................... (8,604) (8,604) (8,604)
--------- ----------- -----------
Total shareholders' equity (deficit).......................................... (5,590) 145 36,429
--------- ----------- -----------
Total capitalization.......................................................... $ 1,357 $ 1,857 $ 38,141
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
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DILUTION
Our net tangible book value as of March 31, 1999, after giving effect to the
conversion of $5,234,840 in debt owed to Navarre into equity and ValueVision's
purchase of 550,000 shares of common stock for $500,000, both occurring at the
closing of this offering, was $(276,367) or $(.04) 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 3,333,000 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 March 31, 1999 would have been
$36,007,913 or $3.67 per share. This represents an immediate increase in net
tangible book value of $3.71 per share to existing shareholders and an immediate
dilution of $8.33 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
March 31, 1999...................................... $ (.04)
Increase per share attributable to new investors...... $ 3.71
---------
Pro forma as adjusted net tangible book value per share
after this offering................................... $ 3.67
---------
Dilution per share to new investors..................... $ 8.33
---------
---------
</TABLE>
The following table summarizes on a pro forma basis after giving effect to
this offering, as of March 31, 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
March 31, 1999.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).......................... 6,472,500 66% $ 6,800,440 15% $ 1.05
New investors(2).................................. 3,333,000 34% $ 39,996,000 85% $ 12.00
---------- --- ------------- ---
Total............................................. 9,805,500 100% $ 46,796,440 100%
---------- --- ------------- ---
---------- --- ------------- ---
</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 550,000 shares
of common stock for $500,000 at the closing of this offering and the
issuance of 40,000 shares of common stock for $65,600 in September 1998.
(2) If the over-allotment option is exercised in full, the number of shares of
common stock held by new investors will increase to 3,832,950 shares, or
37.2% of the total shares of common stock outstanding after this offering.
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<PAGE>
SELECTED FINANCIAL 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 ending 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 three months ended March 31, 1998 and 1999 and the
balance sheet data at March 31, 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 three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
full year.
<TABLE>
<CAPTION>
NETRADIO
---------------------------------------------
NET RADIO NEVADA THREE
------------------------------------------------------- PERIOD FROM MONTHS
PERIOD FROM MARCH 21, 1997 ENDED
PERIOD FROM INCEPTION YEAR ENDED JANUARY 1, 1997 THROUGH YEAR ENDED MARCH 31,
(NOVEMBER 1, 1995) TO DECEMBER 31, THROUGH MARCH 20, DECEMBER 31, DECEMBER 31, -----------
DECEMBER 31, 1995 1996 1997 1997 1998 1998
--------------------- ------------- ----------------- --------------- --------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenues:
Product sales...... $ -- $ -- $ -- $ -- $ 50 $ --
Internet
advertising...... -- -- -- -- 205 47
Miscellaneous...... 22 321 168 163 -- --
----- ------------- ------ --------------- --------------- -----------
Total net
revenues....... 22 321 168 163 255 47
Cost of revenues..... -- -- -- 17 65 8
----- ------------- ------ --------------- --------------- -----------
Gross profit......... 22 321 168 146 190 39
Operating expenses:
Operations and
technical
support.......... -- -- -- 672 686 284
Sales and
marketing........ 12 427 53 161 670 83
General and
administrative... 82 2,154 852 1,268 2,786 436
----- ------------- ------ --------------- --------------- -----------
Total operating
expenses....... 94 2,581 905 2,101 4,142 803
----- ------------- ------ --------------- --------------- -----------
Loss from
operations......... (72) (2,260) (737) (1,955) (3,952) (764)
Net loss............. $ (74) $ (2,254) $ (754) $ (1,987) $ (3,977) $ (771)
----- ------------- ------ --------------- --------------- -----------
----- ------------- ------ --------------- --------------- -----------
Loss per share--basic
and diluted........ $ (.67) $ (.13)
Weighted average
shares
outstanding(1)..... 5,899,167 5,882,500
<CAPTION>
1999
-----------
<S> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenues:
Product sales...... $ 96
Internet
advertising...... 76
Miscellaneous...... --
-----------
Total net
revenues....... 172
Cost of revenues..... 92
-----------
Gross profit......... 80
Operating expenses:
Operations and
technical
support.......... 696
Sales and
marketing........ 373
General and
administrative... 1,639
-----------
Total operating
expenses....... 2,708
-----------
Loss from
operations......... (2,628)
Net loss............. $ (2,640)
-----------
-----------
Loss per share--basic
and diluted........ $ (.45)
Weighted average
shares
outstanding(1)..... 5,922,500
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, PRO FORMA
------------------------------------------ ----------- MARCH 31,
1995 1996 1997 1998 1999 1999(2)
--------- --------- --------- --------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 66 $ 91 $ 4 $ 51 $ 72 572
Working capital (deficit).................................... 57 (828) (930) (176) (648) (148)
Total assets................................................. 206 223 2,395 2,740 2,958 3,458
Long term obligations, less current portion.................. 111 486 1,389 5,363 6,947 1,712
Total shareholders' equity (deficit)......................... 37 (537) 13 (3,830) (5,590) 145
</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 550,000 shares of common stock
for $500,000, both occurring at the closing of this offering. Please see
"Related Party Transactions."
19
<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 March 31, 1999,
we had insignificant revenues and were primarily engaged 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 which are recognized over the
term of the promotion. We derive audio advertising revenues from the sale of
advertising spots, which are recognized when the audio advertisement is
broadcast.
In May 1996, Navarre acquired fifty percent of the stock of our predecessor,
Net Radio Nevada. On March 21, 1997, Navarre acquired the remaining fifty
percent. 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 March 31, 1999 only reflects losses incurred since March
21, 1997. We have incurred significant losses since our inception. Our
accumulated deficit of approximately $8.4 million reflects our operating results
during the period from March 21, 1997 to March 31, 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 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 profit margin and operating expenses as a
percentage of total net revenues, are not necessarily meaningful and should not
be relied upon as indications of our future performance.
20
<PAGE>
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET REVENUES
Net revenues increased to $171,799 for the three months ended March 31, 1999
from $47,057 for the three months ended March 31, 1998, and consisted of product
sales and Internet advertising revenues.
PRODUCT SALES. Product sales for the three months ended March 31, 1999
consisted of $95,497 of sales of audio merchandise, including shipping and
handling costs, compared with no product sales for the three months ended March
31, 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 three months
ended March 31, 1999 were $76,302, compared to $47,057 for the three months
ended March 31, 1998. Internet advertising revenues reflect audio and banner
advertising sales as well as promotional advertising revenues.
COST OF REVENUES
Cost of revenues include the cost of audio merchandise that we sell,
including fulfillment costs through third party vendors who 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
$91,546 for the three months ended March 31, 1999 from $7,694 for the three
months ended March 31, 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
consisted 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 $695,795
for the three months ended March 31, 1999 compared to $283,978 for the three
months ended March 31, 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 consisted primarily of
personnel expenses associated with Internet advertising and the marketing of our
Web site. Sales and marketing expenses were $373,252 for the three months ended
March 31, 1999, compared to $82,785 for the three months ended March 31, 1998.
The increase in sales and marketing expenses was due primarily to the growth in
our sales force and marketing staff and usage of $150,000 in advertising
contributed by ValueVision.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consisted
primarily of administrative personnel expenses, professional fees, depreciation
and amortization, and expenditures for facility costs. General and
administrative expenses were $1,639,545 for the three months ended March 31,
1999 compared to $436,440 for the three months ended March 31, 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.
21
<PAGE>
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, and consisted of product sales, Internet advertising revenues
and miscellaneous 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 primarily due to growth in our
sales force and marketing staff and increased advertising expenses. The decrease
in sales and marketing expenses in 1997 compared to 1996 was primarily due 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 re-deployment of our resources to the development of
our Web site operations.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of equity securities and advances from Navarre.
22
<PAGE>
Net cash used in operating activities was $1,046,840 and $457,817 for the
three months ended March 31, 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 three months ended March
31, 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. Net cash used in operating activities for the three months ended March
31, 1999 and for the years 1998, 1997 and 1996 was primarily composed of our net
losses offset in part by depreciation and amortization.
The growth in accounts receivable to $78,197 at March 31, 1999 from $14,552
at March 31, 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 three
months ended March 31, 1999. The accounts receivable balances at March 31, 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 March 31, 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 accounts payable to $1,311,669 at March 31, 1999 from
$791,713 at March 31, 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 three months ended March 31,
1999 and 1998 was $184,395 and $0, 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 primarily related to purchases
of property and equipment.
We generated net cash from financing activities of $1,252,825 and $465,068
for the three months ended March 31, 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 three months
ended March 31, 1999 was generated from $1,598,144 in advances from Navarre. Net
cash from financing activities in 1998 was primarily generated 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 550,000
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 would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to those of our common stock.
23
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 1999, we had available net operating loss carryforwards
totaling approximately $5,600,000 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.
24
<PAGE>
OUR BUSINESS
OVERVIEW
NETRADIO
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 1,138,933 different users, each of whom was counted
only once, listened to our 120 music and news channels in March 1999. I/PRO has
also estimated that, during March 1999, the average time a visitor spent
listening to any of our channels was approximately 18 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, an independent
Internet market research firm, expects the number of Internet users to grow 36%
per year from approximately 69 million worldwide in 1997 to 320 million by the
end of 2002. In 1997, 78 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 515 million, a compound annual growth rate of 46%. 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.
25
<PAGE>
Forrester Research estimates that United States 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 such 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>
26
<PAGE>
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. Therefore, Internet audio
quality is currently not 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 its 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 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 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
27
<PAGE>
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 that generate revenue through commerce and
advertising. The key elements of our strategy are:
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 & roll. Within the jazz genre, for example, we have created 16 music
channels, each dedicated to a different type of jazz music. The jazz music
channels include Blues, Cafe Jazz, Quiet Storm, Jazz Rock, Smooth Jazz, Classic
Crooners, New Blues, Lounge, Horns, Blues Revival, Big Band, Acid Jazz, Divas,
Swing, Rockin' Blues 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,
several of our channels are pre-sets on RealNetwork's 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. Since May 1997,
over 17,000 Web sites have joined our program.
CREATE STRONG COMMUNITIES OF SIMILAR INTERESTS 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 spent on our Web site. Our programming is divided by
music genre into 14 communities of similar interests, or COSIs:
<TABLE>
<S> <C>
BroadbandPoint KidzRadio
Cafe Jazz Modern Rock
Christian Hits New Age
Classical News and Information
Country Pop Hits
Dance/Urban Vintage Rock
Electronica World Music
</TABLE>
Each COSI targets a wide audience with similar musical preferences. Within
each COSI we generally have between 7 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:
- RECORD LABELS. Record labels partner with us for artist and title
promotions. These promotions allow the labels to specifically promote
individual artists in a targeted environment.
- INTERNET TRAFFIC AND TECHNOLOGY COMPANIES. We have an agreement with
RealNetworks, who licenses the use of its software to play our audio
streams and whose audio player includes presets to several of our
channels. We recently entered into an agreement with AT&T, under which we
will lease additional bandwidth and secure additional technical support.
We are also developing technology to enable our listeners to download
authorized music tracks using
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AT&T's proprietary a2b music player. In addition, we have agreements with
leading cable ISPs such as @Home and MediaOne, who carry 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, software 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 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 RealNetwork 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 14 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:
- 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.
- 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.
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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 that 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 stream channel
featuring music from NetRadio's most popular music channels, and requires a
high-speed connection.
