<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AUDIOHIGHWAY.COM
(Exact Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 7375 77-0377306
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
</TABLE>
AUDIOHIGHWAY.COM
20600 MARIANI AVENUE
CUPERTINO, CA 95014
TELEPHONE (408) 255-5301
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
NATHAN M. SCHULHOF
AUDIOHIGHWAY.COM
20600 MARIANI AVENUE
CUPERTINO, CA 95014
TELEPHONE: (408) 255-5301
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
GROVER T. WICKERSHAM, ESQ. JOHN J. HALLE, ESQ.
DEBRA K. WEINER, ESQ. STOEL RIVES LLP
GROVER T. WICKERSHAM, P.C. 900 SW FIFTH AVENUE, SUITE 2300
430 CAMBRIDGE AVENUE, SUITE 100 PORTLAND, OR 97204
PALO ALTO, CA 94306
------------------------------
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 of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE(1)
<S> <C> <C> <C>
Units,(2) each consisting of:..................................... 2,300,000 $15.00 $34,500,000
(i) one share of Common Stock; and............................. 2,300,000 -- --
(ii) one Warrant to purchase one share of Common Stock.......... 2,300,000 -- --
Units issuable upon exercise of the Representative's Warrants(3),
each consisting of:............................................. 200,000 18.00 3,600,000
(i) one share of Common Stock; and............................. 200,000 -- --
(ii) one Warrant to purchase one share of Common Stock.......... 200,000 -- --
Shares of Common Stock issuable upon exercise of Warrants,
including Warrants underlying Representative's Warrants(4)...... 2,500,000 22.50 56,250,000
Totals............................................................ $94,350,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Units,(2) each consisting of:..................................... $10,177.50
(i) one share of Common Stock; and............................. --
(ii) one Warrant to purchase one share of Common Stock.......... --
Units issuable upon exercise of the Representative's Warrants(3),
each consisting of:............................................. 1,062.00
(i) one share of Common Stock; and............................. --
(ii) one Warrant to purchase one share of Common Stock.......... --
Shares of Common Stock issuable upon exercise of Warrants,
including Warrants underlying Representative's Warrants(4)...... 16,593.75
Totals............................................................ $27,833.25
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as
amended.
(2) Includes 300,000 Units that Paulson Investment Company, Inc., the
representative of the several underwriters (the "Representative") has the
option to purchase to cover over-allotments, if any (the "Over-allotment
Option").
(3) In connection with the sale of the Units, the Registrant is granting to the
Representative warrants to purchase 200,000 Units (the "Representative's
Warrants").
(4) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issuable pursuant to the anti-dilution provisions
of the Warrants and the Representative's Warrants.
------------------------------
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 JULY 24, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 UNITS
[AUDIOHIGHWAY.COM LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF
COMMON STOCK AND ONE COMMON STOCK PURCHASE WARRANT
audiohighway.com (the "Company") hereby offers 2,000,000 units (the
"Units"), each consisting of one share of Common Stock, no par value (the
"Common Stock") and one warrant to purchase an additional share of Common Stock
(the "Warrants"). The Units will separate upon issuance. Each Warrant entitles
the holder to purchase one share of Common Stock at a price of $ per share
(150% of the initial public offering price of the Units), subject to certain
adjustments. The Warrants are exercisable at any time, unless previously
redeemed, until the fifth anniversary of the date of this Prospectus. The
Company may redeem outstanding Warrants, in whole or in part, at any time upon
30 days' prior written notice to the registered holders thereof, at a price of
$0.25 per Warrant, provided the closing bid price of the Common Stock has been
at least $ (200% of the initial public offering price of the Units) for 20
consecutive trading days immediately preceding the date of notice of redemption.
See "Description of Securities--Warrants."
Prior to this offering, there has been no public market for the Common Stock
or Warrants (collectively, the "Securities"). Application has been made for
quotation of the Securities on the Nasdaq National Market under the symbols
"AHWY" and "AHWYW," respectively. It is currently estimated that the initial
public offering price of the Units will be between $12.00 and $15.00 per Unit.
The initial public offering price of the Units will be determined by negotiation
between the Company and Paulson Investment Company, Inc. (the "Representative")
of the several underwriters (the "Underwriters"). See "Underwriting".
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit.................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
(1) Excludes a nonaccountable expense allowance equal to 2% of the gross
proceeds of this offering, payable to the Representative of the several
Underwriters, and five-year warrants (the "Representative's Warrants")
entitling the Representative to purchase up to 200,000 Units at an exercise
price of $ per Unit (120% of the initial public offering price of the
Units). The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses payable by the Company, estimated at
$1,015,000, including the Representative's nonaccountable expense allowance.
(3) The Company has granted the Representative a 45-day option to purchase up to
300,000 additional Units on the same terms as set forth above to cover
over-allotments, if any (the "Over-allotment Option"). If the Representative
exercises such option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The Units offered by this Prospectus are offered by the several Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right to reject any order in whole or in part
and to certain other conditions. Delivery of the Units will be made on or about
, 1998.
PAULSON INVESTMENT COMPANY, INC.
The Date of this Prospectus is , 1998
<PAGE>
Artwork for Inside Front Cover: Graphics depicting names and logos of various
companies whose content is available to be downloaded from the audiohighway.com
Web site.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and with quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
Audio Highway-TM-, audiohighway.com-TM-, AudioWiz-TM- and AudioCast-TM- are
trademarks of the Company. All other tradenames and trademarks appearing in this
Prospectus are the property of their respective holders.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
AND/OR WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE PROVIDES, ALL INFORMATION IN
THIS PROSPECTUS ASSUMES (I) A 1-FOR-3.837 REVERSE STOCK SPLIT OF THE OUTSTANDING
COMMON STOCK TO BE EFFECTED PRIOR TO THE COMMENCEMENT OF THE OFFERING, (II)
CONVERSION OF CERTAIN OUTSTANDING CONVERTIBLE PROMISSORY NOTES INTO AN AGGREGATE
261,217 SHARES OF COMMON STOCK, ASSUMING AN INITIAL PUBLIC OFFERING PRICE OF
$13.50; AND (III) NO EXERCISE OF THE OVER-ALLOTMENT OPTION, THE WARRANTS OR THE
REPRESENTATIVE'S WARRANTS, CURRENTLY OUTSTANDING OPTIONS OR WARRANTS OR
CONVERSION OF CERTAIN OUTSTANDING CONVERTIBLE DEBT. SEE "DESCRIPTION OF
SECURITIES" AND "UNDERWRITING."
THE COMPANY
audiohighway.com, founded in June 1994, offers a proprietary information and
entertainment service that enables its users to download and play back selected
audio content from the Internet (the "AudioCast System"). By entering into
licensing agreements with a wide variety of audio content providers, such as
National Public Radio ("NPR"), Penguin Books USA and Newsweek on Air, the
Company has assembled a continually expanding digital library of over 3,500
titles, including timely news programs that are updated frequently, audio books,
music and other forms of information and entertainment. This digital library can
be accessed over the Internet at the Company's Web site, which was launched in
November 1997. Once audio programming has been selected, the user can either
listen in real time to "streaming" audio (in the case of certain content) or
download and store the selection in digital form so it can be retrieved and
enjoyed at any time or location the user finds convenient.
The Company's AudioCast System consists of (i) proprietary client/server
software developed by the Company that is specifically adapted to transmit audio
data over the Internet, (ii) proprietary application software, known as
AudioWiz, which is provided free of charge to the customer and which allows him
or her to download and play back audio selections and (iii) a substantial,
diverse and growing library of audio content that ranges from audio books to
sports updates and music. The Company also makes available a palm-sized,
portable digital player/recorder (the "ListenUp Player") to provide portability
of audio content retrieved from the Company's Web site.
In recent years, the Internet has become established as a principal medium
for the transmission of textual and graphic data. Transmitting high quality
audio data over the Internet presents a practical challenge because of the
volume of data required to transmit audio. In general, audio available over the
Internet has consisted of short samples, often of relatively poor quality.
Through the use of the Company's proprietary client/server software, users can
download from the Internet selected audio material of their choosing. By using
the ListenUp Player or other audio playback devices equipped with the Company's
proprietary software, the user can replay these selections at the time and place
of his or her choice. The Company's client/server system also supports
Microsoft's NetShow, an application program that permits a user to listen to
certain audio programming in "real time," a process known as "streaming."
Streaming audio is of somewhat lower quality than what is available on a
downloaded basis and requires a continuous Internet connection with the source.
To use the AudioCast System, a user must have a computer with an Internet
connection and must have installed AudioWiz or NetShow. Either or both programs
can be downloaded directly from the Company's Web site following easy-to-use,
menu-driven commands. With AudioWiz or NetShow installed, the user obtains audio
programs by connecting with the Company's Web site, where he or she can select
from the current menu of program offerings. Relatively short programs can be
downloaded in a few minutes. Larger programs require longer download times.
Download time can be reduced through the use of high speed data connections, by
scheduling downloads for an off-peak period, or in some cases, such as audio
books, by downloading in segments. In most circumstances, the AudioWiz program
will operate without interfering with other applications being used at the same
time. Once downloaded, the content can be replayed on any audio-capable computer
or other device incorporating AudioWiz software or uploaded
3
<PAGE>
to the ListenUp Player, which provides portability and allows the customer to
replay the program at virtually any time or location.
The AudioCast System is compatible with Windows 95 and later versions of
Windows. During 1999, the Company expects to offer versions of its software that
will be compatible with other operating systems, such as System 8 (Apple) and
Windows CE used in palmtop computers, personal digital assistants ("PDAs") and
other portable computer devices.
The Company offers a diverse selection of audio content. Currently, its
audio content includes audio recordings of popular and classical books, self
improvement courses, information and news services, magazines, music, sports
updates, as well as various entertainment products such as audio movie reviews
and product information from a variety of product areas. All of the content
currently is offered to users free of charge and is supported in part by audio
advertisements inserted in the audio programs themselves, graphical "banner"
advertisements and channel sponsorships appearing on computer screens viewed
from the Company's Web site. The Company also expects to provide "premium" audio
content, including advertisement-free audio content, for a fee. The Company
contracts for audio content with the creators or owners of the content on either
a fixed monthly fee or a royalty basis.
The Company's strategic objective is to be the leading provider of audio
content over the Internet. The Company believes that there are a wide range of
potential applications for its technology, including the consumer market that it
currently addresses, as well as commercial markets, such as the dissemination of
information in audio format by businesses to their employees or investors or
audio-based promotional materials transmitted over the Internet. During the
fourth calendar quarter of 1998, the Company intends to initiate electronic
merchandising ("e-commerce"), thereby addressing the purchasing interests of an
increasing number of consumers who are accustomed to buying products over the
Internet. The Company expects to develop its consumer and commercial markets
through direct promotions and by entering into cooperative relationships with
other Internet companies that have large viewer bases but lack state-of-the-art
technology for the dissemination of audio materials.
The Company was incorporated in California in June 1994 under the name
Information Highway Media Corporation. In 1998, the Company changed its name to
audiohighway.com. References in this Prospectus to the "Company" refer to
audiohighway.com. Its executive offices are located at 20600 Mariani Avenue,
Cupertino California 95014 and its telephone number is (408) 255-5301. The
Company's Web site is located at HTTP://WWW.AUDIOHIGHWAY.COM ("Web site").
Information contained in the Company's Web site is not to be deemed to be a part
of this Prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,000,000 Units, each Unit consisting of one share of
Common Stock and one Warrant to purchase one additional
share of Common Stock. The Common Stock and Warrants
will trade separately immediately after the offering.
See "Description of Securities."
Warrants.......................... The Warrants will be exercisable at any time until they
expire on the fifth anniversary of the date of this
Prospectus. The Company may redeem the outstanding
Warrants, in whole or in part, at any time upon at least
30 days' prior written notice to the registered holders
thereof, at a price of $0.25 per Warrant, provided that
the closing bid price of the Common Stock has been at
least $ (200% of the initial public offering
price of the Units) for the 20 consecutive trading days
immediately preceding the date of notice of redemption.
See "Description of Securities--Warrants."
Common Stock Outstanding.......... 1,000,742 shares of Common Stock as of July 15, 1998(1);
3,261,959 shares of Common Stock after the offering(2)
Use of Proceeds................... The net proceeds of the offering, estimated to be
approximately $23,825,000 (assuming an initial public
offering price of $13.50 per Unit), will be used to fund
expansion of sales and marketing activities, ongoing
research and development efforts, acquisition of capital
equipment and Internet infrastructure, content
acquisition and working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbols......................... Application has been made for quotation of the Common
Stock and Warrants on the Nasdaq National Market under
the symbols "AHWY" and "AHWYW," respectively.