NetRadio's channels as of May 1, 1999, grouped by COSI, are listed below.
BROADBANDPOINT
Includes selections such
as Country, Pop Hits,
Vintage Rock, Modern
Rock, Maestro, Cafe
Jazz, Blues and 60's
Country.
INFORMATION CHANNELS
NetRadio Network
Today
CDPoint Update
CAFE JAZZ & BLUES
MUSIC CHANNELS
Cafe Jazz
Quiet Storm
Blues
New Blues
Smooth Jazz
Classic Crooners
Lounge
Horns
Blues Revival
Big Band
Acid Jazz
Jazz Rock
Divas
Swing
Rockin' Blues
Zydeco
INFORMATION CHANNELS
Jazz Notes
NetRadio Network Today
CDPoint Update
CHRISTIAN HITS
MUSIC CHANNELS
CN Hits
Gospel
Adult Contemporary
Praise & Worship
Christian Rock
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
CLASSICAL
MUSIC CHANNELS
Maestro
Symphony
Quiet Classics
Opera
Chant
Baroque & Before
Chamber Music
Piano
INFORMATION CHANNELS
Classical Notes
NetRadio Network Today
CDPoint Update
COUNTRY
MUSIC CHANNELS
Route 1 Country
Bluegrass
Alt. Country
60's Country
70's Country
Country Divas
INFORMATION CHANNELS
Country Music News
NetRadio Network Today
CDPoint Update
DANCE/URBAN
MUSIC CHANNELS
Acid Jazz
Ambient
Bhangra
Big Beat/Breaks
Club Mix
Disco Dance
Drum & Bass
Experimental
Electronica
Funk
Hip Hop
House
House Hits
Industrial
Latin
Lounge
Mixed Rhythms
Mix Masters
Rap
Punk
Ska
Solid Gold Soul
Spring Break
Techno
Trip Hop
Urban
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
ELECTRONICA
MUSIC CHANNELS
Ambient
Bhangra
D J Mix
Drum & Bass
Dub Electric
Electronica
Electronic World
Hardcore
Industrial
Jungle Breaks
Musical Starstreams
New Age
Techno
Tech House
Trance/Acid
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
KIDZRADIO
MUSIC CHANNELS
KidzHits
KidzNews
INFORMATION CHANNEL
NetRadio Network Today
CDPoint Today
MODERN ROCK
MUSIC CHANNELS
The 'X'
Industrial
Adult Alternative
New Wave
Punk
Dot.Comedy
Ska
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
NEW AGE
MUSIC CHANNELS
Acoustic
Ambient
Celtic
Electronic World
Folk
Hearts of Space
Musical Starstreams
Nature Sounds
New Age
Soundtracks
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
NEWS & INFORMATION
NEWS CHANNELS
National News
World News
Infobahn News
Business News
Movie News
Showbiz
NetRadio Network
KidzNews
National News
This Is True...Really
News
NetRadio Network Today
Health File
World News
Info Junkie
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
Grammy
Pop Hits
Lite Hits
Disco Fever
Dot.Comedy
Fab 60's
Groovin' 70's
80's Hits
Party Hits
Showtunes
Solid Gold Soul
Teen Scene
INFORMATION CHANNELS
Pop Hits News
NetRadio Network Today
CDPoint Update
VINTAGE ROCK
MUSIC CHANNELS
British Invasion
Guitar Heroes
Hard Rock
Jazz Rock
Psychedelic Rock
Party Rock
Pre-Fab 60's
Progressive Rock
Rockin' Blues
Rockin' Rhythm 50's
Vintage Reggae
Vintage Rock
Vintage Surf
Dot.Comedy
INFORMATION CHANNELS
This Day In Rock History
NetRadio Network Today
CDPoint Update
WORLD MUSIC
MUSIC CHANNELS
Ambient World
Celtic
Earth Beat
Electronica
Hawaiian
Latin & Salsa
Musical Starstreams
Native American
Nature Sounds
New Age
Reggae
World Beat
INFORMATION CHANNELS
NetRadio Network Today
CDPoint Update
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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 225,000 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 through the
NetRadio Web site, NetRadio affiliates' Web sites, a favorite COSI or through
NetCompanion.
Once in CDPoint, customers can search for music by artist or title, browse
categories or featured titles, read reviews, participate in promotions, respond
to advertising or check the status of their order. 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 basket prior to completing
their purchase.
We accept Visa and MasterCard 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 5 to 10
business days. UPS or the United States Postal 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. We also disclose our privacy policy.
Our servers record where visitors to our Web site originate, where they go,
what they listen to and what advertising they click upon. 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 our Web site
design and navigation 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.
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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 who 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, videos and software. To capture what we believe will be
growing consumer demand for DVDs, we expect to launch an online retail store
called DVDPoint in late-1999. We also plan to launch an online video store
called MoviePoint, and an online software store called SoftwarePoint.
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: Windham Hill, Arista, RCA, CDM, CMC, Warner Bros, Nonesuch,
Elektra, Atlantic, Rhino, Capitol, Virgin, Blue Note, EMI/Angel, Nettwork, EMD
Distribution, Polygram, Motown, Mercury, A&M, Moonshine, Relativity, MED, AWA,
MCA, Dreamworks, Decca, Interscope, GRP, RLM, Caroline, Beacon, Brentwood, DA
Music, Damian, Durkin Hayes, Forbidden, J Bird, Jellybean, Leviathan, Macola,
Mission, Public Music, Solid Disc, Un-D-Nyable, Unison, V-Wax, Van Richter and
Vesper Alley.
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:
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- 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 several 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 7 information channels to the Daily Briefing.
- AT&T Corporation. We have entered into an agreement with AT&T under which
AT&T will provide additional bandwidth, round-the-clock technical support
and redundant back-up servers, to meet our increasing listener demand. We
are also developing technology to enable our listeners to download
authorized music tracks using AT&T's proprietary a2b music player.
- MediaOne. We have created a co-branded Web site with MediaOne, the
broadband services arm of MediaOne Group. MediaOne is a leading provider
of cable modem (broadband), telephone and wireless communications
services. Some of the MediaOne Web sites contain links to NetRadio that
enable MediaOne subscribers to listen to our programming through a higher
quality connection than is normally available through a standard telephone
line.
- @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 5-10% 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.
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
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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 DSL, cable modem and broadband
technologies. Audio clarity can vary with speed of transmission. Audio streaming
differs from traditional radio broadcasting in its ability to be transmitted to
a worldwide audience. Real Networks 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 UNIX operating system platform. Our audio
content is programmed and housed in an internal computer network. To provide
bandwidth infrastructure, we obtain bandwidth from AT&T. NetRadio's audio stream
is encoded to the Real Audio format on Windows NT 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 anticipate that during 1999 we will stream all content through
RealNetwork's recent technology known as G2 (Generation 2). RealNetworks reports
that G2 reduces buffering or delays in transmission and offers more pre-set
programming choices than its previous technology.
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 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 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
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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:
- online retail vendors of music, computer software and DVDs, including
CDNow, N2K, Amazon.com, Barnes & Noble.com, and getmusic.com,
- streaming media sites such as broadcast.com and Spinner,
- 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
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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 May 1, 1999, we had 37 full-time and 8 part-time employees. We also
employed 9 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,
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 7,000 square feet of office space under three 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 May 1, 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 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 Technology Officer, Secretary and Director
Jan K. Andersen............... 45 Senior Vice President for Global Sales and
Marketing
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
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 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, 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 has 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 Technology
Officer and Secretary and a director of NetRadio since September 1997. From
April 1994 to April 1997, he was President of ComNet Research Corporation, a
marketer and integrator of fiber channel networks. From 1986 to
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1994, Mr. Pederson served as President of Donavan International, Inc., an
international trade services company.
JAN K. ANDERSEN. Mr. Andersen has served as our Senior Vice President for
Global Sales and Marketing since November 1996. From 1992 to 1996 he was
President and founder of International Resource Group, an international business
consulting and marketing firm.
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'
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 retailer of leather outerwear. From January 1992 to January 1996,
Ms. Kielty was a Buyer for Fingerhut Companies, a Minneapolis 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 and Chief Financial
Officer 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, Minnesota
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 of the Company. From 1994 to 1996, Mr. McCaffery also served as Vice
Chairman of The Signature Group, one of the nation's largest direct marketing
companies. Montgomery Ward filed for Chapter 11 bankruptcy protection in 1997.
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 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.
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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 550,000 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
550,000 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 51% and ValueVision will
own approximately 14.6% of our common stock, assuming the underwriter's
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.
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>
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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 5/31/05 $ 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, Jan K. Andersen, 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, Mr.
Andersen and Mr. Witzig commenced on August 1, 1998 and end on July 31, 2000.
Ms. Kielty's agreement commenced on February 25, 1999 and Mr. Wise's agreement
commenced on April 29, 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
to $140,000 upon the closing of this offering. Each of Messrs. Andersen's and
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, Andersen
and Witzig will each receive a one-time $10,000 bonus upon the closing of this
offering. The employment agreements further provide
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that each executive is eligible to receive an annual performance bonus of up to
60% for Mr. Tomechko, and 40% for Messrs. Pederson, Andersen and Witzig, of
their respective base salaries, if we achieve certain operating objectives. Ms.
Kielty and Mr. Wise received termination agreements in February 1999 and April
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 3 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 3 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 3 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 5 years. In June 1998, Mr. Andersen and Mr. Witzig
each received an option to purchase 75,000 shares of common stock that vests in
equal annual increments over 3 years beginning in June 1998. In June 1998, Mr.
Andersen and Mr. Witzig also each 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 5 years. If the
employment of Messrs. Pederson, Andersen 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.
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 May 25, 1999, there were options to purchase an aggregate of 1,203,150
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 fifty percent (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
twenty percent (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
43
<PAGE>
shareholders as of the date of this prospectus. As a result of the two
transactions, Navarre acquired 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 550,000 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 5 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 550,000 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.
In the event that this offering exceeds 3,499,999 shares of common stock,
ValueVision will receive additional shares of common stock for no additional
consideration. If this offering exceeds 3,499,999 shares, then ValueVision will
receive 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 shares of
common stock, ValueVision will receive an additional 7,000 shares of common
stock.
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
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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.
FULFILLMENT AGREEMENT. In December 1998, we entered into a 5 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 three months ended March 31, 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 4 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. 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 Paulson's spouse.
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.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock as of May 1, 1999, as adjusted to reflect
ValueVision's purchase of 550,000 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 77.5% 51.3%
Charles E. Cheney (2)(5)........................................ 5,024,000 77.3 51.1
Navarre Corporation (2)......................................... 5,000,000 77.2 51.0
ValueVision International, Inc. (3)............................. 1,432,500 22.1 14.6
Gene McCaffery (3)(6)........................................... 1,432,500 22.1 14.6
Donavan W. Pederson (7)......................................... 101,666 1.5 1.0
James Caparro................................................... -- 0.0 0.0
Marc H. Kalman.................................................. -- 0.0 0.0
Edward A. Tomechko.............................................. -- 0.0 0.0
All executive officers and directors as a group
(11 persons)(8)............................................... 6,734,166 100% 67.0%
----------- ----- -----------
</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 a 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 May
1, 1999.
(5) Includes 5,000,000 shares of common stock held by Navarre. Mr. Cheney is an
executive officer, director and a 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 May 1, 1999.
(6) Includes 1,432,500 shares of common stock held by ValueVision. 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 May 1, 1999.
(8) Includes options to purchase 301,666 shares of common stock exercisable
within 60 days of May 1, 1999.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of May 1, 1999, our authorized capital stock consisted of 50,000,000
shares of common stock, no par value, of which 5,922,500 shares were issued and
outstanding and held by six shareholders. In addition, ValueVision has agreed to
purchase 550,000 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 May 1, 1999, also
included 10,000,000 shares of preferred stock, no par value, of which no shares
were issued and outstanding as of May 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, 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 May 25, 1999, we had outstanding options to purchase 1,203,150 shares
of common stock, at exercise prices that range from $1.64 to the initial public
offering price per share and we have 796,850 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 other person is approved by a
majority of our disinterested shareholders, the shares acquired above
47
<PAGE>
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 acquirer of an information statement describing,
among other things, the acquirer and any plans of the acquirer 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 acquirer. If any acquirer
does not submit an information statement to us within 10 days after acquiring
shares representing a new threshold percentage of voting control, or if the
disinterested shareholders vote not to approve the acquisition, we may redeem
the shares so acquired by the acquirer 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 disinterested board members of the issuing corporation.
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 4-year prohibition on mergers,
sales of substantial assets, loans, substantial issuances of stock and various
other transactions involving NetRadio 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 9,805,500 shares of common stock
outstanding. Of this amount, the 3,333,000 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 6,472,500 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 6,472,500 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 EVEREN Securities, Inc. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the
48
<PAGE>
provisions of Rule 701, shares subject to lock-up agreements will not be
saleable until the agreements expire. However, EVEREN 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 386,616 of the 1,203,150 shares underlying
options outstanding as of May 25, 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 3-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 98,055 shares immediately
after this offering) or (2) the average weekly trading volume of the common
stock during the 4 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.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below for whom EVEREN Securities and Legg Mason Wood Walker,
Incorporated are acting as representatives, have severally agreed to purchase
from us, and we have agreed to sell to the underwriters, the respective number
of shares of common stock set forth opposite each underwriter's name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------- ---------
<S> <C>
EVEREN Securities, Inc...........................................
Legg Mason Wood Walker, Incorporated.............................
---------
Total.......................................................... 3,333,000
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the several
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 499,950 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 for the purchase of common stock.
We have agreed to issue to EVEREN Securities warrants to purchase up to
191,648 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 agreed to
grant the warrants for, among other things, investment banking services rendered
to us by EVEREN Securities prior to this offering. The warrants are exercisable
for a period of 4 years, commencing 1 year from the effective date of the
registration statement of which this prospectus is a part and expire 5 years
from the effective date. The warrants
50
<PAGE>
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, 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 EVEREN
Securities demand and piggy-back registration rights related to the warrants,
which are applicable during the period that the warrants are exercisable and
expire 5 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 EVEREN Securities.
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.
51
<PAGE>
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. 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've 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.
52
<PAGE>
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 3 months
ended March 31, 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>
DECEMBER 31
--------------------
PRO FORMA
SHAREHOLDERS'
EQUITY
(DEFICIT) AT
MARCH 31 MARCH 31,
1997 1998 1999 1999
--------- --------- --------- -------------
(NOTES 3 AND
10)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 4,253 $ 50,756 $ 72,346
Accounts receivable, less allowance for
doubtful accounts of $5,000 at December
31, 1997 and 1998 and March 31, 1999.... 9,084 26,213 78,197
Prepaid advertising....................... 50,000 952,793 802,793
--------- --------- ---------
Total current assets........................ 63,337 1,029,762 $ 953,336
Property and equipment, net................. 395,900 881,478 950,525
Prepaid advertising......................... 950,000 -- --
Note receivable--officer.................... -- 62,549 63,751
Deferred offering costs..................... -- 239,643 566,616
Other assets................................ 38,902 -- 3,175
Goodwill, net............................... 947,250 526,250 421,000
--------- --------- ---------
Total assets................................ $2,395,389 $2,739,682 $2,958,403
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.......................... $ 737,300 $1,022,639 $1,311,669
Accrued expenses.......................... 60,901 86,649 197,233
Current maturities of capital lease
obligations............................. 137,550 96,506 92,855
Current maturities of notes payable....... 57,855 -- --
--------- --------- ---------
Total current liabilities................... 993,606 1,205,794 1,601,757
Advances from Navarre....................... 1,212,311 5,234,840 6,832,981 $ 1,598,141
Capital lease obligations, less current
portion................................... 176,455 128,564 113,872 113,872
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 March 31, 1999,
respectively.......................... 2,000,000 2,134,150 3,013,775 8,748,615
--------- -------------
Accumulated deficit....................... (1,986,983) (5,963,666) (8,603,982) (8,603,982)
--------- --------- --------- -------------
Total shareholders' equity (deficit)........ 13,017 (3,829,516) (5,590,207) $ 144,633
--------- --------- --------- -------------
--------- --------- --------- -------------
Total liabilities and shareholders' equity
(deficit)................................. $2,395,389 $2,739,682 $2,958,403
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------------------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 21, THREE MONTHS
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED ENDED
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1998 1999
------------- ------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales............ $ -- $ -- $ -- $ 49,639 $ -- $ 95,497
Internet advertising..... -- -- -- 205,423 47,057 76,302
Miscellaneous............ 320,661 167,950 162,971 -- -- --
------------- ------------ ------------- ------------- ------------- -------------
Total net revenues....... 320,661 167,950 162,971 255,062 47,057 171,799
Cost of revenues........... -- -- 16,989 64,825 7,694 91,546
------------- ------------ ------------- ------------- ------------- -------------
Gross profit............... 320,661 167,950 145,982 190,237 39,363 80,253
Operating expenses:
Operations and and
technical support...... -- -- 672,061 685,767 283,978 695,795
Sales and marketing...... 426,884 53,036 160,748 670,885 82,785 373,252
General and
administrative......... 2,154,455 851,688 1,267,879 2,786,385 436,440 1,639,545
------------- ------------ ------------- ------------- ------------- -------------
Total operating
expenses............... 2,581,339 904,724 2,100,688 4,143,037 803,203 2,708,592
------------- ------------ ------------- ------------- ------------- -------------
Loss from operations....... (2,260,678) (736,774) (1,954,706) (3,952,800) (763,840) (2,628,339)
Other (income) expense:
Interest................. (6,650) 17,694 32,277 23,883 6,888 11,977
------------- ------------ ------------- ------------- ------------- -------------
Net loss before taxes...... (2,254,028) (754,468) (1,986,983) (3,976,683) (770,728) (2,640,316)
Income tax expense......... -- -- -- -- -- --
------------- ------------ ------------- ------------- ------------- -------------
Net loss................... $ (2,254,028) $ (754,468) $ (1,986,983) $ (3,976,683) $ (770,728) $ (2,640,316)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Loss per share--basic and
diluted.................. $ (.67) $ (.13) $ (.45)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares
outstanding.............. 5,899,167 5,882,500 5,922,500
------------- ------------- -------------
------------- ------------- -------------
</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
Net loss................................. -- -- -- (2,640,316) -- (2,640,316)
----------- ------------ ----------- ------------- ------------ -------------
Balance, March 31, 1999 (unaudited)...... 5,922,500 $ 3,013,775 $ -- $ (8,603,982) $ -- $ (5,590,207)
----------- ------------ ----------- ------------- ------------ -------------
----------- ------------ ----------- ------------- ------------ -------------
</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, THREE MONTHS
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED ENDED MARCH 31,
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) $ (770,728) $(2,640,316)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization......... 239,105 98,474 648,280 843,103 188,280 219,396
Stock option compensation............. -- -- -- 20,500 -- 879,625
Changes in operating assets and
liabilities:
Accounts receivable................. (3,500) (22,480) 16,896 (17,129) (5,468) (51,984)
Prepaid expenses.................... 5,795 -- -- 47,207 290 150,000
Accounts payable.................... 759,338 757,612 (780,100) 285,339 54,413 289,030
Accrued expenses.................... 153,429 (97,864) (5,243) 25,748 35,954 110,584
Other assets........................ (189,491) -- -- -- 38,902 (3,175)
------------ ------------ ------------ ------------ ----------- -----------
Net cash used in operating activities... (1,289,352) (18,726) (2,107,150) (2,771,915) (457,817) (1,046,840)
INVESTING ACTIVITIES
Notes receivable--officer............... -- -- -- (62,549) -- (1,202)
Purchases of property and equipment..... (329,831) 1,300 (12,703) (843,700) -- (183,193)
------------ ------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) investing
activities............................ (329,831) 1,300 (12,703) (906,249) -- (184,395)
FINANCING ACTIVITIES
Proceeds from notes payable............. -- 36,879 -- -- -- --
Payments on notes payable............... (15,702) -- (68,994) (9,836) (3,166) --
Payments on capital lease obligations... (19,723) (42,848) (41,977) (113,983) (30,031) (18,343)
Deferred offering costs................. -- -- -- (239,643) -- (326,973)
Proceeds from stock issuances........... 1,680,054 -- 1,000,000 65,600 -- --
Mandatory convertible equity............ -- (45,755) -- -- -- --
Advances from Navarre................... -- -- 1,212,311 4,022,529 498,265 1,598,141
------------ ------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities............................ 1,644,629 (51,724) 2,101,340 3,724,667 465,068 1,252,825
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................... 25,446 (69,150) (18,513) 46,503 7,251 21,590
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 $ 11,504 $ 72,346
------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ----------- -----------
Supplemental cash flow information
Significant noncash investing and
financing activity:................... None None
Stock issued for advertising
rights............................ $ -- $ -- $ 1,000,000 $ --
Fixed assets acquired under capital
lease............................. 405,766 -- -- 25,078
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (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 March 31, 1999 and for the three months
ended March 31, 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 three
months ended March 31, 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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (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.
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.
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.
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 benefit of net operating
losses of NetRadio Corporation, Minnesota during that period have been retained
by Navarre and no benefit has been shown on 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
March 31, 1999 and December 31, 1997 and 1998.
Promotional revenues consist of payments from third parties for the
distribution of coupons and other promotional material. Promotional revenues are
recognized at the time the associated services have been completed. Collection
of these revenues occurs through a chargeback, or credit, against the advances
from Navarre. Promotional revenue is 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."
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
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $40,489 and $222,202 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
three months ended March 31, 1998 and the three months ended March 31, 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 March 31, 1999, December
31, 1998 and December 31, 1997 was $842,250, $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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (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 thousands, except for per share data):
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, THREE MONTHS
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED ENDED
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, MARCH 31,
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) $ (770,728) $ (2,640,316)
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 5,922,500
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 5,922,500
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Basic loss per share.... $ (.68) $ (.14) $ (.34) $ (.67) $ (.13) $ (.45)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Diluted loss per
share................. $ (.68) $ (.14) $ (.34) $ (.67) $ (.13) $ (.45)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
</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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (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 three months ended March 31, 1998 and in the three months ended
March 31, 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. 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.
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1998
----------- ------------ THREE MONTHS ENDED
MARCH 31, 1999
-------------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures....................... $ 129,534 $ 129,534 $ 129,534
Computer equipment and software.............. 699,432 1,541,700 1,722,322
Office equipment............................. 11,503 11,503 14,075
----------- ------------ -------------------
840,469 1,682,737 1,865,931
Accumulated depreciation..................... (444,569) (801,259) (915,405)
----------- ------------ -------------------
$ 395,900 $ 881,478 $ 950,525
----------- ------------ -------------------
----------- ------------ -------------------
</TABLE>
6. 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, $5,861 and $4,892 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 three months ended March 31, 1998 and for
the three months ended March 31, 1999, respectively.