</TABLE>
- ------------------------
(1) Excludes (i) up to 699,735 shares of Common Stock issuable upon exercise of
outstanding options and warrants; and (ii) up to 287,279 shares of Common
Stock issuable upon conversion of outstanding convertible debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--Stock Option Plan" and "Description of
Securities--Existing Warrants" and "--Convertible Promissory Notes."
(2) Includes 261,217 shares of Common Stock issuable upon conversion of certain
outstanding convertible promissory notes, but excludes (i) up to 699,735
shares of Common Stock issuable upon exercise of outstanding options and
warrants; and (ii) up to 26,062 shares of Common Stock issuable upon
conversion of outstanding convertible debt. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Management--Stock Option Plan," "Description of Securities--Existing
Warrants" and "--Convertible Promissory Notes."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................... $ -- $ 4 $ -- $ 52
Operating expenses:
Cost of revenues..................................................... -- 35 -- 29
Marketing and sales.................................................. 850 1,634 603 604
Research and development............................................. 367 677 247 410
General and administrative........................................... 287 157 67 272
--------- --------- --------- ---------
Total expenses....................................................... 1,504 2,503 917 1,315
--------- --------- --------- ---------
Operating loss......................................................... (1,504) (2,499) (917) (1,263)
Interest expense....................................................... 77 1,292 586 403
--------- --------- --------- ---------
Net loss............................................................... $ (1,581) $ (3,791) $ (1,503) $ (1,666)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share (basic and diluted)................................. $ (2.10) $ (4.11) $ (1.66) $ (1.67)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share(1)......................... 752 923 903 1,001
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 236 $ 24,061
Working capital (deficit)............................................................... (1,542) 22,651
Total assets............................................................................ 648 24,473
Accumulated deficit..................................................................... (8,316) (10,187)
Shareholders equity (deficit)........................................................... (1,958) 23,007
</TABLE>
- ------------------------
(1) Based on an aggregate of 1,000,742 shares of Common Stock outstanding as of
June 30, 1998. Excludes (i) 699,735 shares of Common Stock issuable upon
exercise of outstanding options and warrants; and (ii) 287,279 shares of
Common Stock issuable upon conversion of outstanding convertible debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Management--Stock Option
Plan" and "Description of Securities--Outstanding Warrants." See also Note 1
of Notes to Financial Statements for an explanation of the determination of
the number of shares used in computing net loss per share.
(2) Adjusted (i) to give effect to the sale by the Company of 2,000,000 Units
offered hereby at an assumed initial public offering price of $13.50 per
Unit, after deducting the underwriting discount and estimated offering
expenses and the receipt of the net proceeds therefrom, and as adjusted to
give pro forma effect to (ii) the conversion of $3,011,000 of outstanding
convertible subordinated notes into 261,217 shares of Common Stock and (iii)
a charge to retained earnings of $1,871,000, representing the unamortized
value of the warrants relating to convertible subordinated notes issued by
the Company. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of
Securities--Convertible Promissory Notes."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE UNITS BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY OF THE UNITS OFFERED HEREBY. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL
AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
COMPETITION. The Company will face intense competition in every aspect of
its business, including competition for consumers of audio materials,
advertisers, providers of audio materials and vendors of products. The business
of providing data and other products using the Internet is currently
experiencing explosive growth and is characterized by extremely rapid
technological development, rapid changes in consumer habits and preferences,
massive infusions of capital and the emergence of a large number of new and
established companies with aspirations to control as much of the distribution
process as possible. A relatively small number of these companies, including
America On Line and Yahoo!, currently control primary or secondary access of a
significant percentage of all Internet users and therefore have a competitive
advantage in marketing to those users. Other large and established companies,
such as local and long distance telephone companies, cable companies, satellite
programming providers and others have established relationships with large
customer bases and are rapidly expanding into the provision of Internet
services. Substantially all of these companies have financial, technological,
promotional and other resources that are much greater than those available to
the Company. Most, if not substantially all, of such providers could use or
adapt their current technology, or could purchase technology, to provide a
service directly competitive with the Company's AudioCast System. The Company's
attractiveness to advertisers, content providers and vendors, and its ability to
earn revenues, is directly related to the size and, to a lesser extent, the
quality of the customer base for its services, which is, in turn, dependent on
the size and quality of the product offerings the Company can make available to
its customers. There is no assurance that the Company will be able to compete in
its chosen market. See "Business--Competition."
UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM. The market
for Internet advertising has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants, although
Internet advertising continues to be dominated by the larger Web sites. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty. The Company's ability to generate advertising revenue will
depend on, among other factors, (i) the continued development of the Internet as
an advertising medium, (ii) pricing of advertising on other Web sites, (iii) the
amount of traffic on the Company's Web site, (iv) the Company's ability to
achieve and demonstrate user demographic characteristics that are attractive to
advertisers, (v) the development and expansion of the Company's advertising
sales force and (vi) the establishment and maintenance of desirable advertising
sales agency relationships. Most potential advertisers and their advertising
agencies have only limited experience with the Internet as an advertising medium
and have not historically devoted a significant portion of their advertising
expenditures to Web-based advertising. There is no assurance that advertisers or
advertising agencies will be persuaded to allocate or continue to allocate
portions of their budgets to Web-based advertising or, if so persuaded, that
they will find such advertising to be effective for promoting their products and
services relative to traditional print and broadcast media. No standards have
yet been widely accepted for the measurement of the effectiveness of Web-based
advertising, and there is no assurance that such standards will develop
sufficiently to enable Web-based advertising to become a significant advertising
medium. Acceptance of the Internet among advertisers and advertising agencies
will also depend, to a large extent, on the level of use of the Internet by
consumers and upon growth in the commercial use of the
7
<PAGE>
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, the Company's business, results of operations and financial
condition would be materially adversely affected.
The Company's current arrangements with advertisers call for compensation
based solely and directly on the number of "impressions" recorded as viewers
call up the page on which the advertising is included or the number and duration
of audio ads delivered with audio content. Therefore, the Company does not
receive compensation simply for providing the advertising space. Accordingly its
revenues from banner advertising, channel sponsorships and audio ads are
entirely dependent on the number of viewers accessing its Web site and the
number of pages called up by such viewers or the volume of downloaded audio
content. There is no assurance the Company will be able to attract a number of
viewers sufficient to attain profitable operations. See "Business--Sales and
Marketing."
LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE OPERATING RESULTS;
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company has a limited
operating history on which to base an evaluation of its business and prospects.
Among other things, the Company has a limited history of providing audio content
over the Internet, a minimal history of earning revenues of any kind and no
history of charging fees for audio content or of selling products made by other
vendors. Because of its limited operating history, the Company does not have
historical financial data on which it or prospective investors can plan or base
forecasts of revenues, earnings or capital requirements with any accuracy.
Moreover, the long-term acceptance of Web-based advertising is as yet uncertain.
Accordingly, there is no assurance that the Company's revenues will increase or
even continue at their current level or that the Company will generate
sufficient cash from operations in future periods. The Company currently intends
to increase substantially its operating expenses in order to, among other
things, (i) expand its distribution network capacity, (ii) fund increased sales
and marketing activities, (iii) license additional content, (iv) develop and
upgrade technology and (v) purchase equipment for its operations. The Company's
expense levels are based, in part, on its expectations with regard to future
revenues, and to a large extent, such expenses are fixed, particularly in the
short term. To the extent the Company is unsuccessful in increasing its
revenues, it may be unable to appropriately adjust spending in a timely manner
to compensate for any unexpected revenue shortfall or may have to reduce its
operating expenses, causing it to forego potential revenue generating
activities, either of which could cause a material adverse effect upon the
Company's business, results of operations and financial condition.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include (i) the cost of acquiring and the availability of content, (ii)
demand for Internet advertising, (iii) seasonal trends in advertising
placements, (iv) the advertising cycles for, or the addition or loss of,
individual advertisers, (v) the level of traffic on the Company's Web site, (vi)
the amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, (vii) price competition or pricing
changes in Internet advertising, (viii) the level of and seasonal trends in the
use of the Internet, (ix) technical difficulties or system downtime, (x) the
introduction of new products or services by the Company or its competitors and
(xi) general economic conditions and economic conditions specific to the
Internet, such as e-commerce and online media. Any one of these factors could
cause the Company's revenues and operating results to vary significantly in the
future. In addition, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions or acquisitions that could cause significant declines in the
Company's quarterly operating results.
DEPENDENCE ON ADVERTISERS. Virtually all of the Company's Web advertising
revenues are derived from short-term contracts from a limited number of
advertisers. Consequently, many of the Company's advertising customers can cease
advertising on the Company's Web site quickly and without penalty, thereby
increasing the Company's exposure to competitive pressures. There is no
assurance that the Company's current advertisers will continue to purchase
advertisements or that the Company will be able
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to secure new advertising contracts from existing or future customers at
attractive rates or at all. Any failure of the Company to achieve sufficient
advertising revenue could have a material adverse effect on the Company's
business, results of operations and financial condition.
HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES. The Company was
incorporated in June 1994 to deliver free, personalized audio via the Internet
and was in the development stage until the fourth quarter of 1997. The Company
first recognized revenues in November 1997 and has recorded net losses each year
and quarter since its inception. As of June 30, 1998 the Company had an
accumulated a deficit of approximately $8,316,000 and is continuing to operate
at a loss. The Company and its prospects must be considered in light of the
early stage of development, particularly companies in new and rapidly evolving
markets, including Internet content, electronic commerce ("e-commerce") and
Internet advertising. To achieve and sustain profitability, the Company must,
among other things, (i) provide diverse content of interest to Internet users,
(ii) effectively develop new and maintain existing relationships with
advertisers, advertising agencies and content providers, (iii) continue to
develop and upgrade its technology and network infrastructure; (iv) respond to
competitive developments, (v) successfully introduce enhancements to its
existing products and services to address new technology standards and
developments on the Internet, and (vi) attract, retain and motivate qualified
personnel. The Company's operating results are also dependent on factors outside
the control of the Company, such as the availability of desirable content. There
is no assurance that the Company will be successful in addressing these risks
and the failure to do so would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company expects to
continue to incur significant losses on a quarterly and annual basis for the
foreseeable future. For these and other reasons, there is no assurance that the
Company will ever achieve profitability or, if profitability is achieved, that
it can be sustained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PRODUCT DEVELOPMENT AND TECHNOLOGICAL OBSOLESCENCE. The market for Internet
information delivery is characterized by extensive research and development and
rapid technological change, frequent new product introductions and technological
innovation, resulting in short product life cycles and evolving industry
standards. Development by others of new or improved products, processes or
technology may render the Company's products and services less competitive or
obsolete. The emerging character of these products and services and their rapid
evolution will require the Company to effectively use leading technologies,
continue to develop its technological expertise, enhance its current services
and continue to improve the performance, features and reliability of its network
infrastructure. Changes in network infrastructure, transmission and content
delivery methods and underlying software platforms and the emergence of new
technologies could dramatically change the structure and competitive dynamic of
the market for the Company's products and services. There is no assurance that
the Company will be successful in responding quickly, cost effectively and
sufficiently to these or other such developments. In addition, the widespread
adoption of new Internet technologies or standards could require substantial
expenditures by the Company to modify or adapt its Web site and services. A
failure by the Company to rapidly respond to technological developments could
have a material adverse effect on the Company's business, results of operations
and financial condition.
DEPENDENCE ON CONTENT PROVIDERS; LICENSE FEES PAYABLE TO CONTENT
PROVIDERS. The Company's future success depends in large part upon its ability
to obtain rights to and deliver content of sufficient interest to users of the
Internet. The Company does not create its own content. Rather, the Company
relies on third party content providers, such as book publishers, news and
financial information services and music publishers for the content it makes
available to users visiting its Web site. The Company's ability to maintain its
existing relationships with such content providers and to build new
relationships with additional content providers is critical to the success of
its business. Although many of the Company's agreements with third party content
providers are for an initial term of one year, with automatic renewal unless
cancelled, the content providers may choose to terminate such agreements prior
to the expiration of their terms. The Company's inability to secure licenses
from content providers or the termination of a
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significant number of content provider agreements would decrease the
availability of content that the Company can offer users. This may result in
decreased traffic on the Company's Web site and, as a result, decreased
advertising revenue, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's
agreements with most of its content providers are nonexclusive, and many of the
Company's competitors offer, or could offer, content that is similar to or the
same as that obtained by the Company from such nonexclusive content providers.
Some of the Company's potential competitors have established relationships and
financial and other resources that could enable them to offer inducements to the
Company's content providers or potential content providers to enter into
exclusive relationships with them, thereby denying access to such content by the
Company. Such direct competition could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Competition."