7. 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.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
<S> <C> <C>
1998 1997
------------- -----------
Gross deferred tax assets:
Net operating loss carryforwards................................ $ 1,400,000 $ 500,000
------------- -----------
Valuation allowance............................................. (1,400,000) (500,000)
------------- -----------
$ -- $ --
------------- -----------
------------- -----------
</TABLE>
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
8. CAPITAL STOCK
THE COMPANY
The Company is authorized by its articles of incorporation to issue 20
million 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 million in cash and an agreement to provide $2 million 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 million 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 550,000 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.
9. STOCK OPTIONS AND GRANTS
All stock option plans prior to the 1998 plan were terminated at the time of
the acquisition by Navarre Corporation 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
Corporation'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.
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
9. STOCK OPTIONS AND GRANTS (CONTINUED)
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 5 years
and maximum option terms of 10 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 for the three months ended March 31,
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........................................... (272,750) 272,750 $ 5.00
Forfeited......................................... 10,000 (10,000) $ 3.00
------------ ------------ -----
Balance on March 31, 1999 (unaudited)............. 797,750 1,202,250 $ 2.88
------------ ------------ -----
------------ ------------ -----
</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.
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 factor
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
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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
9. STOCK OPTIONS AND GRANTS (CONTINUED)
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>
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
The Company has 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 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 percent 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 THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
10. 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 capitalized 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>
NETRADIO CORPORATION
[LOGO]
<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.............................................................. $ 13,852
NASD filing fee................................................................... 5,483
Nasdaq National Market listing fee................................................ 78,875
Printing and engraving expenses................................................... 150,000
Legal fees and expenses........................................................... 300,000
Accounting fees and expenses...................................................... 200,000
Blue Sky fees and expenses........................................................ 8,000
Transfer agent and registrar fees................................................. 7,500
Directors and officers insurance.................................................. 55,000
Miscellaneous expenses............................................................ 93,920
-----------
Total......................................................................... $ 912,000
-----------
-----------
</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 6 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,
International, in exchange for ValueVision's agreement to provide NetRadio
with total consideration of $3 million, of which $1 million was paid in
cash, and $2 million 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 February 1999, we granted stock options to 35
employees, consultants and directors under our stock option plan covering an
aggregate of 1,202,250 shares of our common stock at exercise prices ranging
from $1.64 to $5.00 per share.
In May 1999, we granted 22,500 options to employees at an exercise price
equal to the initial public offering price.
At the closing of this offering, we expect to sell ValueVision approximately
550,000 shares of common stock for consideration of $500,000. In the event that
this offering exceeds 3,499,999 shares of common stock, ValueVision will receive
additional shares of common stock for no additional consideration. If this
offering exceeds 3,499,999 shares, then ValueVision will receive 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 shares, ValueVision will receive an
additional 7,000 shares of common stock.
Each of these sales were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, 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 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.
II-2
<PAGE>
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 EVEREN Securities, Inc.
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
10.3* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and
Jan K. Andersen
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 first day of December 1998 by and between
Navarre and NetRadio
10.11+ License Agreement dated September 3, 1998 between NetRadio and Real Networks, Inc.
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
10.13* 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
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
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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 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
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 25th day of May, 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 May 25,
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 Technical 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 EVEREN Securities, Inc.
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
10.3* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and Jan K. Andersen
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 first day of December 1998 by and between Navarre and NetRadio
10.11+ License Agreement dated September 3, 1998 between NetRadio and Real Networks, Inc.
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
10.13* 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
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>
PROMISSORY NOTE EXHIBIT 10.1.1
$62,140 Minneapolis, Minnesota
December 1, 1998
1. FOR VALUE RECEIVED, Edward A. Tomechko (the "Borrower"), hereby promises
to pay to the order of NetRadio Network/Navarre Corporation (the "Holder"), at
such location as the Holder may direct, the principal sum of sixty-two thousand
one hundred forty and 00/100 dollars ($62,140.00) together with interest on the
unpaid balance at the rate of seven and three quarters (7.75%) per annum.
2. The principal amount of the Note, together with all interest accrued,
shall be due and payable on demand pursuant to the terms and conditions of the
Equity Protection Plan dated August 20, 1998. If termination occurs before
12/2001, measurement of the home equity* protection will accelerate to the date
of termination. Net amount will be payable on demand.
3. The interest payment on this note will begin 12/99 and continue to be
current through the duration of this note (12/2001).
4. All payments made by the Borrower shall, at the option of the Holder, be
applied first to costs of collection, if any, second to accrued interest and the
remainder thereof to principal.
5. The Borrower promises to pay all costs of collection, including but not
limited to, attorney's fees, paid or incurred by the Holder on account of such
collection, whether or not suit is filed and whether or not such costs are paid
or incurred, or to be paid or incurred, prior to or after the entry of judgment.
6. The Note may be prepaid at any time, either in whole or in part, without
premium or penalty. All prepayments shall, at the option of the Holder, be
applied first to costs of collection, if any, second to accrued interest, and
the remainder thereof to principal.
7. This Note shall be governed by and construed in accordance with the laws
of the State of Minnesota.
BORROWER
By: /s/ Edward A. Tomechko
---------------------------
Edward A. Tomechko
* Equity Protection Agreement attached
<PAGE>
August 20, 1998
Mr. Ed Tomechko
85 Delancy Court
Phoenixville, PA 19480
Dear Ed:
As we discussed, we believe that you are an important key to the growth and
success of NetRadio. Therefore, the following outlines an equity protection plan
which we have discussed.
NetRadio agrees to make up any difference between the sale of your Philadelphia
home and the three-year gain on property being purchased in Minnesota. This
formula will be derived from a proof of building/purchase price of your home in
Philadelphia, including landscaping, subtracted from the sale price. If a loss
is incurred, that loss will be subtracted from the gain on the purchase price of
your Minnesota home based on purchase price compared to appraisal value after
three years.
Further, NetRadio will give you an equity swing loan plus interest (prime rate
at the time of the loan). Upon the sale of your Philadelphia house, you agree to
reimburse NetRadio for the portion of equity you receive which is above the loan
value.
Our desire is to help you and Mary Ann experience a smooth transition back to
Minnesota and to keep you "whole."
I look forward to seeing you on Tuesday, August 25!
Best Regards,
NetRadio Corporation
Eric Paulson
cc: Margot McManus
<PAGE>
EXHIBIT 10.10
FULFILLMENT AGREEMENT
This Fulfillment Agreement, including all exhibits and attachments hereto (the
"Agreement") is entered into this 1st day of December, 1998 (the "Effective
Date"), by and between NAVARRE CORPORATION, a Minnesota corporation ("Navarre")
with its principal place of business at 7400 49th Avenue North, New Hope,
Minnesota 55428 and NETRADIO CORPORATION, a Minnesota corporation ("NetRadio")
with its principal place of business at Riverplace Exposition Hall, 43 Main
Street Southeast, Suite 149, Minneapolis, Minnesota 55414.
RECITALS
WHEREAS, Navarre is in the business of sales and distribution of audio/video
computer software, compact disks, cassettes and DVDs, and provides, packs and
ships such products to the NetRadio Retail Website customers; and
WHEREAS, NetRadio operates several "Online Retail Websites" on the "World Wide
Web" through which it intends to sell "Products" (as hereinafter defined) to
consumers including, but not limited to, audio/video computer software, compact
disks, cassettes, vinyl, and DVDs, via a Website channel; and
WHEREAS, NetRadio desires to engage Navarre for the purpose of fulfilling
NetRadio purchase orders for Products on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
(a) "Product(s)" shall mean audio and/or video products and computer
software items including, but not limited to, compact disks,
cassettes, vinyl, singles, computer software programs, and DVD
available for sale as offered over the NetRadio Websites or as
available from time to time on the NetRadio Websites and any partner
Websites via "Nested Commerce."
(b) "Nested Commerce" shall mean the business conducted by creating
NetRadio Retail Website "Virtual Storefronts" on other, non-owned
Websites. The purpose is to distribute the NetRadio Retail Websites
to as many locations as possible in exchange for a commission on
Products sold off of the Nested Commerce Websites. The goal for
Nested Commerce is to maximize sales for NetRadio Retail Websites.
<PAGE>
(c) "Navarre Payments" shall mean all payments due Navarre from NetRadio
based on the pricing list and payment schedule set forth on the
attached Exhibit A, which pricing list may be updated by Navarre from
time to time, and such updates shall be a part of this Agreement
within [60] days after Navarre's delivery to NetRadio of an updated
Exhibit A.
(d) "Term" shall mean the term of this Agreement [which shall be for
approximately five (5) years] beginning on the date of this Agreement
and ending on December 1, 2003. Thereafter, the Agreement shall
automatically renew for successive [one (1)] month/year periods unless
sooner terminated by one or the other of the parties in accordance
with the procedures set forth in Section 10 of this Agreement.
(e) "User(s)" shall mean those individuals or entities who sign on to a
NetRadio Website and who are potential customers.
(f) "SCICOM" shall mean the company that provides Management Information
Systems ("MIS") for Navarre including inventory updates, order status,
and database updates.
2. GRANT.
(a) BASIC AGREEMENT. NetRadio and Navarre agree to develop a computer
interface for the purposes of conducting small order music product
transactions via on-line retail stores. NetRadio has built and will
maintain Online Retail Websites. NetRadio will also conduct all
marketing and merchandising efforts, collect orders and send such
orders to Navarre via Electronic Data Interchange ("EDI"). Navarre
will be responsible for picking, packing and shipping orders directly
to NetRadio's customers. Navarre hereby accepts such grant and agrees
to fulfill such orders as set forth herein.
(b) INTERNET FULFILLMENT. During the term of this Agreement, Navarre
agrees that it will not provide Internet fulfillment of Products for
any other exclusive Internet company; provided, however, that Navarre
reserves the right to provide Internet fulfillment for any current or
prospective retail customer of Navarre that also buys audio CD product
from Navarre for its retail sales establishments. If Navarre does
provide such Internet fulfillment, it will be at a pricing schedule
equal to or higher than the prices then charged to NetRadio.
(c) COMPLIANCE. NetRadio and Navarre agree to implement such practices
and procedures as are necessary to assure the compliance of either
party, or any division thereof, with the terms and conditions of this
Agreement.
(d) SET UP. Navarre will provide database and technical assistance to
NetRadio for the testing of NetRadio's EDI transmission of orders to
Navarre's inventory and IT system.
(e) ADVERTISING REVENUE. NetRadio will procure co-op advertising revenue
from media software manufacturers. Navarre will administer co-op
funds for all NetRadio Retail
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Website co-op advertising programs from labels distributed by Navarre.
In exchange for co-op administration services, Navarre will receive a
15% commission for such services performed on labels distributed by
Navarre.
(f) "FIRST-CHOICE SUPPLIER". Navarre will be a "First-Choice" supplier of
Products and related order fulfillment services for NetRadio Retail
Websites; provided, however, that NetRadio may utilize third party
fulfillment sources for any Products not available through Navarre.
The mutual goal for NetRadio and Navarre will be to provide a
competitive range of products, at a competitive retail price, for all
NetRadio Retail Websites and be competitive with industry benchmarks
for fulfillment, delivery, and service. First-Choice is defined as
follows:
NetRadio's e-commerce engine will search the
Navarre database system for immediate availability
of Product inventory before any other fulfillment
source is used. If Navarre's database indicates
that inventory is available, Navarre shall notify
NetRadio in writing within 24 hours if for any
reason such inventory is not immediately available
for shipment. If Navarre has current inventory,
and the lowest cost per item, for the selected
product, Navarre will receive the purchase order
via EDI from NetRadio. If Navarre does not carry
current inventory for the selected product,
NetRadio will then search secondary fulfillment
sources for inventory availability. In the case of
a multiple unit order, Navarre must be able to
fulfill all items on a multiple-unit order, at the
lowest cost per item, to avoid a duplication of
shipping costs to NetRadio (by using multiple
fulfillment sources to fulfill one transaction).
If Navarre cannot fulfill all items for a multiple
unit order, NetRadio's e-commerce engine will
search for a secondary fulfillment source that can
fill all items on the purchase order.
3. ORDER PROCEDURE.
(a) FULFILLMENT. The following sets forth NetRadio's service requirements
from Navarre's fulfillment and warehouse operational systems:
(i) STANDARD. Standard orders are defined as orders shipped
domestically and internationally via carriers other than
overnight carriers (FedEx, UPS Overnight, Airborne Express,
etc.). On any business day that Navarre receives standard
orders by 1:00 p.m. Central Standard Time ("CST"), it will ship
the orders the same business day. Standard orders received
after 1:00 p.m. CST will be deemed received the next business
day and Navarre will ship these orders the next business day.
Orders from NetRadio retail Websites will be transmitted via
EDI every hour. The fulfillment goal for standard shipments
for United States orders shall be shipment to the customer
within three (3) business days from receipt of the order at
NetRadio. The fulfillment
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goal for international order delivery is to have Products
arrive within seven (7) to ten (10) business day from the
receipt of the order.
(ii) PRIORITY. Priority orders are defined as orders shipped
domestically via Federal Express, UPS overnight or 2 Day or
Airborne Express. Priority orders received on any business day
by 11:00 a.m. CST will be shipped on the same day. Orders
received after 11:00 a.m. CST will be shipped the following
business day.
(iii) PEAK PERIODS. The first day of a business week and any day on
which order volume is greater than 20% above average
(calculated on a floating 30-day basis) is defined as a "Peak
Period." Navarre shall use best efforts to (a) notify NetRadio
in advance of any seasonal or other anticipated Peak Periods
and (b) adhere to the fulfillment policies set forth above
during Peak Periods, but its failure to so adhere during Peak
Periods shall not be considered a default under this Agreement.
(iv) PRE-ORDERS. NetRadio shall collect pre-orders until five (5)
business days prior to the date that a new release title is
first to be made available to consumers (the "street date"), at
which point such pre-orders will be forwarded in a separate
batch-EDI to Navarre on the date and time of day required by
Navarre. Navarre shall ship all pre-orders no later than
street date minus one day, provided Navarre has received the
new release title(s) from the label/distributor of such new
release(s) in time for processing. If a street date is
delayed, NetRadio will be responsible for holding the
pre-orders until five (5) days before the new street date.
(v) BACK-ORDERS. NetRadio may elect to have Navarre hold an order
that has one or more items out of stock (only if secondary
fulfillment sources are also out of stock) until it is
completely fulfilled by typing a "Y" in the "ship complete"
field of the EDI inbound specifications. NetRadio may inform
Navarre from time to time of the number of days, up to a
maximum of 30 days (the "Back-Order Period"), that Navarre is
to hold such "ship complete" orders before shipping the
available Products and canceling the out of stock Products. In
the event that all Products included in an order are out of
stock, and secondary fulfillment sources cannot ship an order,
Navarre will hold the order for a 30 day period before
canceling the order (subject to prior cancellation of such
order by NetRadio).
(vi) INVENTORY. Navarre will provide NetRadio with inventory
updates on an hourly basis via File Transfer Protocol ("FTP").
This FTP update should occur during Navarre business hours,
second shifts, and any time that SCICOM updates the Navarre
inventory database. Since the
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<PAGE>
NetRadio Retail Websites are open 24 hours a day and seven days
a week, this information is vital for timely, accurate
information for NetRadio customers. NetRadio will e-mail
customers with information on inventory availability. NetRadio
customers will have the option of canceling an order that
cannot be fulfilled, or choosing to elect an option of waiting
no longer than 30 days for the back-ordered Product to be
fulfilled. In addition, if Navarre's record keeping is
inaccurate and/or Navarre cannot ship requested inventory
within 24 hours, NetRadio shall be entitled to use alternative
fulfillment sources.
(vii) LABELS; PACKING SLIPS. At the request and with the approval of
NetRadio, Navarre will create customer mailing labels AND
packing slips with NetRadio Retail Website logos for all orders
shipped from Navarre.
(viii) PACKAGING. Navarre will strive for the highest quality of
package presentation for all items fulfilled by Navarre. This
includes, but is not limited to (1) cardboard box packaging for
all configurations for media software, (2) even alignment of
the mailing label on the top of the carton, (3) even alignment
of sealing tape on the shipping carton, (4) the packing list
shall be neatly folded and placed INSIDE of the carton,
(5) packaging shall be consistent with other, leading Online
Retail Websites. This will help maintain the consumer
perception that NetRadio Retail Websites are of the highest
quality and consistent with industry benchmarks.
(ix) NAVARRE PAYMENTS. At the end of each month, NetRadio shall
transfer the Navarre Payments for Product orders for the month
to the Navarre account designated for this purpose by Navarre.
Calculations of the Navarre Payment due each month shall be
based on the total Navarre Product orders completed at the
prices calculated in accordance with the pricing sheet attached
to this Agreement as Exhibit A.
(x) MONTHLY REPORTS. NetRadio and Navarre shall compare and
deliver to the other party summary reports of Product
transactions each month within 15 days of the end of each
calendar month. These reports will verify and confirm that
unit sales and costs are accurate and the respective sales
reporting systems are in synch.
4. PRODUCT RETURNS.
(a) RETURN POLICY. Navarre will re-fulfill orders to NetRadio's customers
at no additional fulfillment or return processing costs to NetRadio
for returnable Product, under the following circumstances:
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(i) Items reported as missing by the consumer that were listed on
the invoice as fulfilled;
(ii) Items returned as incorrect items shipped (items included in
the package that were not listed on the invoice); and
(iii) Items returned as defective product. Return processing
information will be posted weekly to Navarre's Bulletin Board
System.
(b) RETURNS. Navarre will accept NetRadio Retail Website returns into the
Navarre warehouse facility. Shipping instructions and return policies
will be included on the back of each packing list.
(c) RESTOCKING FEE. All accepted returns, other than those set forth in
Section 4(a) above, will include a ten percent (10%) restocking fee
payable to Navarre for processing such returns. NetRadio will also
pay a $0.25 refurbishing fee on all accepted open returns.
(d) MODIFICATIONS. Navarre and NetRadio reserve the right to modify
respective return policies through mutual agreement from time to time
by way of written notice.
(e) RESTRICTED RETURNS. Navarre will not accept for return accessories,
blank tape and vinyl product (including, without limitation, LPs and
12" singles), shopworn product (items that have damage to the artwork,
have foreign substance on the media or have been defaced), imports,
limited editions, Product identified in the Navarre database as
non-returnable, Product sold by a record club, promotional product
(free product give-a-ways), counterfeit product, product without the
original artwork or liner notes, or Product with a last customer
return date (as defined in the Navarre database documentation) prior
to the date the returned Product is received by Navarre from NetRadio.
In addition, Navarre does not accept return of opened CDs from the
following: (1) Sony Music Entertainment ("Sony"); (2) Universal
("UNI"); (3) Warner, Electra & Atlantic ("WEA"); or (4) Polygram
Distribution ("PGD") CDs, or PGD cassettes, or any opened PGD
cassettes that do not have their original wrapper intact. For
purposes hereof, "opened" means product returned with the top spine
label or original manufacturer's "dog-bone" holographic sticker
removed or cut in any way.
(f) CREDIT CARD CHARGE BACKS. NetRadio will be responsible for any
required credit card charge back and may set off any Navarre portion
of the return against Navarre Payments due in the following month.
Products not returned within this 30-day period shall be deemed
accepted by NetRadio and its users as non-defective. Other than
return of defective Products, NetRadio shall have no right of return
or refund without the express written approval of Navarre.
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<PAGE>
5. SHIPPING.
(a) RISK OF LOSS. All shipments under this Agreement shall be F.O.B.
Navarre's shipping facility. Title and risk of loss with respect to
all orders and Products shipped by Navarre under this Agreement shall
pass to NetRadio or its customers upon delivery of the Products to the
carrier at the point of shipment. In the event of shipping damage or
orders lost in shipment, Navarre will assist in filing a claim on
behalf of NetRadio and will credit NetRadio any amounts received or
credit to Navarre in connection with each claim.
(b) CHOICE OF CARRIER. Navarre shall ship the order with the carrier
requested by NetRadio or its customer. Navarre shall cancel any order
for which the delivery address is not serviced by the indicated
carrier, and NetRadio shall have the option to retransmit the order to
be shipped via a secondary fulfillment source or alternate carrier.
(c) SHIPPING COSTS. Navarre shall invoice NetRadio's customers at such
rates as are requested by NetRadio. NetRadio shall pay Navarre
shipping costs per the shipping tables attached hereto as Exhibit B
(as amended from time to time by Navarre). Navarre shall provide
NetRadio written notice of shipping rate changes and the effective
date of such changes. Navarre represents that the shipping costs
charged to NetRadio are its actual shipping costs (not considering
rebates).
(d) PAPER INSERTS. NetRadio shall pay a fee of $0.05 per paper insert
packed by Navarre at the request of NetRadio in Product shipped under
this Agreement. NetRadio shall supply the required paper inserts at
no cost to Navarre. All paper inserts must be lightweight,
paper-based, promotional items the same size or smaller than a
standard single CD, or pre-folded to such size.
(e) MERCHANDISE INSERTS. At NetRadio's request, Navarre shall insert
promotional merchandise inserts in its orders at a cost to be
negotiated by the parties. NetRadio shall supply those inserts at no
cost to Navarre.
(f) INSERT BAR-CODES. A unique UPC bar-code is required for each
merchandise insert. NetRadio shall purchase and apply a proprietary
bar-code on all merchandise inserts. At NetRadio's request or if the
bar-code does not meet Navarre's standards, Navarre shall create and
apply a bar-code for a fee of $0.10 per applied bar-code.
(g) EXCLUSIVE MERCHANDISE. Navarre shall receive, warehouse and ship
exclusive merchandise sold through NetRadio for a fee to be negotiated
after a sample has been received and reviewed for packing and shipping
requirements. For merchandise that is standard Product (single CDs or
cassettes and single VHS) a fee of $0.20 per unit will be applied.
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<PAGE>
6. PAYMENTS.
(a) PRICING SHEETS. The Navarre Payments due Navarre from NetRadio for
the sales of Products shall be determined as set forth on the pricing
sheets attached to this Agreement as Exhibit A.
(b) NAVARRE PAYMENTS. All Navarre Payments shall be made in United States
dollars, and shall be made without deduction or withholding. All risk
of currency exchange shall be borne by NetRadio. Navarre's fees do
not include any foreign, national, state or local sales, use,
value-added, withholding or other taxes, custom duties or similar
tariffs and fees which Navarre may be required to pay or collect upon
delivery of the Products. Should any tax or levy be made, NetRadio
agrees to be fully responsible for, and promptly pay such tax or levy
and indemnify Navarre for any claim for such tax or levy demanded.