License fees payable to content providers and other licensing agencies may
increase as the Company continues to accumulate content and as competition for
such content increases. There is no assurance that the Company's content
providers and other licensing agencies will enter into prospective agreements
with the Company on the same or similar terms as those currently in effect or on
terms acceptable to the Company, if no agreement is in effect. If the Company is
required to pay increased licensing fees, such increased payments could have a
material adverse effect on the Company's business, results of operations and
financial condition.
MANAGEMENT OF GROWTH. The Company anticipates that significant expansion of
its operations will be required in order to address potential market
opportunities. The Company expects that it will need to increase its personnel
significantly in the near future. The anticipated substantial growth is expected
to place a significant strain on its managerial, operational and financial
resources and systems. To manage its growth, the Company must implement, improve
and effectively use its operational, management, marketing and financial systems
and train and manage its employees. There can be no assurance that the Company
will be able to manage effectively the expansion of its operations or that the
Company's current personnel, systems, procedures and controls will be adequate
to support the Company's operations. Any failure of management to manage
effectively the Company's growth could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"--Dependence on Key Personnel; Need for Additional Personnel."
RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY; SINGLE SITE. The
performance, reliability and availability of the Company's Web site and network
infrastructure are critical to its reputation and ability to attract and retain
users, advertisers and content providers. The Company's network infrastructure
is located at a single, leased facility in Cupertino, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, earthquakes, power loss, telecommunications failure, Internet breakdowns,
break-ins and similar events. The Company does not presently have redundant
facilities or a formal disaster recovery plan and carries only limited business
interruption insurance to compensate it for losses that may occur. Services
based on sophisticated software and computer systems often encounter development
delays and the underlying software may contain undetected errors that could
cause system failures when introduced. Any system error or failure that causes
interruption in the availability of content or an increase in response time
could result in a loss of potential or existing users, advertisers or content
providers and, if sustained or repeated, could reduce the attractiveness of the
Company's Web site to such entities or individuals. In addition, because the
Company's Web advertising revenues are directly related to the number of
advertisements delivered by the Company to users, system interruptions that
result in the unavailability of the Company's Web site or slower response times
for users would reduce the number of advertisements delivered and reduce
revenues.
A sudden and significant increase in traffic on the Company's Web site could
strain the capacity of the software, hardware and telecommunications systems
deployed or used by the Company, which could lead to slower response times or
system failures. The Company's operations also are, in part, dependent upon
receipt of timely feeds from certain of its content providers, and any failure
or delay in the transmission or
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<PAGE>
receipt of such feeds, whether due to system failure of the Company, its content
providers, satellites or otherwise, could disrupt the Company's operations. The
Company is also dependent upon Web browsers, Internet Service Providers ("ISPs")
and online service providers ("OSPs") to provide Internet users access to the
Company's Web site. Users may experience difficulties accessing or using the
Company's Web site due to system failures or delays unrelated to the Company's
systems. These difficulties may result in intermittent interruption in
programming. Any sustained failure or delay could reduce the attractiveness of
the Company's Web site to users, advertisers and content providers. The
occurrence of any of the foregoing events could have a material adverse effect
on the Company's business, results of operations and financial condition.
SECURITY RISKS. Despite the implementation of security measures, the
Company's networks may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
the Company's Internet operations. ISPs and OSPs have in the past experienced,
and may in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. The Company may be required to expend significant capital
or other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Although the Company intends to
continue to implement industry-standard security measures, there is no assurance
that measures implemented by the Company will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to users accessing the Company's
Web site, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company may require additional capital to take full advantage of future growth
opportunities, fund its ongoing research and development efforts and continue to
upgrade its technology and network systems. The Company's future capital
requirements will depend on many factors, including, among others, market
acceptance of and demand for the Company's products and services, the acceptance
by advertisers of the Company's business concept, the successful implementation
and expansion of the e-commerce portion of its business, the costs of acquiring
desirable content and the Company's ability to attract distribution partners.
The Company has no current anticipated sources of funding beyond the proceeds
from this offering. The Company currently believes that the proceeds of this
offering will satisfy its capital requirements for at least the 12 months
following this offering. However, there is no assurance that additional
financing will not be required prior to such time. Moreover, there is no
assurance that additional equity or debt financing, if required, will be
available on acceptable terms or at all. The Company may receive additional
funds upon the exercise from time to time of the Warrants and other outstanding
warrants and stock options, but there is no assurance that any holders of
options or warrants will elect to exercise or that the amounts received will be
sufficient for the Company's purposes. If additional funds are raised by issuing
equity securities, further substantial dilution to existing shareholders,
including purchasers of the Units offered hereby, may result. The inability of
the Company to obtain financing on acceptable terms when needed would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. Rapid growth in use
of and interest in the Internet is a recent phenomenon and there is no assurance
that acceptance and use of the Internet will continue to develop or that a
sufficient base of users will emerge to support the Company's business. Because
global commerce and on-line exchange of information on the Internet is new and
evolving, it is difficult to predict with any assurance whether the Internet
will prove to be a viable commercial marketplace. Future revenues of the Company
will depend largely on the widespread acceptance and use of the Internet as a
source of multimedia information and entertainment and as a vehicle for commerce
in goods and services. The Internet may not be accepted as a viable commercial
medium for broadcasting
11
<PAGE>
multimedia content, if at all, for a number of reasons, including (i)
potentially inadequate development of the necessary infrastructure, (ii)
inadequate development of enabling technologies, (iii) lack of acceptance of the
Internet as a medium for distributing content and (iv) inadequate commercial
support for Web-based advertising. To the extent that the Internet continues to
experience an increase in users, an increase in frequency of use or an increase
in the bandwidth requirements of users, there is no assurance that the Internet
infrastructure will be able to support the demands placed upon it, specifically
the demands of delivering high-quality audio content. In addition, the Internet
could lose its viability as a commercial medium due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased government regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in unacceptable response times and could adversely affect use
of the Internet generally and of the Company's Web site in particular. If use of
the Internet does not continue to grow or grows more slowly than expected, or if
the Internet infrastructure does not effectively support the growth that may
occur, the Company's business, results of operations and financial condition
could be materially adversely affected.
DEPENDENCE UPON KEY PERSONNEL. The Company's success depends, to a
significant extent, upon a number of key employees and consultants. The loss of
the services of one or more of these employees or consultants could have a
material adverse effect on the business of the Company. The Company currently
does not maintain "key person" life insurance on the lives of any officers or
employees, nor does it have employment agreements with its key personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical personnel and management. Competition for such
personnel is intense and there is no assurance that the Company will be able to
retain its key management and technical employees or that it will be able to
attract or retain additional qualified technical personnel and management in the
future. The inability to attract and retain the necessary technical personnel
and management could have a material adverse effect upon the Company's business,
result of operations and financial condition. See "Management."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The
Company has filed several patent applications with respect to certain aspects of
the AudioCast System, and two patents have issued. Although the Company does not
believe that its existing patents provide a competitive advantage, there is no
assurance that in the future, patent protection will not be of substantial
importance to the Company's business and future prospects. There is no assurance
that patents will be issued pursuant to the pending applications or that the
patents that are issued will not be held invalid or unenforceable by a court
having jurisdiction over a dispute challenging their validity. Even if patents
are upheld and are not challenged, third parties might be able to develop
equivalent technologies or products without infringing such patents or the
Company could be required to expend substantial funds in order to defend its
patents.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success, and the Company relies on a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
its employees and with third parties to establish and protect its proprietary
rights. There is no assurance that these steps will be adequate, that the
Company will be able to secure trademark registrations for all of its marks in
the United States or other countries or that third parties will not infringe
upon or misappropriate the Company's copyrights, trademarks, service marks and
similar proprietary rights. The Company does not own any registered copyrights
protecting its products but claims common law copyrights in its software. There
is no assurance that common law copyright will provide adequate protection for
the Company's related intellectual property. In addition, effective copyright
and trademark protection may be unenforceable or limited in certain countries,
and the global nature of the Internet makes it impossible to control the
ultimate destination of the content downloaded from the Company's Web site. In
the future, litigation may be necessary to enforce and protect the Company's
trade secrets, copyrights and other intellectual property rights.
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<PAGE>
The Company has filed trademark applications with the U. S. Patent Office
for several of its unregistered trademarks. The "ListenUp" trademark is licensed
from ListenUp, Inc. The Company intends to pursue the registration of its
trademarks based upon anticipated use internationally. There is no assurance
that the Company will be able to secure adequate protection for these trademarks
in foreign countries. In addition, there could be potential trademark or
trademark infringement claims brought by owners of other registered trademarks
or trademarks.
There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all. See "Business--Patents,
Trademarks and Proprietary Rights."
There is also no assurance that the measures taken by the Company will
adequately protect the confidentiality of the Company's proprietary information
or that others will not independently develop products or technology that are
equivalent or superior to those of the Company. See "--Liability for Internet
Content" and "--Government Regulation."
SINGLE SOURCE MANUFACTURING. Although the Company does not expect sales of
the ListenUp Player to provide a substantial source of revenues, it does believe
that the portability of its audio content will be considered an important or
desirable feature by many users of its audio Web site. The Company does not
manufacture the ListenUp Player and does not anticipate doing so in the future.
Accordingly, its success will depend in part upon its ability to have its
hardware product or products manufactured successfully in commercial volumes.
Sycom Technologies ("Sycom") has agreed to manufacture of the ListenUp Player
for the Company through June 2001. While Sycom provides manufacturing capacity
and expertise, there is no assurance that it will meet the Company's future
demand for mass production on a timely basis. Inasmuch as the Company does not
have a second manufacturing source, any failure of Sycom to meet the Company's
requirements, as to quality, quantity or timing of delivery, may have a material
adverse effect on the Company. See "Business--Manufacturing."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTY. Although there are currently
few laws and regulations directly applicable to the Internet, it is likely that
new laws and regulations will 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. The adoption of restrictive laws or regulations could slow Internet
growth or expose the Company to significant liabilities associated with content
available on its Web site. The application of existing laws and regulations
governing Internet issues such as property ownership, libel and personal privacy
is also subject to substantial uncertainty. There can be no assurance that
current or new laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, content, taxation, defamation and personal injury), will not expose
the Company to significant liabilities, significantly slow Internet growth or
otherwise cause a material adverse effect on the Company's business, results of
operations or financial condition. See "Business--Government Regulation."
The Company currently does not collect sales or other taxes with respect to
the sale of services or products in states and countries where the Company
believes it is not required to do so. Some states and 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 the Company should collect sales or other taxes on
products and services, or remit payment of sales or other taxes for prior
periods, could have a material adverse effect on the Company's business, results
of operations and financial condition.
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The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. Although the
Company does not currently distribute the types of materials that the CDA 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 similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, results of
operations and financial condition.
POTENTIAL LIABILITY FOR INTERNET CONTENT. As a distributor of Internet
content, the Company faces potential liability for negligence, copyright,
patent, trademark, defamation, indecency and other claims based on the nature
and content of the materials that it makes available to Internet users. Such
claims have been brought, and sometimes successfully pressed, against Internet
content distributors. In addition, the Company could be exposed to liability
with respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Company's Common Stock or
Warrants, and there is no assurance that an active public market for any of the
Company's Securities will develop or be sustained after this offering. The
initial public offering price was determined by negotiation between the Company
and the Representative of the Underwriters. See "Underwriting."
The trading price of the Company's Securities could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations or new products by the Company or its competitors, or other events
or factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices for many
technology and small capitalization companies. These broad market fluctuations
may materially and adversely affect the market price of the Common Stock or the
Warrants.
REDEMPTION OF WARRANTS. The outstanding Warrants will be subject to
redemption at $0.25 per Warrant on 30 days' written notice, provided that the
closing bid price of the Common Stock has been at least $ for the 20
consecutive trading days immediately preceding the date of notice of redemption.
In the event the Company exercises the right to redeem the Warrants, a holder
would be forced either to exercise the Warrants or accept the redemption price.
See "Description of Securities--Warrants."
CURRENT PROSPECTUS REQUIRED TO EXERCISE WARRANTS. Purchasers of Units will
be able to exercise the Warrants included therein only if a current prospectus
relating to the shares of Common Stock underlying such Warrants is then in
effect. Although the Company has undertaken to use its best efforts to maintain
a current registration statement covering the Warrants until they expire or are
redeemed, there is no assurance that the Company will be able to do so. The
value of the Warrants may be impaired if a current prospectus covering the
Common Stock issuable upon exercise of the Warrants is not kept effective. See
"Description of Securities--Warrants."
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SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby will incur
immediate and substantial dilution of approximately $6.45 per share in the pro
forma net tangible book value per share of the Common Stock from the initial
public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
Following this offering, there will be 3,261,959 shares of Common Stock
outstanding, of which the 2,000,000 shares offered hereby as a component of the
Units (3,561,359 if the Over-allotment Option is exercised in full) will be
freely tradable without restriction under the Securities Act, except for shares
acquired in this offering by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. The 1,261,959 shares of Common
Stock outstanding prior to the offering are shares of Restricted Stock, are
subject to lock-up agreements with the Representative and may not be sold or
otherwise transferred until expiration of the one-year lock-up for directors,
executive officers and principal shareholders (aggregating 407,722 shares) and
the six month lock-up pertaining to the balance of the shares, unless sooner
released by the Representative in its sole discretion. Upon expiration of the
one-year lock-up agreements with the Representative, all such shares of Common
Stock will become eligible for sale in the public market, subject to the
provisions of Rule 144 or Rule 144(k). If the Representative releases the shares
from the lock-up agreements early, a significant portion of the Restricted Stock
will be available for sale immediately under either Rule 144 or Rule 144(k). In
addition, the Company intends to file a registration statement under the
Securities Act covering shares of Common Stock reserved for issuance under its
stock option plan. Upon filing of such registration statement, shares purchased
upon exercise of options covered thereby will be freely tradable without
restriction, except for shares acquired by affiliates. See "Shares Eligible For
Future Sale."
ANTI-TAKEOVER PROVISIONS. The Company is authorized to issue 5,000,000
shares of Preferred Stock, with such designations, rights and preferences as may
be determined from time to time by the Board of Directors in accordance with the
Company's Articles of Incorporation and California law. Accordingly, the Board
of Directors will be empowered, without shareholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock and the Preferred Stock offered hereby. In the event of such issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. See
"Description of Securities--Preferred Stock."
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DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
Payment of any cash dividends will depend upon the results of operations,
financial condition and capital expenditure plans of the Company, as well as
such other factors as the Board of Directors, in its sole discretion, may
consider relevant. However, the Company presently intends to retain any earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
The Company is currently prohibited under California law from paying
dividends because it has an accumulated deficit and no retained earnings. Upon
achieving retained earnings, the Company will no longer be precluded from
declaring and paying dividends, but may still elect to retain all earnings for
use in the business.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,000,000 Units offered hereby are estimated to be approximately $23,825,000
(assuming an initial public offering price of $13.50 per Unit), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and assuming no exercise of the Warrants.
Of the net proceeds from this offering, the Company intends to use
approximately $10,000,000 to expand its sales and marketing operations,
approximately $5,000,000 to fund greater levels of product development,
approximately $3,000,000 for capital expenditures consisting primarily of
additions to the Company's networking and computer infrastructure and
approximately $3,000,000 for additional content acquisition. The remainder of
the net proceeds will be used for other general corporate purposes, including
working capital. The Company believes the net proceeds of this offering will be
sufficient to fund its plan of operations for at least the next twelve months.
The above allocations represent the Company's best estimate based upon its
current plans. The amounts actually expended by the Company on any particular
use of proceeds may vary significantly depending on a number of factors,
including future revenue growth, the cash generated or used by the Company's
operations and the progress of the Company's marketing efforts. The Company
reserves the right to reallocate the net proceeds of this offering among the
various categories set forth above as it, in its sole discretion, deems
necessary or advisable.
Pending such uses, the net proceeds of this offering will be invested in
short-term, investment grade, interest-bearing securities or other instruments
as the Company deems appropriate.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1998 (i) on an actual basis, (ii) with pro forma changes to reflect conversion
of certain convertible securities and (iii) as adjusted to give effect to the
sale by the Company of the 2,000,000 Units offered hereby at an assumed initial
public offering price of $13.50 per Unit and the receipt of the net proceeds
therefrom. This table should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED
--------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Convertible subordinated notes............................................. $ 1,140 $ -- $ --
Other debt................................................................. 233 233 233
Shareholder's equity (deficit):
Preferred stock, no par value: 5,000,000 shares authorized; none
outstanding actual, pro forma or as adjusted no shares outstanding
actual or as adjusted.................................................. -- -- --
Common stock, no par value: 50,000,000 shares authorized; 1,000,742
shares issued and outstanding, actual(1); 1,261,959 issued and
outstanding pro forma(1)(2); 3,261,959 shares issued and
outstanding(3), as adjusted............................................ 2,971 5,982 29,807
Additional paid in capital................................................. 3,387 3,387 3,387
Accumulated deficit........................................................ (8,316) (10,187) (10,187)
--------- ------------- -----------
Total shareholders' equity (deficit)..................................... (1,958) (818) 23,007
--------- ------------- -----------
Total capitalization................................................... $ (585) $ (585) $ 23,240
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) Excludes 987,014 shares of Common Stock reserved for issuance upon
conversion of all currently outstanding convertible promissory notes and
upon exercise of all currently outstanding options and warrants. See
"Management--Stock Option Plan," "Description of Securities--Convertible
Promissory Notes" and "--Warrants."
(2) Gives effect to the conversion of $3,011,000 outstanding of convertible
subordinated notes into 261,217 shares of Common Stock and a charge to
retained earnings of $1,871,000, representing the unamortized value of the
warrants relating to convertible subordinated notes issued by the Company.
(3) Excludes an aggregate of 725,797 shares of Common Stock reserved for
issuance upon conversion of certain outstanding convertible promissory notes
into 26,062 shares, and upon exercise of all outstanding options and
warrants into an aggregate of 699,735 shares. See "Management--Stock Option
Plan," "Description of Securities--Convertible Promissory Notes" and
"--Warrants."
17
<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing the net tangible book
value (total tangible assets less total liabilities) of the Company by the
number of shares of Common Stock outstanding.
At June 30, 1998, the net tangible book deficit of the Company was
($1,958,000), or ($1.96) per share of Common Stock. After giving effect to the
Pro Forma Adjustments (see footnote 2 of "Capitalization"), the pro forma net
tangible book deficit of the Company at June 30, 1998 would have been $(818,000)
or $(0.65) per share. After also giving effect to the sale by the Company of the
Units offered hereby, and the receipt of the estimated net proceeds therefrom,
assuming an initial public offering price of $13.50 (after deducting the
underwriting discount and the estimated offering expenses and attributing no
portion of the value of the Unit to the Warrant), the pro forma net tangible
book value of the Company as of June 30, 1998 would have been $23,007,000 or
$7.05 per share of Common Stock. This represents an immediate increase in the
net tangible book value of $7.70 per share to existing shareholders and an
immediate dilution in net tangible book value of $6.45 per share to the
purchasers of the Units in the offering.
The following table illustrates the per share dilution to purchasers of the
Units:
<TABLE>
<CAPTION>
Assumed initial public offering price....................... $ 13.50
<S> <C> <C>
Net tangible book deficit per share....................... $ (1.96)
Increase per share attributable to Pro Forma
Adjustments............................................. 1.31
---------
Pro forma net tangible book deficit before offering....... (0.65)
Increase attributable to new investors.................... $ 7.70
---------
Adjusted net tangible book value after offering............. 7.05
---------
Dilution per share to new investors......................... $ 6.45
---------
---------
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1998, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share (i) paid by
the existing shareholders and (ii) paid by the purchasers of the Units in this
offering, assuming the sale of 2,000,000 Units at an assumed public offering
price of $13.50 per Unit, before deduction of underwriting discounts and other
estimated offering expenses payable by the Company and ascribing no portion of
the value of a Unit to the Warrant. The calculation in this table with respect
to shares of Common Stock to be purchased by new investors in this offering
excludes shares of Common Stock issuable upon exercise of the Warrants.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............................ 1,261,959 38.7% $ 5,982,000 18.1% $ 4.74
New Investors.................................... 2,000,000 61.3 27,000,000 81.9 $ 13.50
---------- ----- ------------- -----
Total........................................ 3,261,959 100.0% $ 32,982,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing table assumes conversion of certain outstanding convertible
notes into an aggregate of 261,217 shares of Common Stock but no exercise of the
Over-allotment Option, outstanding options or warrants, the Warrants or the
Representative's Warrants or certain other convertible promissory notes. At June
30, 1998, there were convertible promissory notes, options and warrants
outstanding to purchase up to an aggregate of 987,014 shares of Common Stock at
exercise or conversion prices ranging from $1.92 to $14.39. See
"Management--Stock Option Plan," "Description of Securities--Existing Warrants,"
"--Convertible Promissory Notes" and the Notes to Financial Statements. To the
extent that these options and warrants are exercised, or the convertible notes
are converted, there will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1996 and 1997 and the selected balance sheet data at December 31,
1997 have been derived from, and are qualified by reference to, the Company's
financial statements included elsewhere in this Prospectus, which have been
audited by Grant Thornton LLP, independent auditors. The selected statements of
operations data for the six month periods ended June 30, 1997 and 1998 and the
selected balance sheet data at June 30, 1998 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
In the opinion of management of the Company, such unaudited financial statements
have been prepared on a basis consistent with the audited financial information
and include all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the results for these periods and as of
such dates. The selected financial data provided below for the six months ended
June 30, 1998 are not necessarily indicative of the future results of operations
or financial performance of the Company. The data set forth below should be read
in conjunction with the financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................. $ -- $ 4 $ -- $ 52
Operating expenses:
Cost of revenues........................................................ -- 35 -- 29
Marketing and sales..................................................... 850 1,634 603 604
Research and development................................................ 367 677 247 410
General and administrative.............................................. 287 157 67 272
--------- --------- --------- ---------
Total expenses........................................................ 1,504 2,503 917 1,315
--------- --------- --------- ---------
Operating loss............................................................ (1,504) (2,499) (917) (1,263)
Interest expense.......................................................... 77 1,292 586 403
--------- --------- --------- ---------
Net loss.................................................................. $ (1,581) $ (3,791) $ (1,503) $ (1,666)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share (basic and diluted).................................... $ (2.10) $ (4.11) $ (1.66) $ (1.67)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share(1)............................ 752 923 903 1,001
Pro forma net loss per share (basic and diluted).......................... $ (1.50) $ (2.23) $ (0.84) $ (1.08)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing pro forma net loss per share..................... 1,013 1,184 1,164 1,262
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 5 $ 236
Working capital (deficit)....................................................... (1,741) (1,542)
Total assets.................................................................... 428 648
Accumulated deficit............................................................. (6,650) (8,316)
Shareholders equity (deficit)................................................... (2,445) (1,958)
</TABLE>
- --------------------------
(1) Based on an aggregate of 1,000,742 shares of Common Stock outstanding as of
June 30, 1998. Excludes (i) 699,735 shares of Common Stock issuable upon
exercise of outstanding options and warrants; and (ii) 287,279 shares of
Common Stock issuable upon conversion of outstanding convertible debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Management-- Stock Option
Plan" and "Description of Securities--Outstanding Warrants." See also Note 1
of Notes to Financial Statements for an explanation of determination of the
number of shares used in computing net loss and pro forma net loss per
share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the two fiscal
years ended December 31, 1996 and 1997 and the six month periods ended June 30,
1997 and 1998. The following discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
The following discussion contains forward-looking statements. The Company's
actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
GENERAL
The Company offers a proprietary information and entertainment service that
enables its users to download and play back selected audio content from the
Internet (the "AudioCast System"). The AudioCast System consists of (i)
proprietary client/server software developed by the Company that is specifically
adapted to transmit audio data over the Internet, (ii) proprietary application
software, known as AudioWiz, which is provided free of charge to the customer
and which allows him or her to download and play back audio selections and (iii)
a substantial, diverse and growing library of audio content that ranges from
audio books to sports updates and music. The Company also makes available a
palm-sized, portable digital player/recorder (the "ListenUp Player") to provide
portability of audio content retrieved from the Company's Web site.
The Company believes that what differentiates the AudioCast System from
other Internet-based information services is its focus on audio content versus
text, the downloading of audio content as digital files available for later use
and its emphasis on portability. The Company's system provides users with a
simple, easy to use method of selecting a diverse range of audio content from a
single Web site and the ability to listen to such programming in almost any
environment.
During the period from the Company's inception in June 1994 through December
31, 1996, the Company had no revenues and its operating activities related
primarily to the research and development efforts and initial planning and
development of the Company's Web site and operations. During 1997, the Company
generated minimal revenues from Web-based advertising, and the Company's
operating activities related to the continued development of its proprietary
software, building market awareness and the launch and continued enhancement of
its Web site. Throughout the Company's existence, it has expended significant
resources in the research and development of its technology and the aggregation
of content by obtaining Internet broadcasting rights to audio programming.
The Company's revenues are derived principally from the sale of audio
commercials included in its downloaded or streamed audio programming, channel
sponsorships and banner advertisements, all on short-term contracts. Advertising
revenues are recognized in the period in which the advertisement is delivered,
provided that collection of the resulting receivable is probable. For each hour
of downloaded content, the Company distributes six minutes of audio commercials.