NetRadio is not liable for any income taxes due by Navarre. NetRadio
agrees to provide Navarre with appropriate resale certificate numbers
and other documentation satisfactory to the applicable taxing
authorities to substantiate any claim of exemption from any such taxes
or fees.
7. FURTHER OBLIGATIONS.
(a) "FIRST-CHOICE" PROVIDER. NetRadio agrees that Navarre is, for the
Term of this Agreement, NetRadio's First-Choice provider for
fulfillment of Products sold over the NetRadio Websites.
(b) EMPLOYEES. Navarre and NetRadio shall each assign specific
individuals to assist the other in the fulfillment of this Agreement
for order placement and confirmation.
(c) DISCLOSURE. Navarre and NetRadio may make public statements about the
existence of general terms of this Agreement.
(d) INFORMATION DATABASE. NetRadio maintains the rights and ownership of
the customer "Transaction Information Database" of sales off of
NetRadio Retail Websites. Both parties shall use best efforts to
ensure maximum security of transaction information maintained on each
party's computer system including, but not limited to, the names,
addresses and Products ordered by NetRadio's customers. NetRadio and
Navarre shall not sell, license, or transfer the customer information
database to a third party as this would be a violation of the NetRadio
customer "Privacy Pledge."
(e) FILL RATES. Navarre shall strive to maintain 24-hour turnaround fill
rates greater than 90% for all items listed in the Navarre inventory
database as "in stock." If Navarre-distributed transaction fill rates
fall below the 90% level, NetRadio reserves the right to direct orders
to secondary fulfillment sources until Navarre can achieve fill rates
above the 90% level. In addition, if Navarre cannot ship any
particular product or products within 24 hours, NetRadio shall be
entitled to use secondary fulfillment sources.
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<PAGE>
8. CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. During the Term of this Agreement, and for
a period of two (2) years from the termination or expiration of this
Agreement, NetRadio and Navarre mutually agree to keep in confidence
and prevent the acquisition, disclosure, use or misappropriation by
any person or persons of information relating to this Agreement,
including but not limited to all types of information regarding
customer and supplier lists, pricing information, new product
development, technical information, data, formulas, patterns,
compilations, programs, devices, methods, techniques, marketing plans,
business procedures, agreements with any supplements, techniques or
know-how, processes or other proprietary or confidential or
intellectual proprietary information (hereafter "Confidential
Incorporation") which is received from either party under this
Agreement; provided, however, that neither party shall be liable to
the other party for disclosure of any data if the same is disclosed
with the prior written approval of the other party. Both parties
agree that if it breaches this non-disclosure agreement, the owner of
the Confidential Information shall suffer irreparable injury and be
entitled immediately to a temporary and permanent injunction.
(b) EXEMPT CONFIDENTIAL INFORMATION. The foregoing confidentiality
obligation shall not apply to information which the recipient can
demonstrate by written evidence:
(i) is or becomes publicly available without breach of this
Agreement by the party receiving the Confidential Information;
(ii) is released for disclosure by the disclosing party with its
written consent;
(iii) is known by the receiving party prior to the disclosure;
(iv) is rightly received by the receiving party from a third party
without confidential limitations; or
(v) is hereafter disclosed by the owner of the Confidential
Information to a third party without restriction on disclosure.
(c) CONFIDENTIAL INFORMATION REPRESENTATIONS. NetRadio and Navarre each
hereby agree:
(i) that all Confidential Information remains the property of the
disclosing party and will upon written request by the
disclosing party, promptly return all Confidential Information
to the disclosing party;
(ii) that the parties hereto shall disclose Confidential Information
in writing when practical, and when Confidential Information is
disclosed orally, shall promptly confirm such Confidential
Information in writing;
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<PAGE>
(iii) that the parties hereto shall not disclose Confidential
Information given to it by the other party to any person, real
or legal, except as necessary for the other party to perform
its obligations under this Agreement;
(iv) that the parties hereto shall require employees and third
parties having necessary access to Confidential Information
obligations of confidence and non-use consistent with this
non-disclosure agreement;
(v) that the parties hereto shall exercise the same degree of care
to safeguard the confidentiality of such Confidential
Information as it would exercise in protecting the
confidentiality of similar property of its own (but in no event
less than is standard in the industry); and
(vi) that the parties hereto use their best efforts to prevent
inadvertent or unauthorized disclosure, publication or
dissemination of any Confidential Information.
(d) UNAUTHORIZED USE OF CONFIDENTIAL INFORMATION. Each party shall notify
the other of any actual or suspected unauthorized use or disclosure of
Confidential Information of infringement of any proprietary rights of
which such party has knowledge and will reasonably cooperate with the
other party in the investigation and prosecution of such unauthorized
use, disclosure or infringement.
(e) CONFIDENTIAL INFORMATION SURVIVAL. This confidentiality and
non-disclosure agreement shall survive the termination or expiration
of the entire Agreement.
9. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATIONS
(a) NETRADIO RIGHTS. NetRadio represents and warrants to Navarre that it
has (i) used best-practices to obtain the sufficient rights to all the
code, documentation, trademarks, trade names, copyrights and other
intellectual properties that are contained in the NetRadio Website(s)
or the Products to be sold by NetRadio, and has (ii) procured the
right to grant the rights contemplated by this Agreement.
(b) NETRADIO INDEMNIFICATION. NetRadio shall indemnify Navarre and hold
Navarre harmless from and against any and all claims, costs, or
damages arising from any claim relating to Paragraph 9(a) above.
(c) NAVARRE RIGHTS. Navarre represents and warrants to NetRadio that it
has (i) used best-practices to obtain the sufficient rights to all the
code, documentation, trademarks, trade names, copyrights and other
intellectual properties that are used in Navarre's business or the
Products to be sold by Navarre, and has (ii) procured the right to
grant the rights contemplated by this Agreement.
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<PAGE>
(d) NAVARRE INDEMNIFICATION. Navarre shall indemnify NetRadio and hold
NetRadio harmless from and against any and all claims, costs, or
damages arising from any claim relating to Paragraph 9(c) above.
(e) AUTHORITY. Each party represents to the other party that it has
authority to enter into this Agreement and to carry out the
transactions contemplated herein.
10. TERMINATION. Either party may terminate this Agreement upon thirty
(30) days' written notice under the following conditions:
(a) MUTUAL BREACH. On thirty (30) days written notice, for material
breach of the terms by the other party hereof unless the breach is
cured in the said thirty (30) days; or
(b) CEASE BUSINESS. Immediately if the other party shall cease conducting
business in the normal course for more than 10 days; or
(c) INSOLVENCY. Immediately if the other party becomes insolvent, makes a
general assignment for the benefit of creditors, suffers or permits
the appointment of a receiver provided such action is not dismissed
within sixty (60) days; or
(d) DISCONTINUATION. Navarre or NetRadio delivers to the other party a
30-day written notice of termination for a material breach of this
Agreement, provided such breach was previously identified by way of
written notice and the other party failed to resolve such breach
within thirty (30) days; or
(e) DISCONTINUATION. Navarre discontinues fulfillment services to online
customers or NetRadio discontinues the online sale of pre-recorded
music.
11. DISPUTES AND RESOLUTIONS. The Agreement shall be governed by the laws
of the United States and the State of Minnesota (without regard to its
principles of conflicts of laws) and without regard to any state or federal
provision providing for the interpretation of an agreement more strongly
against the drafter thereof. Both parties expressly reject the application
of the United Nations Convention on Contracts for the International Sale of
Goods. All disputes related to this Agreement shall be subject to the
jurisdiction of the United States Federal Court in Minneapolis, Minnesota.
Provided, however, that this clause shall not be construed to limit or
preclude either party from bringing any action in any court of competent
jurisdiction for an injunction or other provisional relief as either party
deems to be necessary or appropriate to compel either party to fulfill its
obligations hereunder or to protect the trademark or other proprietary
rights of either party.
12. MISCELLANEOUS PROVISIONS.
(a) AGREEMENT NOT TO CONSTITUTE JOINT VENTURE. Nothing in this Agreement
shall be construed as making either NetRadio or Navarre the agent of,
or in joint venture with, the other for any purposes except as
specifically set forth herein.
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(b) ASSIGNMENT. This Agreement and the rights and obligations hereunder
shall not be assigned by either party without the prior written
consent of the other party.
(c) ENTIRE AGREEMENT. This Agreement represents the final, complete and
understanding of every kind or nature whatsoever between the parties
hereto concerning this subject.
(d) COVENANTS. The covenants contained in this Agreement which, by their
terms, expressed or implied, require performance by the parties after
the expiration or termination of this Agreement, shall be enforceable
notwithstanding said expiration or other termination of this Agreement
for any reason whatsoever.
(e) SUCCESSORS AND ASSIGNS. The covenants, conditions and obligations
herein contained shall apply to and bind any heirs, successors or
assigns of the parties hereto.
(f) WAIVER. No waiver by Navarre of any breach or series of breaches or
defaults in performance by NetRadio and no failure, refusal, delay or
neglect of Navarre to exercise any right, power, or option given to it
hereunder or to insist upon strict compliance with or performance of
Navarre's obligations under this Agreement shall constitute a waiver
of the provisions of this Agreement with respect to any subsequent
breach thereof or a waiver by Navarre of its right at any time
thereafter to require exact and strict compliance with the provisions
thereof.
(g) FORCE MAJEURE. Notwithstanding any provisions of this Agreement to
the contrary, neither party shall be liable to the other, nor shall
any breach of this Agreement occur, by reason of any delay or loss
reasonably incurred by acts of God, fire, natural disaster,
governmental order, materials shortages, war, riot or insurgency, work
stoppage or strike, or other such occurrence.
(h) SALES. The Products subject to this Agreement shall be sold,
advertised, and promoted by NetRadio in accordance with all applicable
laws, rules, and regulations, and the policies and methods of sale,
advertising, and promotion shall be of high standard and shall in no
manner reflect adversely upon Navarre. It is expressly understood
that it is the responsibility of NetRadio to comply with all
applicable regulations, including but not limited to, licensing,
royalty and copyright requirements. Additionally, it is the sole
responsibility of NetRadio to pay all duties, tariffs and taxes
relating to sale of the Products.
(i) SEVERABILITY. This Agreement is severable and the invalidity of any
term or condition shall not affect the validity of any other term or
condition. Nothing contained in this Agreement shall be construed as
requiring the commission of any act contrary to the law. Whenever
there is any conflict between any provisions of this Agreement and any
present or future statute, ordinance, or regulation contrary to which
the parties have no legal right to contract, the latter shall prevail,
but in such event the provision of this Agreement thus affected shall
be curtailed and limited to only the extent necessary to bring it
within the requirements of law. In the event that any part,
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article, paragraph, sentence, or clause of this Agreement shall be
held to be indefinite, invalid, or otherwise unenforceable, the
indefinite, invalid, or unenforceable provision shall be deemed
deleted, and the remaining part of the Agreement shall continue in
full force and effect, unless said provision pertains to the payment
of fees in which case this Agreement shall terminate. If any tribunal
or court of appropriate jurisdiction deems any provision hereof, other
than for the payment of money, unenforceable, such provision shall be
modified only to the extent necessary to render it enforceable and
this Agreement shall be valid and enforceable and the parties hereto
agree to be bound by and perform same as thus modified.