The audio selections, which include audio advertisements, are free of charge to
the user. In the future, the Company anticipates that it may generate additional
revenue streams through ad-free program charges and charges for premium content,
hardware sales of the ListenUp Player, e-commerce, licensing and Intranet sales.
However, the extent and timing of developing such additional revenue sources is
not currently known, and there is no assurance that the Company will in fact
generate revenues from all or any of these potential sources at any time in the
future.
The amount of revenue that the Company can generate is directly related to a
number of factors, including the volume of advertisers, the rates charged for
the various types of advertising, the number of
20
<PAGE>
users who visit the Company's Web site and the amount of audio content
downloaded or streamed. To date, the Company has generated a minimal amount of
advertising revenue, in part due to excess advertisement "inventory" resulting
from the fact the Company has attracted more customers than advertisements to
match with its audio content. The Company expects to use a significant portion
of the net proceeds of this offering for sales and marketing and thereby expects
to rapidly expand its advertising inventory. There is no assurance, however,
that the Company will successfully increase revenues or achieve profitability.
The Company has signed agreements with major media companies to provide a
wide selection of audio content such as news, books, self improvement programs,
magazine articles, radio and television programs and movie reviews. The Company
stores audio content on its Web site and is continually adding content to its
audio library. The cost of this content to the Company is, for the most part,
directly proportional to the duration of downloaded content. Certain of the
content is purchased on a flat fee basis.
The Company has incurred significant losses since its inception. As of June
30, 1998, the Company had an accumulated deficit of approximately $8,316,000 and
is continuing to operate at a loss. The Company believes that its success will
depend largely on its ability to attract users to its Web site, obtain
advertising contracts and secure additional audio content of interest to users.
Accordingly, the Company intends to invest heavily in sales and marketing,
content acquisition and continued research and development efforts.
In view of the rapidly evolving nature of the Company's business and its
limited operating history, the Company believes that period-to-period
comparisons of its revenues and operating results, including its 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 future
performance.
PLAN OF OPERATIONS
The Company intends to use the net proceeds of this offering to expand and
improve its AudioCast System. The Company expects expenditures to increase very
substantially across all expense categories as it seeks to increase its
advertising inventory, expand its digital audio content library and upgrade its
Web site following the offering. The Company expects the most significant
expense increases will occur in sales and marketing and research and
development.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Net revenues were $52,000 for the first two quarters of 1998, while the
Company recognized no revenues for the same period in 1997. The Company launched
its Web site and began generating revenues in November 1997.
Cost of revenues was $29,000 for the first half of 1998. This primarily
represents licensing costs of content distributed on the Company's Web site.
Since there were no revenues recognized in the first half of 1997, there was no
cost of revenues in that period.
Selling and marketing expenses were $604,000 for the first two quarters of
1998, up slightly from selling and marketing expenses of $603,000 for the same
period in 1997. The Company expects selling and marketing expenses to increase
substantially in future periods as the Company secures the financial resources
from this offering to grow its business.
Research and development expenses were $410,000 for the first half of 1998,
up 66% from $247,000 for the same period in 1997. This increase was primarily
the result of increased staffing and use of consulting engineers. The Company
employs outside consulting engineers to facilitate a portion of its development
effort.
21
<PAGE>
General and administrative expenses ("G&A") were $272,000 for the first six
months of 1998, compared to G&A expenses of $67,000 for the same period in 1997.
This increase was primarily the result of increased costs in rent, legal fees
and consulting fees. The Company also expanded into new office space (8,000
square feet) in December 1997 to accommodate increased staffing.
The operating loss was $1,263,000 for the first half of 1998 compared to an
operating loss for the same period of 1997 of $917,000, an increase of
approximately 38%. As noted above, the increased loss was primarily the result
of increased expenses for rent, legal fees, advertising, marketing, engineering
and product development.
Interest expense decreased approximately 31% to $403,000 during the first
half of 1998 from $586,000 in the same period in 1997, despite the fact that the
Company's outstanding debt increased significantly during this same period. This
was the result of amortizing the fair value attributed to warrants issued in
connection with the outstanding debt over the life of the related debt.
Amortization for the first half of 1997 was $537,000 compared to $300,000 for
the comparable period in 1998.
For the first six months of 1998 the Company incurred a net loss of
$1,666,000 compared to a net loss of $1,503,000 for the same period in 1997. The
increase was primarily the result of increased expenses for research and
development.
The fair value of warrants issued in connection with debt is being amortized
as interest expense over the contractual life of the related debt. In the
quarter in which this offering is completed, the unamortized discount, estimated
at $1,871,000, will be recorded as a charge to operations for debt restructuring
(as an extraordinary item) and will be reflected in the Company's statement of
operations for that period. The charge is likely to have a material effect on
the Company's reported earnings for that quarter, and as a result the Company
expects to have a significant net loss for the quarter in which the offering
occurs.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company's financial results in the years ended December 31, 1997 and
1996 were significantly affected by the amount of capital raised during the
respective periods. Since inception, the Company has funded its development
primarily through the sale of equity and debt securities. Capital constraints
have, on occasion, resulted in some delay of product development and of the
launching of the Company's Web site.
Net revenues for the year ended December 31, 1997 were $4,000. There were no
net revenues for the period ending December 31, 1996. The Company's business
model is primarily based on generating revenues from the sale of adverting and
on electronic commerce. During the last two months of 1997, the Company launched
its Internet Web site and began to generate advertising revenues.
Cost of revenues in 1997 was $35,000. Because the Company had not yet begun
generating revenues during 1996, there was no cost of sales in the prior year.
The increase in the cost of revenues was due to the launch of the Company's Web
site in November 1997 and content acquisition costs.
Selling and marketing expenses in 1997 increased $784,000, or 92%, to
$1,634,000 from $850,000 in 1996. This increased was due to an aggressive
advertising campaign designed to promote the launch of the Company's new Web
site in November 1997. The advertising campaign included exposure on radio and
television, Internet distribution sites and Internet "direct" e-mail. Selling
and marketing expenses in 1997 also included increased travel, entertainment and
marketing expenses related to trade shows and conferences that were designed to
gain exposure and promote the Company's Web site and proprietary technology.
Research and development expenses in 1997 increased $310,000, or 85%, to
$677,000 from $367,000 in 1996. The increase reflected an increase in research
and development personnel. The Company also has employed outside engineering
consultants to facilitate a portion of its development effort, and in 1997,
22
<PAGE>
more extensively used consultants than it had in 1996. During 1997, the Company
completed development of its Web site and its AudioWiz proprietary software.
However, in order to remain competitive in this rapidly evolving market, the
Company expects to have to continue to expend considerable sums on research and
development, and the Company has allocated a portion of the net proceeds of this
offering to that purpose.
General and administrative expenses in 1997 decreased $130,000, or 45%, to
$157,000 from $287,000 in 1996. The decrease reflected a decrease in
administrative personnel as well as the implementation of a cost control
program, which was put into place during the second quarter of 1997.
Based on the foregoing, the net loss from operations in 1997 increased
$995,000, or 66%, to $2,499,000 from $1,504,000 in 1996. As described above,
this was primarily the result of increased expenditures to expand research and
development combined with sales and marketing expenses related to the
introduction of the Company's Web site.
Interest expense was $1,292,000 in 1997 compared to $77,000 in 1996. The
increase reflects increased debt financing and the amortization in 1997 of
$1,009,000 representing the fair value of warrants issued in connection with
debt.
The resulting net loss in 1997 was $3,791,000 compared to a loss of
$1,581,000 in 1996. The Company expects to continue generating losses until at
least the fourth quarter of 1999. However, there is no assurance that the
Company will become profitable on this schedule or at any time thereafter.
The Company has no current tax liability, and management has determined that
the realization of its deferred tax assets is not probable. As such, the Company
has provided a full valuation allowance against its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception almost entirely from
the sale of equity and debt securities, supplemented with a bank line of credit.
As of June 30, 1998, the Company had cash and cash equivalents of $236,000 and a
working capital deficit of $1,542,000. The Company currently is financing its
daily operations primarily through debt financing.
The Company has issued subordinated convertible promissory notes (the
"Notes") of which $3,011,000 in principal were outstanding at June 30, 1998. The
Notes, which bear interest at 10%, are convertible into Common Stock at rates
ranging from $6.75 to $14.39 per share. On January 3, 1998, the Company
converted $591,000 of Notes and accrued interest of $59,000 into 56,430 shares
of Common Stock. The remaining Notes are all due on or before March 31, 2000.
Officers and directors of the Company purchased $130,000 of the Notes, all of
which were converted as described above prior to June 30, 1998. The Notes will
convert into an aggregate of 261,217 shares of Common Stock concurrently with
the closing of this offering and such conversion is reflected in the pro forma
adjustments described elsewhere in this Prospectus.
The Company has a $100,000 line of credit with a bank that expires on August
14, 1998. The line bears interest at 9% per annum and is guaranteed by a
non-affiliate shareholder. At June 30, 1998, $99,000 was outstanding under the
line of credit.
The Company has also issued subordinated notes payable in the amount of
$134,000 to private investors, of which $100,000 is convertible into Common
Stock at $3.84 per share. These notes are subordinated to all other
indebtedness, require no payments until maturity, bear interest at rates ranging
from 9% to 12% per annum and are due by July 31, 1999.
The Company believes the net proceeds of this offering will be sufficient to
fund its operations for at least the next 12 months and that, during that
period, it will not be necessary for the Company to raise additional funds to
meet the expenditures required for operating its business. The proceeds of this
23
<PAGE>
offering, together with the bank line of credit, are the only sources of capital
currently available to the Company, other than existing cash and cash
equivalents.
The Company will make significant ongoing investments in research and
development for future generation products and services. It also expects to have
significant expenditures in sales and marketing and further content acquisition
in order to attract customers to its Web site. There is no assurance that the
Company's analysis of its capital requirements will be accurate, particularly in
light of the fact that it is entering a new business in a new market.
The Company's future expenditures and capital requirements will depend on a
number of factors including the development and implementation of next
generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet based products and services.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1997, the Company had approximately $6,250,000 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $3,125,000 of California net
operating loss carryforwards for tax reporting purposes which will expire
beginning in 1999.
The Tax Reform Act of 1986 imposes limitations on the use of net operating
loss carryforwards if certain stock ownership changes have occurred or could
occur in the future. The sale of the Units offered hereby constitutes such a
change in ownership.
YEAR 2000 COMPLIANCE
There are issues associated with the programming code in existing computer
systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company has evaluated its current systems, purchased necessary
upgrades and believes that its current hardware and software is Year 2000
compliant. The Company does not anticipate that the Year 2000 problem will have
a material impact on its business or operations.
24
<PAGE>
BUSINESS
The Company is an Internet-based information and entertainment company
which, through its AudioCast System, uses the capabilities of the World Wide Web
(the "Web") to deliver audio content. By entering into licensing agreements with
a wide variety of audio content providers such as National Public Radio ("NPR"),
Penguin Books USA and Newsweek on Air, the Company has assembled a continually
expanding digital library of over 3,500 titles, including timely news programs
that are updated frequently, audio books, music and other forms of information
and entertainment. Once a consumer has selected audio programming, he or she can
either listen in real time to "streaming" audio (in the case of certain content)
or download and store the program in digital form so it can be retrieved and
enjoyed at any time or location the user finds convenient. This digital library
can be accessed over the Internet at the Company's Web site. The AudioCast
System was awarded the "INNOVATIONS '97 DESIGN & ENGINEERING SHOWCASE AWARD" at
the 1997 Consumer Electronics Show, the "PEOPLE'S CHOICE AWARD" at the 1998
Internet Showcase sponsored by Upside Magazine and, in June 1998, CommerceNet's
"NEW INNOVATOR AWARD."
To access the Company's digital library, a user simply visits the Company's
Web site located at HTTP://WWW.AUDIOHIGHWAY.COM, registers using his or her name
and e-mail address, then downloads and installs the Company's proprietary
AudioWiz software. Once on-line, the user may then select any audio content of
his or her choice from the Company's audio content library. Certain of the
user's selections can be streamed in "real time" over the Internet, using
Microsoft NetShow, which is available for free download on the Company's Web
site. Even more content selections are available for download to the user's
personal computer ("PC") memory.
Substantially all of the audio content provided by the Company is available
to users from other sources. Recorded music and audio books are available
through many retail outlets. Current audio programming, such as news and market
data, are available on radio and from a variety of data sources. The advantage
of the Company's AudioCast System is that it allows the user to select precisely
the content he or she wishes to hear, to download it directly from the Internet
to a home or office computer at any time and to play it back at any convenient
time. For example, a user can download market or other business information at
any time and can play it back during a commute to work or other automobile
travel when it would be impractical to view a video presentation of the same
information.