(j) INCORPORATION OF EXHIBITS. The provisions set forth in Exhibits A and
B as may be updated from time to time by Navarre, are a part hereof as
if fully incorporated into this document, and shall supersede the
terms and conditions of the body of this Agreement to the extent that
they are inconsistent with the same.
(k) COUNTERPARTS. This Agreement may be executed in various counterparts
or copies, all of which, when taken together, shall constitute the
entire agreement.
(l) AMENDMENTS. All amendments or modifications to this Agreement must be
in writing and signed by all parties to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
NAVARRE CORPORATION, NETRADIO CORPORATION,
a Minnesota corporation a Minnesota corporation
By: /s/ Eric H. Paulson By: /s/ Edward A. Tomechko
------------------------------ -----------------------------
Its: President Its: President and C.E.O.
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EXHIBIT A
PRICING SHEET and PAYMENT SCHEDULE
Pricing Sheet
<TABLE>
<CAPTION>
MANUFACTURERS
SUGGESTED CD CASSETTE
LIST PRICE COST COST PRIMARY PRODUCT CATEGORIES
<S> <C> <C> <C>
$ 3.49 $ 2.10 Cassette Singles
3.98 $ 2.62
4.49 2.95
4.98 3.33 3.18 Budget Cass (BMG, UNI) CD Singles/Cass
Maxi
5.98 4.04 4.04 Budget Cassette (PGD, Sony) Cassette
Maxi
6.49 4.41 CD5
6.98 4.79 4.79 CD5
7.98 5.44 5.43 Midline Cass/Budget CDs
8.98 6.20 6.03
9.98 6.55 6.71 Frontline Bass/Budget CDs (BMG, CEMA,
PGD, Sony, WEA)
10.98 7.97 7.38 Premium Frontline Cass
11.98 8.25 7.50 Budget CD - UNI Midline CD (All
Majors) Premium Frontline CS
12.98 9.39 8.11
13.98 10.35 Developing Artist Frontline CD
14.98 10.86 Frontline CD
15.98 11.14 Frontline CD
16.98 11.41 Frontline CD
17.98 12.34 Frontline CD
18.98 13.82
19.98 14.55
</TABLE>
* NetRadio terms are 2% Net 30
<PAGE>
EXHIBIT B
SHIPPING & HANDLING CHARGES
NetRadio will pay the following Shipping and Handling costs:
- For each Domestic order:
First unit @ $2.50
Each additional unit @ $0.50, maximum of $5.00 per order
- For each International order:
First unit @ $8.50
Each additional unit @ $1.50; maximum of $22.00 per order
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
September 3, 1998
BY FACSIMILE
Jan Andersen
Sr. VP of Global Sales and Marketing
NetRadio Networks
43 Main Street, S.E.
Suite 149
Minneapolis, MN 55414
Navarre Corporation
7400 49th Ave. North
New Hope, MN 55428
Re: LICENSE OF REALNETWORKS SOFTWARE
Dear Mr. Andersen:
1. LICENSE. NetRadio currently holds a license to RealNetworks' RealServer
Version 5.0, with the capability to stream 2,250 streams of
RealAudio/RealVideo-encoded content (the "Software"). NetRadio agrees to
purchase a license to upgrade the Software to [Confidential Treatment
Requested], and one year of Upgrades and Support therefor. NetRadio
acknowledges and agrees that its use of the Software shall be governed by
RN's standard RealSystem Server license agreement (the "License
Agreement"), attached hereto and incorporated herein by this reference,
as may be revised from time to time with each Upgrade of the Software.
RN shall initially deliver the Software to NetRadio in the form of a
30-day time-out license key. The Software will cease functioning at
the end of the 30-day period.
2. CONSIDERATION. In consideration for the licenses granted to NetRadio
hereunder, NetRadio shall pay to RN [Confidential Treatment Requested],
payable in full within thirty (30) days of the date hereof. Immediately
upon receipt thereof, RN shall replace the time-out license key, with a
perpetual license key, and shall provide NetRadio an additional
[Confidential Treatment Requested] at no charge. This offer is good
through September 9, 1998.
3. OPTION. For one year from the date hereof, NetRadio will have an option
to license additional RealAudio/RealVideo streams in minimum lots of
1,000 streams at [Confidential Treatment Requested], which shall include
Upgrades and Support therefor.
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
Upgrades do not include new media or data types other than RealAudio and
RealVideo. The license therefor will be perpetual. As per the License
Agreement, NetRadio may not sublicense any streams hereunder to third
parties. NetRadio shall have the option to receive RN's standard
Upgradesand Support for the Software for three additional years at a
cost of [Confidential Treatment Requested].
4. [Confidential Treatment Requested].
5. ADDITIONAL RN OBLIGATIONS.
a. RN shall provide NetRadio with the highest level of technical
support offered to similarly situated customers, with a dedicated
prime technical contact, for one year from the date hereof.
b. RN will participate with NetRadio in extensive public relations
and marketing programs to build brand name awareness for NetRadio,
as agreed upon by the parties.
6. GUARANTY. Navarre Corporation, the parent company of NetRadio,
unconditionally guarantees payment for all Software licensed and
delivered hereunder, according to the terms of this letter agreement.
If you agree with the terms of this letter agreement, please sign below and
return to my attention. This agreement shall not be deemed effective until
signed by all three parties below.
Sincerely,
REALNETWORKS, INC.
By: Jeff Mandelbaum
V.P. North American Sales
<PAGE>
ACCEPTED AND AGREED TO:
NetRadio NETWORKS
By: /s/ D.W. Pederson Addendum to Point #4:
-----------------------------
Name: D.W. Pederson Inclusion of RealNetworks within
--------------------------- NetRadio's TV advertising will be
in effect for 1 year from initial
Title: Chief Operating Officer date of TV campaign.
--------------------------
Date: September 17, 1998
--------------------------
NAVARRE CORPORATION /s/ D.W. Pederson
---------------------------------
NetRadio
By: /s/ Charles E. Cheney
---------------------------
Name: Charles E. Cheney /s/ Jeff Mandelbaum
--------------------------- ---------------------------------
Vice President of North
American Sales
RealNetworks
Title: /s/ Charles E. Cheney
Date: September 18, 1999
---------------------------
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
REALNETWORKS LICENSE AGREEMENT AND WARRANTY DISCLAIMER
REDISTRIBUTION OF SOFTWARE NOT PERMITTED
______________________________________
COMMERCIAL NETWORK OPERATORS LICENSE FOR USE WITH REALNETWORKS INTERNET SERVER
VERSION 5.0.
IMPORTANT -- READ CAREFULLY: THIS REALNETWORKS LICENSE AGREEMENT ("LICENSE
AGREEMENT") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR AN ENTITY)
AND REALNETWORKS, INC. AND ITS SUPPLIERS AND LICENSORS (COLLECTIVELY "RN") FOR
THE RN SERVER SOFTWARE PRODUCT LISTED ABOVE, WHICH INCLUDES COMPUTER SOFTWARE
AND ASSOCIATED MEDIA AND PRINTED MATERIALS, WHETHER PROVIDED IN PHYSICAL FORM OR
RECEIVED ON-LINE IN ELECTRONIC FORM ("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 "LICENSES"
FOLDER ON YOUR COMPUTER, UPON INSTALLATION OF THE SOFTWARE.
1. SOFTWARE OWNERSHIP. This is a license agreement and NOT an agreement for
sale. RN continues to own the Software, and other content provided or
transmitted to you by RN. 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 in this License
Agreement, 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, according to the following terms
and conditions:
(a) INSTALLATION. This License permits you to install one copy of the
Software with the same (or a lower) version number as the Software version
number listed above 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"). A license fee is required for each Host Computer,
and if you would like to add Host Computers in a clustering configuration, you
must purchase from RN a multiple Server Software License Agreement (or licenses)
and pay the applicable license fees.
(b) USE RIGHTS. You may use your installed copy of the Software to deliver
up to 50 simultaneous User-Streams of RN media-compatible data (e.g., audio,
video or other media only as specifically enabled by the license key which
accompanies the Software) as set forth on the applicable Order Form or signed
agreement between the parties. A "User-Stream" is defined as the stream of
digitally-encoded data that delivers the media type associated with the Software
you have licensed to a single end-user client computer. You may only serve
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
the media types(s), e.g., audio and/or video, that are authorized by
your Server License Key. The number of User-Streams being 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 User-Streams, you must purchase a Software License
Key upgrade from RN.
(c) HOSTING RIGHTS. You may only rent, sell or sublicense User-Streams under
this License Agreement to third parties to whom you are providing web hosting
services (referred to as "Hosted Customer"), subject to the following terms:
(i) You will only deliver User-Streams to Hosted Customer with whom
you have entered into a formal agreement to host the Hosted Customer's website
or a significant portion thereof for an uninterrupted period of no less than (1)
month and only as a part of a Bundled Hosting Solution which must include, at a
minimum, bandwidth usage, network environment, server hardware, power supply,
operations center staff and engineers. Under no circumstances may you
sublicense or deliver User-Streams on a stand-alone basis.
(ii) You must allocate a specific number of User-Streams to each of
your Hosted Customers for the duration of the term of your agreement to provide
RN-media datatype hosting services ("RN Media Hosting") as part of your hosting
agreement, which must be at least one continuous and uninterrupted month.
Allocated User-Streams must be dedicated to the Hosted Customer, and cannot be
offered to, sublicensed to or accessed by any other party including you for your
own use regardless of whether the Hosted Customer to whom the User-Streams were
allocated is utilizing all, part or none of the allocated streams. The total
number of User-Streams allocated may not exceed the total number of User-Streams
represented by your Server License Key, and cannot be overallocated, oversold or
overcommitted. Upon the expiration or termination of the RN Media Hosting or
one (1) month, whichever is later, you may resume usage of the User-Streams (for
your own purposes or for other Hosted Customers or Sub-Licensees).
(iii) Prior to entering into RN User-Stream Agreements, you shall
notify Hosted Customers in writing that they are using User-Streams subject
to, and agree to be bound by, RN's User-Stream License Agreement (the
"User-Stream License"), a copy of which is attached hereto as Attachment 1.
You shall distribute a copy of the User-Stream License to each Hosted
Customer. The User-Stream License shall be between RN and the Hosted
Customer. You may refer any questions the Hosted Customers may have about
the User-Stream License directly to RN. You shall notify RN of any violation
of the User-Stream License by any of the Hosted Customers as soon as you
becomes aware of such violations, and, if RN is unable to obtain such Hosted
Customer's compliance with the User-Stream License after reasonable effort to
do so, RN will provide three (3) days' written notice to you and, upon
expiration of the notice period, you agree to cease distributing the
User-Streams to such Hosted Customer.
(d) LIVE EVENTS. Subject to the requirements of Sections 1 and 2 of this
Agreement, you may use the Software to host or serve live broadcast events
which do not exceed 24 hours ("Events"), provided that you may use only the
number of User-Streams, if any, which have not been allocated to your Hosted
Customers or Sub-licensees or to other Events. If you desire to obtain
additional User-Streams to host occasional Events which require capacity in
excess of your unallocated User-Streams, please see RN's website at
http://www.real.com
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
for information, pricing and licensing options for obtaining Event Licenses,
or for purchasing or sublicensing access to the Real Broadcast Network, RN's
live broadcast events network.
(e) ATTRIBUTION. You must indicate which publicly available files are in a
proprietary RN format (e.g., RealAudio (.ra) or RealVideo (.rm)). 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 or RealVideo content is
available at your web page. You agree that shall not use any RN trademark in a
way which may imply that you are an agency or branch of RN. You agree that you
shall not use any RN trademark in a way which may imply that RN endorses, is
affiliated with, or sponsors you or your products without RN's express written
permission. You also agree that you may not link directly to any media file or
.ram file made available from the RN website. You agree that the rights set
forth in this paragraph may be immediately terminated by RN in the event of any
violation of RN's rights in its trademarks or for a violation of RN's Trademark
and Logo Usage Policy.
3. LIMITATIONS. NOTICE TO USERS. You agree to inform all users of the
terms of this License Agreement. INTRANET USE. YOU MAY NOT USE THE SOFTWARE TO
SERVE YOUR CORPORATE INTRANET. PLEASE SEE RN'S WEBSITE AT
HTTP://WWW.REAL.COM/PRODUCTS/SERVER/INTRANET/INDEX.HTML FOR INFORMATION, PRICING
AND LICENSING OPTIONS FOR INTRANET SYSTEMS AND LICENSED SEATS. DUAL-MEDIA
SOFTWARE. You may receive the Software in more than one medium (e.g., by
electronic distribution and on CD-ROM). 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 RESALE
OF USER-STREAMS ON STAND-ALONE BASIS. YOU MAY NOT, UNDER ANY CIRCUMSTANCES,
TRANSFER, RESELL, SUBLICENSE OR DELIVER USER-STREAMS ON A STAND-ALONE BASIS TO
ANY THIRD-PARTY. 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 and your Sub-Licensee's 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. RN may develop or issue upgraded versions of the
Software from time to time. For a period of one (1) year from the effective
date of this License Agreement (and with respect to any future licenses of
Software, from one (1) year from the date of such license), RN shall make
Software maintenance and upgrades available to you for no charge in accordance
with RN's standard upgrade and support policy. Thereafter, at its sole option,
and for a fee to be determined, RN may make such upgrades available to you. 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.
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
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. 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.
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 MERCHANTIBILITY AND FITNESS FOR A
PARTICULAR PURPOSE, WITH REGARD TO THE SOFTWARE, THE ACCOMPANYING WRITTEN
MATERIALS, AND ANY ACCOMPANYING HARDWARE. RN MAKES NO WARRANTY Of
NONINFRINGEMENT OF THIRD PARTIES' RIGHTS. THIS LIMITED WARRANTY GIVES RECIPIENT
SPECIFIC LEGAL RIGHTS. RECIPIENT 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 License 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 repair or
replace the Software or media that does not meet RN's Limited Warranty and which
is returned to RN with a copy of your receipt or other proof of purchase;
(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) if RN deems the
above remedies impracticable, to 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 provides 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.
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
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 DIRECT, 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 LICENSE 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. 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, copied or transmitted any
materials in connection with the Software in violation of another party's rights
or 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.
9. TERMINATION. This License Agreement will terminate immediately if you
fail to comply with any term hereof within three (3) days of receiving notice
from RN. You may 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, except that Hosted
Customers and Sub-licensees may continue to use allocated User-Streams for no
more than thirty (30) days from the date of termination. Your obligation to pay
accrued charges and fees shall survive any termination of this License
Agreement.
10. MISCELLANEOUS. This License Agreement 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
conditioned on your consent to the terms set forth herein. A separate written
agreement with respect to the subject matter hereof shall supersede this License
Agreement 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 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
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
without regard to conflicts of law provisions and you consent to the
exclusive jurisdiction of the state and federal courts sitting in the State
of Washington. 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.
11. 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, Iraq, Libya, Sudan, North Korea, Iran, Syria 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.
INTENDING TO BE LEGALLY BOUND, the parties have executed this License Agreement
by their duly authorized representatives, to be effective as of the date first
written above.
<TABLE>
<S> <C>
REALNETWORKS, INC. ________________________ ("Licensee").
By______________________________ By_________________________________
Its_______________________________ Its__________________________________
</TABLE>
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
ATTACHMENT 1
USER-STREAM LICENSE AGREEMENT
YOUR INTERNET SERVICE PROVIDER OR OTHER COMMERCIAL NETWORK OPERATOR, FROM
WHOM YOU RECEIVE INTERNET ACCESS, IS GIVING YOU THE RIGHT TO USE MULTIMEDIA
USER-STREAMS OF DIGITALLY-ENCODED DATA THAT WILL ENABLE YOU TO DELIVER
MULTIMEDIA TO END-USER CLIENT COMPUTERS ("USER STREAMS"). YOUR USE OF THE
USER STREAMS IS SUBJECT TO THIS LICENSE AGREEMENT.
IMPORTANT - READ CAREFULLY: THIS REALNETWORKS USER-STREAM LICENSE AGREEMENT
("LICENSE AGREEMENT") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL
OR AN ENTITY) AND REALNETWORKS, INC., ITS LICENSORS AND SUPPLIERS
(COLLECTIVELY. ("RN") FOR THE USER STREAMS PROVIDED TO YOU BY YOUR INTERNET
SERVICE PROVIDER OR OTHER COMMERCIAL NETWORK OPERATOR. BY, ACCEPTING,
COPYING OR OTHERWISE USING THE USER STREAMS, YOU AGREE TO BE BOUND BY THE
TERMS OF THIS LICENSE AGREEMENT. IF YOU DO NOT AGREE TO THE TERMS OF THIS
LICENSE AGREEMENT, NOTIFY YOUR INTERNET SERVICE PROVIDER OR OTHER COMMERCIAL
NETWORK OPERATOR ("PROVIDER") FROM WHOM YOU RECEIVED THE USER-STREAMS THAT
YOU DO NOT DESIRE TO USE THE USER STREAMS.
1. OWNERSHIP. This is a license agreement and NOT an agreement for sale.
RN continues to own the User Streams, and other content provided or
transmitted to you by RN. Your rights to use the User Streams 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 in this License
Agreement, RN hereby grants you a non-exclusive, non-transferable, perpetual,
worldwide license to the version of the User Streams specified by your User
Streams License Key for installation of the User Streams, according to the
following terms and conditions:
(a) RIGHTS. You may use your User Streams to deliver up to the number of
User-Streams of RN media-compatible data (e.g., audio, video or other media
only as specifically enabled by the license key which accompanies the User
Streams) authorized by your Internet Service Provider ("ISP"). A
"User-Stream" is defined as the stream of digitally-encoded data that
delivers the media type you have licensed from your ISP. You may only serve
the media types(s), e.g., audio and/or video, that are authorized by your ISP.
(b) RESTRICTIONS.
(i) NO INTRANET USE. YOU MAY NOT USE THE USER STREAMS TO SERVE
USER-STREAMS PRIMARILY TO END-USERS OF YOUR INTERNAL NETWORK OR INTRANET
SYSTEM. IF YOU WISH TO DO SO, PLEASE CONTACT RN OR VISIT THE RN WEBSITE
AT HTTP://WWW.REAL.COM TO OBTAIN THE APPROPRIATE INTRANET SYSTEMS
LICENSE.
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
(ii) NO RESALE. YOU MAY NOT, UNDER ANY CIRCUMSTANCES, TRANSFER,
RESELL, SUBLICENSE OR DELIVER THE USER STREAMS TO ANY THIRD-PARTY.
(iii) NO HOSTING. YOU MAY NOT RENT, SELL OR SUBLICENSE USER-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 the
RN website at http://www.real.com for information on how to obtain the
appropriate Commercial Network Operator License.
3. ATTRIBUTION. You must indicate which publicly available files are in a
proprietary RN format (e.g., RealAudio (.ra) or RealVideo (.rm)). 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 or RealVideo content is
available at your web page. You agree that shall not use any RN trademark in a
way which may imply that you are an agency or branch of RN. You agree that you
shall not use any RN trademark in a way which may imply that RN endorses, is
affiliated with, or sponsors you or your products without RN's express written
permission. You also agree that you may not link directly to any media file or
.ram file made available from the RN website. You agree that the rights set
forth in this paragraph may be immediately terminated by RN in the event of any
violation of RN's rights in its trademarks or for a violation of RN's Trademark
and Logo Usage Policy.
4. OTHER RIGHTS AND LIMITATIONS. NOTICE TO USERS. You agree to inform all
users of the User Streams, other than end-users receiving User-Streams, of the
terms of this License Agreement. 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) the
User Streams. AUDIT RIGHTS. You shall permit RN to audit your compliance with
this License Agreement, as RN deems reasonable necessary. RESERVATION OF
RIGHTS. All rights not expressly granted to you are reserved to RN.
5. LIMITED WARRANTY. If any RN software ("Software") has been provided to
you by RN or your ISP, 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. 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
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
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.
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 MERCHANTIBILITY AND FITNESS FOR A
PARTICULAR PURPOSE, WITH REGARD TO THE USER STREAMS AND SOFTWARE, THE
ACCOMPANYING WRITTEN MATERIALS, AND ANY ACCOMPANYING HARDWARE. RN MAKES NO
WARRANTY OF NONINFRINGEMENT OF THIRD PARTIES' RIGHTS. THIS LIMITED WARRANTY
GIVES RECIPIENT SPECIFIC LEGAL RIGHTS. RECIPIENT 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 repair or
replace the Software or media that does not meet RN's Limited Warranty and which
is returned to RN with a copy of your receipt or other proof of purchase; (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) if RN deems the
above remedies impracticable, to refund the license fee you paid for the
Software, if Software has been provided to you. 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.
6. 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 USER STREAMS, 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
USER STREAMS, 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
USER STREAMS. 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.
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
7. INDEMNIFICATION. You agree to transmit only those materials for which
you have the necessary copyright 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, copied or transmitted any materials (other than
materials provided by RN) in connection with the User Streams in violation of
another party's rights or in violation of any law. If you are importing the
User Streams 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.
8. TERMINATION. This License Agreement will automatically terminate if you
fail to comply with any term hereof. No notice shall be required from RN to
effect such termination. 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 User Streams and
shall within three (3) days return to RN, or certify destruction of, all full or
partial copies of the User Streams, documentation and related materials provided
by RN. Your obligation to pay accrued charges and fees shall survive any
termination of this License Agreement.
9. MISCELLANEOUS. This License Agreement and any accompanying order form
for the User Streams 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 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 and you consent to the exclusive jurisdiction of the
state and federal courts sitting in the State of Washington. 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.
10. U.S. GOVERNMENT RESTRICTED RIGHTS. This User Streams 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 User Streams - Restricted Rights at FAR 52.227-19
when applicable, or in subparagraph (c)(1)(ii) of the Rights in Technical Data
and Computer User Streams 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 User Streams or underlying information or technology may be
accessed, downloaded or otherwise exported or re-exported (i) into (or to a
national or resident of) Cuba, Iraq, Libya, Sudan, North Korea, Iran, Syria 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
<PAGE>
EXHIBIT 10.11
CONFIDENTIAL TREATMENT REQUESTED
Certain information has been omitted from this exhibit
and filed separately with the SEC pursuant to a request
for confidential treatment under Rule 406
Table of Denial Orders. By using the User Streams 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.
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- 1995-1998 RealNetworks, Inc. and/or its suppliers. 1111 Third
Avenue, Suite 2900, Seattle, Washington 98101 U.S.A. All rights reserved.
RealNetworks, Real Audio and RealVideo are trademarks or registered trademarks
of RealNetworks, Inc.
RealNetworks User-Stream License (6-4-98).
<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. 3 to the Registration
Statement (Form S-1 No. 333-73261) and related Prospectus of NetRadio
Corporation for the Registration of 3,333,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
May 25, 1999