If the user has purchased the Company's proprietary ListenUp Player, a
hand-held device containing solid state digital memory, the downloaded audio
selections of the user's choice can be uploaded from his or her PC to the
ListenUp Player and stored for future playback. The Company's ListenUp Player,
which can be purchased from the Company's Web site, is a solid state portable
audio device that adds portability to the AudioCast System, allowing users to
choose and store a wide variety of audio programming for listening while
commuting, exercising, doing housework or in virtually any other setting,
typically by use of headphones or over the car stereo using a cassette adapter.
As new generations of palmtops and other handheld devices from various
manufacturers add audio capability, the Company's technology will enable users
to upload audio programming to these other compatible digital listening devices
as well.
Listeners can visit the Company's Web site as often as they like and
download free audio content supported by the sponsorship of the Company's
advertisers. Because of the increasing acceptance of Internet commerce, the
Company believes that many consumers will be willing to purchase training
seminars or other premium audio content that is not offered on the
advertising-supported portion of the Web site and that still others will be
willing to pay to receive non-premium audio content on an advertising-free
basis. To accommodate this market, the Company currently plans to begin selling
audio content to consumers on its Web site during the fourth quarter of 1998.
However, there is no assurance that the timing of the availability of premium
content and advertisement-free content on the Company's Web site will not be
delayed for business or other reasons.
25
<PAGE>
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET. The Internet has grown rapidly in recent years,
spurred by developments such as easy-to-use Web browsers, the availability of
multimedia PCs, the adoption of more robust network architectures and the
emergence of quality Web-based content and commercial applications. The broad
acceptance of the Internet Protocol ("IP") standard has also led to the
emergence of intranets and the development of a wide range of non-PC devices
that allow users to access the Internet and intranets. e-land estimates that the
number of Web users worldwide will increase from approximately 36 million at the
end of 1997 to approximately 142 million by the end of 2002. This represents an
average annual growth rate of 79%. The following graph illustrates historic and
projected use of the Internet.
GROWTH IN INTERNET USERS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MILLIONS OF USERS
<S> <C> <C>
Year United States Worldwide
1996 12.5 19
1997 24 36
1998 33 67
1999 39 92
2000 51 106
2001 58 127
2002 64 142
Source: e-land
</TABLE>
Much of the Internet's rapid evolution towards becoming a mass medium can be
attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and qualitatively improved users' on-line
experiences. Most notably, the Internet has evolved from a mass of static, text-
oriented Web pages and e-mail services to a much richer environment, capable of
delivering graphical, interactive and multimedia content. Prior to the
development of streaming media technologies, users could not play back audio and
video clips until the content was downloaded in its entirety. As a result, live
Internet broadcasts were not possible. The development of streaming media
products from companies such as Microsoft and RealNetworks enables the
simultaneous transmission and playback of continuous "streams" of audio and
video content over the Internet and intranets. These technologies have evolved
to deliver audio and video over widely used 28.8 kbps narrow bandwidth modems,
yet can scale in quality to take advantage of higher speed access that is
expected to be provided by xDSL, cable modems and other emerging broadband
technologies.
THE INTERNET AS A NEW MEDIUM FOR ADVERTISING. The rapidly increasing number
of Web users and ubiquitous access to the Internet, both in the United States
and internationally, have resulted in the emergence of the Web as new mass
medium for advertising. An independent study conducted by e-land
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estimates that the number of Web users doubled during 1996 to 19 million. A high
rate of growth is expected to continue over the next few years with over 140
million users anticipated by the year 2002, including 64 million users in the
United States alone.
The proliferation of workstations and personal computers served by local
area networks has also resulted in the rapid increase in the number of potential
recipients for electronically distributed information. Forrester Research
estimates that electronic delivery of information to corporate desktops alone
will generate approximately $800 million in revenues by the year 2001. The
Global Internet Project estimates that the amount of information on the Internet
is doubling each year and that the number of pages currently on the Internet is
approximately 11 million.
The Web is an attractive medium for advertising because of its
interactivity, flexibility, targetability and measurability. Advertisers can
reach broad audiences and target advertisements to users with similar
demographic characteristics, specific regional populations, affinity groups or
selected individuals. The interactive nature of the Web enables advertisers to
determine customer preferences, using these to initiate ongoing commercial
relationships with potential customers. Advertisers can easily change their
advertising messages frequently. The Web is a measurable medium because
impression levels and demographic information concerning users can be tracked
and reported to advertisers.
According to e-land, United States Web ad spending in 1996 was approximately
$175 million and is projected to be as large as $8 billion by the year 2002, as
shown in the following graph:
U.S. ADVERTISING ON THE INTERNET
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEAR MILLIONS
<S> <C>
1995 $32
1996 $175
1997 $650
1998 $1,500
1999 $2,200
2000 $3,800
2001 $6,500
2002 $8,000
Source: e-land
</TABLE>
INTERNET COMMERCE. The Web is also emerging as a new medium for global
commerce. A rapidly increasing number of consumers have begun transacting
business over the Web, such as paying bills, buying airline tickets, trading
securities and purchasing books and other consumer merchandise. Moreover, online
transactions can be faster, less expensive and more convenient than transactions
conducted via human interaction. Internet retailers can offer convenience and
value to their customers and simultaneously
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display in-depth information concerning products or services selected by users
according to their preferences using a combination of text, video and sound.
International Data Corporation estimates that the total value of goods and
services purchased on the Web will increase from $2.6 billion in 1996 to $220
billion in 2001.
DEMAND FOR AUDIO CONTENT. The total market for audio content is substantial
and includes such diverse types of content as audio books, broadcast radio,
recorded and live music, business news, education and training. An increasing
number of commuters and other mobile listeners demand quality audio content.
This demand has not only fueled growth in the number of types of audio content,
but has also generated the development of new entertaining, useful and/or
educational forms of content. For example, in 1996, there were over $1.6 billion
in sales of audio books, a relatively recent product that was not widely
available until the late 1980's. The Company believes that, increasingly,
consumers will look to the Internet as a source for audio content.
THE AUDIOHIGHWAY.COM OPPORTUNITY: BUSINESS STRATEGY
Although several alternative means of providing audio content have achieved
acceptance by the general public, the Company believes that Internet
distribution of audio content can have cost or convenience advantages for the
consumer over both radio and physical merchandise, such as compact disks or
audio tapes. For example, a consumer can listen to broadcast radio but only to
whatever happens to be on the air at the time. The radio listener has limited
control over the selection of broadcast content (I.E., he or she can change the
channel) and has no control over the time at which specific programs can be
heard. The purchaser of CDs or audio tapes can make selections and determine
when to listen to the content but must pay for the entire recording even if only
selected portions are desired. In addition, the Company believes that
distribution over the Internet can provide significant price and convenience
advantages to users of its Web site by eliminating the need to physically visit
a retail store.
The Company believes broadcasting audio content over the Internet offers
advantages over traditional media. The Company intends to exploit the advantages
of the Internet in capitalizing on the worldwide popularity of various kinds of
audio programming, including audio books, musical and comedy programs, and
timely news programs such as those provided by NPR and Newsweek. By offering
quality audio programming and by using the Web's graphical and interactive
capabilities to add value to its content, the Company hopes to increase brand
recognition for the audiohighway.com name. The Company believes that it can
build upon its brand recognition, its digital library of audio content and its
proprietary technology to pursue multiple revenue opportunities, including,
among others, advertising, merchandising, technology licensing and intranet
programs.
THE AUDIOHIGHWAY.COM WEB SITE: CONTENT AND TECHNOLOGY
After logging onto the Company's Web site at HTTP://WWW.AUDIOHIGHWAY.COM,
the customer can browse the Web site to learn more about the Company's digital
library. When a new customer decides to download or "AudioCast," he or she first
must register with audiohighway.com by providing limited personal information
such as name and e-mail address. The registration page permits the entry of
additional data, including personal listening category preferences, but the
system does not require this information nor does it require confidential
information that other sites require, such as home address and telephone number.
The data entered on the registration page is used by the AudioCast System to
route appropriate advertising targeted to the user's preferences.
The Company has designed its Web site to offer a large and comprehensive
selection of audio programming and has the capability to "stream" audio content
on a real time basis or transfer it over the Internet to the user's PC for
storage and playback. The Company has actively sought out sources of audio
programming that it has then digitized and added to the library of material
stored electronically on the Company's Web site. In the News and Journalism
portion of the Company's digital library, for example, a consumer can download
news stories and audio programs on a current basis from a long list of
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programmers including National Public Radio, Associated Press, Newsweek and Dow
Jones. The user can assemble a personalized news broadcast from his or her
personal selection of sources chosen from the Company's audio content library
and play it back at a convenient place and time. The Company is actively engaged
in negotiations with numerous other providers of audio content and believes that
it has many opportunities to quickly expand its digital library following its
public offering. The Company will use a portion of the net proceeds of the
offering to rapidly expand its audio programming library.
All of the audio content currently available on the Company's Web site is
available to the user free of charge. However, the Company believes that the
delivery of user-selectable audio content over the Internet for a fee, as well
as advertising-free audio content, represents a significantly under-exploited
market segment. The Company intends to offer audio content and merchandise
through electric commerce ("e-commerce") and revenue sharing arrangements with
existing and future content providers.
Initially, the Company has pursued a strategy of maturing, or "beta testing"
its Web site by offering all content free of charge, partially as a means of
encouraging a high level of usage. The Company believes that active usage of the
Web site has meaningfully accelerated development by identifying problem areas
and promoting the testing refinements. Based upon extensive marketing and
technical evaluation, the Company is currently initiating a commercial strategy
that contains the following elements: advertising, electronic commerce, category
channel sponsor fees, partnership sales and licensing.
AUDIOWIZ. The Company's proprietary AudioWiz software, which is downloaded
by the user free of charge, allows users to receive, download from the Company's
Web site and play back content on his or her computer or compatible portable
listening device. The AudioWiz user interface consists of an onscreen player
that acts as a control panel, allowing the user to control the computer audio.
Using AudioWiz, the user can navigate through stored items of audio content that
have been downloaded using control functions much the same as those found on a
standard CD player. AudioWiz displays a description of each downloaded item. The
user can play back audio selections on his or her computer while simultaneously
using another application such as a word processor or spreadsheet. The AudioWiz
software also keeps track of the content selected by the user over time. This
enables the Company's Web site to select advertisements for the user based upon
previously selected content as well as the user's personal profile.
THE LISTENUP PLAYER AND PORTABILITY. The Company believes that the ability
to move the audio content from a PC to a portable listening device will be
important or desirable for many listeners on its Web site. The ListenUp Player
is a portable storage device that is connected to the user's personal computer
through a docking station. It has a simple control panel allowing precise access
to the stored content by displaying content location by title on a small LCD
screen. The ListenUp Player is about the same size as a typical pager, weighs
3.4 ounces and is small enough to fit into a shirt pocket. Content is received
by uploading previously downloaded material from the user's PC using the
AudioWiz software. The ListenUp Player can then be removed from its cradle, and
the audio selections can be played back through (i) the player's built-in
speaker, (ii) headphones, or (iii) through the car stereo using a cassette
adapter plugged into the car's cigarette lighter. Additionally, the ListenUp
Player includes a built in microphone, allowing it to be used as an audio memo
pad, so that the user may dictate notes directly into the ListenUp Player for
later playback.
The ListenUp Player can be ordered for $199 on the Company's Web site. While
the Company expects to generate revenue from the sale of the ListenUp Player, it
intends to focus its resources on providing diverse, quality downloaded audio
content. The Company does not believe that it can generate significant margins
from sales of ListenUp Players. The Company does not plan to manufacture the
ListenUp Player and has entered into an agreement with Sycom Technologies to
supply ListenUp Players. See. "--Manufacturing."
In addition to achieving portability with the ListenUp Player, the Company's
technology can be adapted to allow owners of palmtop computers, personal digital
assistants ("PDAs") and other compatible hand-held computing devices with
speakers to be loaded with digital audio material obtained by the user
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from the Company's Web site. The Company expects that in the future there will
be a number of portable listening devices with the capability of receiving audio
content downloaded from the Company's Web site.
ADVERTISING. Initially, the Company expects to derive the majority of its
revenue from advertising on its Web site. It uses three methods of advertising:
"banner" ads, audio ads and channel sponsorships. The Company's audio ads are
included as part of the downloaded and streaming audio content. Audio channel
sponsorships enable the Company to charge for focused advertising related to a
specific content channel. Banner advertisements allow interested readers to link
directly to the advertisers' own Web sites. The Company targets traditional
advertisers, such as consumer product and service companies, manufacturers and
automobile companies, as advertisers on its Web site.
Advertising revenue has been derived principally from short-term advertising
contracts on a per impression basis or for a fixed fee based on a minimum number
of impressions. Audio ads currently are $0.20 per 30 second ad, while the
Company's banner advertising rates generally range from $20 to $35 per one
thousand impressions.
The Company's audio material is divided by subject matter into 12 category
channels, including News, Travel, Sports, Technology, Music, Business, Health,
Finance, Entertainment, Education, Comedy and Books. For each of the category
channels on the Company's Web site, the Company offers a premier content
sponsorship to a content provider who prefers to be prominently displayed on the
Web site. Channel sponsorships are currently priced at $20 per one thousand
impressions. Although the Company is currently accepting channel sponsorships,
it does not expect to begin placing channel sponsorships on its Web site until
the third quarter of 1998, concurrent with the introduction of Version 2.0 of
the Web site.
To enable advertisers to verify the number of ad playbacks or visual
impressions made by their advertisements and monitor their advertisements'
effectiveness, the Company provides its advertisers with reports showing data on
impressions or download time applicable to their advertisements.
The Company believes that the majority of Internet consumers would be
willing to listen to advertisements as long as the advertisements are focused on
subject categories selected by the consumer. Additionally, the AudioWiz software
has been programmed to track and store information regarding the consumer's
download requests by subject and category and then to select advertisements
specifically targeted to the consumer's personal profile.
For example, a customer considering the purchase of a new computer may
request content from the Company's Technology channel. The AudioWiz software,
interfacing with the Company's proprietary advertising server software,
recognizes that the consumer is selecting the Technology channel, checks the
personal profile of the user, I.E.; age and Zip Code, and delivers a
topic-appropriate advertisement to the target consumer. This benefits both the
advertiser and the customer. The customer saves time and effort by receiving
relevant messages from various manufacturers prior to making a purchase, while
the advertiser reaches a prospective buyer at or near the time the consumer is
making a purchase decision.
The Company intends to maximize its resources by contracting with third
parties for order fulfillment of physical merchandise; however, the Company will
collect a commission-based fee for all product sales. With regard to downloaded
digitized audio content, the Company will generally obtain a fully paid-up
license or enter into a revenue sharing agreement with publishers or other audio
content providers.
SECURE TRANSACTION ELECTRONIC COMMERCE. During the fourth calendar quarter
of 1998, the Company intends to initiate electronic merchandising, thereby
addressing the purchasing interests of an increasing number of consumers who are
accustomed to buying products over the Internet. The Company is negotiating a
license from an established provider of secure financial communications software
so that it can offer users the ability to purchase and own permanent recordings
of audio selections available on the Company's Web site. Initially, the Company
will sell training seminars, audio books and archival sources in digital form,
downloaded to the customer's PC. The Company will also offer physical
merchandise directly related to the Company's audio content, such as music CDs
and cassette tapes and printed versions of
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audio books. Customers will pay by credit card for merchandise or downloading at
the time of ordering directly over the Internet, using the Company's financial
communications software.
DISTRIBUTION PARTNERSHIPS. The Company intends to develop partnerships with
strategic Internet sites to increase the traffic to its Web site category
channels. The Company offers audio technology, audio content and audio
advertising capable of delivering audio to other companies' Web sites in order
to develop additional streams of revenue from audio advertising. These
partnerships can be easily implemented by putting a button on the partner's Web
site that will link the user to the audio content being made available by the
Company's server. Incremental increases in traffic generated from partnership
sites will increase the frequency of advertisement impressions on the Company's
Web site. The Company believes it can significantly increase total advertising
revenue from the increased traffic generated by partnered sites.
LICENSING AND INTRANET SALES. The Company believes the systems and
technology it has developed can be productively employed in many applications.
For example, many corporations and other large organizations have developed
internal network systems using telecommunications technology to facilitate
secure communications throughout the organization. Such systems, commonly
referred to as "intranets," are growing at a rate faster than the Internet
itself. The Company's technology can allow audio transfers on these networks
containing such things as announcements and bulletins, meeting summaries or
product descriptions.
The Company believes this application may be useful for internal training
for large corporations, such as for use in producing and distributing training
seminars to targeted groups of employees, such as to their sales force. The
audiohighway.com solution could accelerate and simplify the distribution of
information throughout national or international office networks, thereby
replacing conventional instructional tapes with digital, two-way communications.
The Company has entered into an agreement with the University of Texas at
Dallas, for use of the ListenUp Player in two distance learning programs at the
Graduate School of Management. The audio files containing course lectures,
faculty feedback on student projects and student team presentations that will be
delivered via the Company's Web site. The University of Texas MBA students, some
of whom travel extensively in their work, will be able to obtain lectures and
hear professors' comments on their projects while on the road.
AUDIO CONTENT. The Company seeks to enter into licensing agreements with a
wide variety of content providers in an effort to appeal to the broadest
possible market. Current categories include children's programming, commercial
programming and academic programming. Content providers currently include audio
recordings of popular and classical books, self improvement courses, information
and news services, magazines, music and sports updates, as well as various
entertainment products such as audio movie reviews and product information from
a variety of product areas.
The Company believes that the audiohighway.com concept has been well
received by content providers because it (i) represents a display shelf of
infinite length not limited by physical space such as in retail stores, and (ii)
provides them with additional distribution for their programming as well as the
incremental revenue stream that accompanies it.
Different types of content typically have different types of licensing
terms. For the most part, the Company content only pays for the content on a
"per download" basis, so the Company is not charged simply for having the
content available on its Web site. These download charges range from $0.40 to
$0.60 per download hour. Exceptions to this include the Brite Voice content
(E.G., stock market updates, sport scores, etc.), which is updated via satellite
feed many times per day for a flat fee.
Each item of audio content is digitized and added to the Company's content
library. This digital library is stored electronically and is located at the
Company's central office. When a customer's content selection is received by the
system, the Company's proprietary routing, scheduling and queuing system will
initiate the AudioCast and storage of the user-selected content on the user's
PC, which may then be uploaded to the portable ListenUp Player or other
compatible portable listening device.
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AUDIOHIGHWAY.COM'S EXISTING LIBRARY. Since launching its Web site in
November 1997, the Company has collected a library of over 3,500 titles and
segments covering a broad range of subject categories, and it intends to rapidly
increase the size of its audio library upon completion of this offering. Current
audio content providers include, among others, ABC Tonight, Associated Press,
National Public Radio, CBS Tonight, Compact Classics, Dateline, Dow Jones, ESPN,
NBC Tonight, Newsweek, Penguin Books USA and PR Newswire.
The Company is actively pursuing additional sources of content in all areas
for which channels are offered on its Web site.
THE AUDIOHIGHWAY.COM WEB SITE ARCHITECTURE
The Company has developed a proprietary information publishing system
capable of disseminating a wide variety of audio content to a large population
of consumers using the Internet. The system is organized into a number of
software modules summarized below.
CONTENT MANAGEMENT MODULE. The Content Management Module is a
client/server-based software module that enables the system to add new files to
the Audio Content Database ("ACD"). In addition, it provides audio compression
of the digitized content file. This allows for rapid uploading from the user's
personal computer to the ListenUp Player or other compatible playback devices.
CATALOG SERVER. The Catalog Server is a Web Server-based software module
that provides a catalog interface into the ACD. This module allows end users to
browse the content library and select content for downloading. This module also
provides the user with a search engine for finding information quickly and
easily and includes secured identifiers for AudioWiz.
ADVERTISING SERVER. The Advertising Server consists of a database system
that provides advertising segments to logged-on users. This server identifies
certain advertisements based on its content and then matches them to recorded
user preferences or interest profiles. This technology allows users to receive
advertisements that correspond to their interests whether explicitly disclosed
in the user profile or based on content selections over time.
MERCHANT SYSTEM. The Merchant System is responsible for tracking and
managing all transactions. This is used for billing and system auditing as well
as sales and service of the ListenUp Player.
CUSTOMIZATION MODULE. The Customization Module allows the end-user to
customize the content delivery system to his or her specific needs. It further
allows for scheduled downloads and automated
e-mail notification of updates. In addition, it handles the end user's requests
and preferences for content and is the server interface to AudioWiz.
ADS AND CONTENT SERVER. The Audio Digitizing System ("ADS") is a hardware
and software-based system that provides the tools to digitize audio content from
DAT, audio cassette or broadcast sources and processes the content for loading
onto the Content Server. The Content Server is then responsible for distributing
the audio content to the end user.
AUDIOWIZ SOFTWARE. This software is a client application used to manage the
audio files on the end user's computer. Tasks such as uploading to the ListenUp
Player or other compatible listening device and simple file management are
performed using this utility. It is also used for configuring automated tasks,
such as pre-scheduled or automatic nightly downloads. The AudioWiz interfaces to
the end user's Windows 95 or newer version of Windows, as well as to the
ListenUp Player or other compatible listening device.
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MARKETING AND SALES
The Company attracts users to its Web site, primarily through Web-based
promotions. These can take the form of either advertisements on other targeted
Web sites or e-mail directed at selected Internet users. This use of e-mail is
the Internet version of direct marketing, and the Company feels it will prove to
be an important method by which it can continue to promote its Web site to an
increasing number of registered users. To a lesser extent, the Company plans to
attract new users through more traditional media, such as print ads and audio
spots on drive time radio.
The Company has gained significant recognition within the industry by its
participation in various tradeshows and through its public relations efforts.
The Company's AudioCast System won the "INNOVATIONS '97 DESIGN & ENGINEERING
SHOWCASE AWARD" at the 1997 Consumer Electronics Show, the "PEOPLE'S CHOICE
AWARD" at the 1998 UpSide Magazine Internet Showcase and, in June 1998,
CommerceNet's "NEW INNOVATOR AWARD."
The Company's in-house sales force develops and implements its advertising
strategies, including identifying strategic accounts and developing
presentations and promotional material. As of July 15, 1998, the Company employs
five persons to carry out its sales and marketing activities. Each sales person
has been assigned a territory and solicits advertising contracts from companies
and their agencies located within that territory. The Company plans to use part
of the proceeds of this offering to increase the size of its sales force.
The Company also enters into cross-marketing relationships with other Web
sites, including NPR. This is primarily implemented through putting
click-through banners on each other's Web sites so that traffic generated on one
Web site has the ability to move easily to the cross-marketing partner's Web
site by simply clicking on the banner.
MANUFACTURING
The Company does not plan to become a manufacturing company. Rather, the
Company has executed a three-year agreement with Sycom Technologies whereby
Sycom has agreed to manufacture the ListenUp Player through June 2001, with
renewal options. Sycom is entitled to a royalty of up to 8% of the revenue
generated by advertisements uploaded to the Company's ListenUp Player.
RESEARCH AND DEVELOPMENT
Since inception, the Company has devoted significant time and financial
resources to research and development activities to develop its current
technology, products and services. The Company anticipates that a portion of its
ongoing operations will continue to include research and development activities
due to the rapid technological evolution of Internet-based commerce. Research
and development expenditures were $367,000 and $677,000 in 1996 and 1997,
respectively.
There is no assurance that the Company will successfully develop these
products or that competitors will not develop products sooner or products that
are superior to the Company's product offerings.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company has filed several patent applications with respect to certain
aspects of the AudioCast System, and two patents have issued. Although the
Company does not believe that its existing patents provide a competitive
advantage, there is no assurance that in the future, patent protection will not
be of substantial importance to the Company's business and future prospects.
There is no assurance that patents will be issued pursuant to the pending
applications or that the patents that are issued or may be issued in the future
will not be held invalid or unenforceable by a court having jurisdiction over a
dispute challenging their validity. Even if patents are upheld and are not
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challenged, third parties might be able to develop equivalent technologies or
products without infringing such patents or the Company could be required to
expend substantial funds in order to defend its patents.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success and relies on a combination of
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with its employees and with
third parties to establish and protect its proprietary rights. There is no
assurance that these steps will be adequate, that the Company will be able to
secure trademark registrations for all of its marks in the United States or
other countries or that third parties will not infringe upon or misappropriate
the Company's copyrights, trademarks, service marks and similar proprietary
rights. The Company does not own any registered copyrights protecting its
products but claims common law copyrights in its software. There is no assurance
that common law copyright will provide adequate protection for the Company's
related intellectual property. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the content downloaded from the Company's Web site. In the future, litigation
may be necessary to enforce and protect the Company's trade secrets, copyrights
and other intellectual property rights.
The Company has filed trademark claims for "Audio Highway," "AudioWiz" and
"AudioCast." The "ListenUp" trademark is licensed from ListenUp, Inc. The
Company intends to pursue the registration of its trademarks based upon
anticipated use internationally. There is no assurance that the Company will be
able to secure adequate protection for these trademarks in foreign countries. In
addition, there could be potential trademark or trademark infringement claims
brought by owners of other registered trademarks or trademarks.
There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.
There is no assurance that the measures taken by the Company will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. Moreover, the Company may also be subject
to litigation to defend against claims of infringement of the rights of others
or to determine the scope and validity of the intellectual property rights of
others. If competitors of the Company prepare and file applications in the
United States that claim trademarks used or registered by the Company, the
Company may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
the Company. Similarly, actions could be brought by third parties claiming that
the Company's products infringe patents owned by others. An adverse outcome
could require the Company to license disputed rights from third parties or to
cease using such trademark or infringing product. Any litigation regarding the
Company's proprietary rights could be costly and divert management's attention,
result in the loss of certain of the Company's proprietary rights, require the
Company to seek licenses from third parties and prevent the Company from selling
its products and services, any one of which could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, inasmuch as the Company licenses a substantial portion of its content
from third parties, its exposure to copyright infringement actions may increase
because the Company must rely upon such third parties for information as to the
origin and ownership of such licensed content. The Company generally obtains
representations as to the origins and ownership of such licensed content and
generally obtains
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indemnification to cover any breach of any such representations; however, there
can be no assurance that such representations will be accurate or that such
indemnification will adequately protect the Company.
COMPETITION
The Company will face intense competition in every aspect of its business,
including competition for consumers of audio materials, advertisers, providers
of audio materials and vendors of products. The business of providing data and
other products using the Internet as a medium is currently experiencing
explosive growth and is characterized by extremely rapid technological
development, rapid changes in consumer habits and preferences, massive infusions
of capital and the emergence of a large number of new and established companies
with aspirations to control as much of the distribution process as possible. A
relatively small number of these companies, including America On Line and
Yahoo!, currently control primary or secondary access of significant percentages
of all Internet users and therefore have a competitive advantage in marketing to
those users. Other large and established companies, such as local and long
distance telephone companies, cable companies, satellite programming providers
and others have established relationships with large customer bases and are
rapidly expanding into the provision of Internet services. Although the Company
does not believe that any of these companies currently are direct competitors
and believes that it provides services and has technology that could be
attractive to such companies as customers, substantially all of these companies
have financial, technological, promotional and other resources that are much
greater than those available to the Company. Most, if not substantially all, of
such providers could use or adapt their current technology, or could purchase
technology, to provide a service directly competitive with the Company's
AudioCast System.
The Company competes with (i) other Web sites and Internet broadcasters to
acquire and provide content to attract users, (ii) 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' total advertising
budgets, (iii) local radio and television stations and national radio and
television networks for sales of advertising spots and (iv) other Web site
operators engaged in e-commerce.
Competition among Web sites that provide content such as news, financial
information, music and audio books is intense and is expected to increase
significantly in the future. The Company competes against a variety of
businesses that provide content through one or more mediums, such as print,
radio, television, cable television and the Internet. Traditional media
companies that have not established a significant presence on the Internet may
expend resources to establish such a presence in the future. The Company
competes generally with other content providers for the time and attention of
users and for advertising revenues. To compete successfully, the Company must
license and then provide sufficiently compelling and popular content to generate
users and support advertising intended to reach such users. The Company believes
that the principal competitive factors in attracting Internet users include the
quality of service and the relevance, timeliness, depth and breadth of content
and services offered. The Company also competes for the time and attention of
Internet users with thousands of Web sites operated by businesses and other
organizations, individuals, governmental agencies and educational institutions.
The Company expects competition to intensify and the number of competitors to
increase significantly in the future. In addition, as the Company expands the
scope of its content and services, it will compete directly with a greater
number of Web sites and other media companies. Because the operations and
strategic plans of existing and future competitors are undergoing rapid change,
it is extremely difficult for the Company to anticipate which companies are
likely to offer competitive services in the future.
The Company also competes 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' total advertising budgets. The Company
believes that the principal competitive factors for attracting advertisers
include the number of users accessing the Company's Web site, the demographics
of the Company's users, the Company's ability to deliver focused advertising and
interactivity through its Web site and the overall cost-effectiveness and value
of advertising offered by the Company. There is intense competition for the sale
of
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<PAGE>
advertising on high-traffic Web sites, which has resulted in a wide range of
rates quoted by different vendors for a variety of advertising services, making
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.
The Company believes that the number of companies selling Web-based advertising
and the available inventory of advertising space have recently increased
substantially. Accordingly, the Company may face increased pricing pressure for
the sale of advertisements. Reduction in the Company's Web advertising revenues
would have a material adverse effect on the Company's business, results of
operations and financial condition. There is no assurance that the Company will
be able to compete in its chosen market.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will 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. It is possible that governments will enact
legislation that may be applicable to the Company in areas such as content,
network security, encryption and the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
majority of such laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any such
export or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase the Company's cost of doing business or increase the Company's legal
exposure, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition.
EMPLOYEES
As of June 30, 1998, the Company has 15 full time employees, five in
marketing and sales, seven in research and development and three in finance and
administration. In addition, three consultants devote substantially all of their
time to the Company in the areas of system design and engineering. The Company
makes use of additional outside consultants and independent contractors to
perform various functions such as programming, engineering, development, and
accounting. The Company believes this approach not only allows it to limit
expenses, but also provides maximum flexibility to react to a rapidly changing
environment. None of the Company's employees is represented by a labor union.
The Company believes that its employee relations are good.
FACILITIES
The Company's executive offices are located in an approximately 9,600 square
foot facility located in Cupertino, California. This space, which houses the
Company's current operations in two neighboring buildings, is subject to
separate leases that expire in December 1999. The monthly base rental under the
combined leases (not including insurance) is approximately $25,700 per month.
LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of July 15, 1998 with
respect to each person who is an executive officer or director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Nathan M. Schulhof................................ 49 President, Chief Executive Officer and Director
Grant Jasmin...................................... 46 Executive Vice President, Chief Operating Officer,
Secretary and Director
Robert S. Leff.................................... 51 Director
Lee M. Gammill.................................... 62 Director
Muninderpal Rehki................................. 49 Director
Gregory Sutyak.................................... 42 Chief Financial Officer
Marc Baum......................................... 34 Vice President, Product Development
Theodore Richards................................. 50 Vice President and Creative Director
Michael M. Lamb................................... 38 Vice President, Sales and Alliances
</TABLE>
Mr. Schulhof is one of the founders of the Company and has served as Chief
Executive Officer, President and a Director since the Company's inception in
June 1994. From January 1993 to May 1994, Mr. Schulhof was President and Chief
Executive Officer of TestDrive Corporation, a pioneer in the distribution of
computer software on CD-ROM ("TestDrive"), which he founded and sold to RR
Donnelley & Sons Co. For more than four years prior to forming TestDrive, Mr.
Schulhof worked as an independent management consultant to the computer
industry. Mr. Schulhof received a Bachelor of Arts degree in English from the
University of Wisconsin.
Mr. Jasmin is one of the founders of the Company and has served as Executive
Vice President, Chief Operating Officer, Secretary and a Director since the
Company's inception in June 1994. From June 1994 until January 1998, Mr. Jasmin
also served as the Company's Vice President, Finance. For more than five years
prior to joining the Company, Mr. Jasmin was engaged in the practice of law
specializing in corporate and securities law. Mr. Jasmin received the degree of
Juris Doctor from the University of California Hastings College of the Law,
Master of Business Administration from the University of Santa Clara and a
Bachelor of Arts degree in Economics from San Jose State University.
Mr. Leff has served as a Director of the Company since February 1995. Mr.
Leff has served as an independent financial consultant since December 1994.
Prior thereto, Mr. Leff was a founder of Softsel, Inc., the predecessor to
Merisel, Inc., a publicly-held company, where he served as Co-Chairman of the
Board for more than five years until December 1994. Merisel is one of the
world's largest distributor of microcomputer hardware and software and
associated products. Mr. Leff holds both a Master of Science degree and a
Bachelor of Science degree from the State University of New York at Albany.
Mr. Gammill has served as a Director of the Company since November 1997.
Since May 1997, Mr. Gammill has served as Chief Executive Officer of The Gammill
Group, a consultant to the insurance and financial industry. In May 1997, Mr.
Gammill retired from 40 year career with New York Life Insurance Company where
he served as Vice Chairman of the Board of Directors. Mr. Gammill also serves on
the Board of Directors of Guarantee Life Insurance Company, Omaha Nebraska, and
is a Trustee of the American College, Bryn Mawr, Pennsylvania. Mr. Gammill
received a Bachelor of Arts degree in Business Administration from Dartmouth
College.
Mr. Rehki has served as a Director of the Company since April 1998. Mr.
Rehki has been Chief Executive Officer of TDP, Inc., a high technology software
consulting firm, since January 1998. From
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<PAGE>
October 1997 to January 1998, he was Chief Executive Officer of TransWeb, a
software consulting firm to the medical industry. TransWeb is a wholly-owned
subsidiary of CyberPlus, an Internet-based software medical support company in
which Mr. Rehki served as Chief Executive Officer and Director from February
1996 to October 1997. From December 1993 to January 1996, Mr. Rehki was Vice
President of Operations for Intellimatch, Inc., an Internet-based human
resources company. Mr. Rehki received a Bachelor of Arts degree in Economics and
a Master of Arts degree in Economics from Christ Church College, India.
Mr. Sutyak has served as Chief Financial Officer since January 1998. From
January 1995 through December 1997, Mr. Sutyak served as a consultant to the
Company performing financial services. From March 1996 through December 1997,
Mr. Sutyak was an independent consultant. From May 1993 through February 1996,
Mr. Sutyak was Chief Financial Officer for TestDrive. Mr. Sutyak received a
Bachelor of Arts degree in Economics from the University of Pittsburgh and a
Masters of Business Administration degree from the University of San Francisco.
Mr. Baum has served as Vice President, Product Development since April 1998.
From May 1996 through March 1998, Mr. Baum was Vice President of Paragon
Technology Corporation, a network company providing software and consulting
services to the financial, insurance and retail industries. From March1992
through April 1996, Mr. Baum was Director of Network Systems Products for U.S.
Robotics, a leading manufacturer of network and Internet connectivity products.
Mr. Baum received a Bachelor of Science degree in Computer Engineer from the
University of Illinois.
Mr. Richards has served as Vice President and Creative Director since July
1996. From November 1994 to July 1996, Mr. Richards was Vice President of User
Interface Design and Creative Director for SoftAd, a firm specializing in the
design and implementation of sales force automation and integrated
client-server-based Web sites. From January 1993 to July 1994, Mr. Richards was
Executive Creative Director and Vice President of TestDrive. Mr. Richards
received a Bachelor of Arts degree in Creative Writing from San Francisco State
University.
Mr. Lamb has served as Vice President, Sales and Alliances since July 1998.
From February 1995 to July 1998, he was Vice President, Business Development and
a director for Sycom Technologies, Inc., a consumer electronics company
specializing in digital audio technology where he still serves as a director.
From March 1991 until February 1995, Mr. Lamb was an associate with the law firm
of Green, Lundgren & Ryan, Haddonfield, New Jersey. Mr. Lamb received a Bachelor
of Science Degree in Electrical Engineering from Villanova University and a
Juris Doctor from Rutgers University School of Law.
All members of the Board of Directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation, or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee exercises the Board's authority to determine the cash
and non-cash compensation of each officer, salaried employee and consultant of
the Company, to establish and administer the Company's insurance and benefits
plans and to administer the Company's stock option plans. The Compensation
Committee also recommends to the full Board of Directors the cash and non-cash
compensation (including stock options and awards) to be paid to each member of
the Board of Directors who serves as an officer, employee or consultant of the
Company. Mr. Jasmin and Mr. Rehki are currently the members of the Compensation
Committee.
The Audit Committee is responsible for reviewing and evaluating the scope
and results of audits and other services provided by the Company's independent
accountants and determining the adequacy of the
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<PAGE>
Company's internal controls and other financing reporting matters. Mr. Rehki
currently is the sole member of the Audit Committee.
EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Directors receive no fees, other than reimbursement of travel expenses, for
attendance at meetings of the Board of Directors. Each director (including
employee directors) receives a one-time grant of warrants to purchase 25,000
shares of Common Stock at a price equal to the fair market value on the date of
grant, which vest over a two year period.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and to each other executive officer who received salary
and bonus in excess of $100,000 in 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION--
AWARDS
ANNUAL COMPENSATION ---------------
--------------------- OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS(#)
- ------------------------------------------------------------------ --------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Nathan M. Schulhof ............................................... 1997 $ 157,500 $ -- --
CHIEF EXECUTIVE OFFICER, 1996 121,950 50,000 20,850
PRESIDENT AND CHAIRMAN 1995 117,500 -- 26,062(1)
OF THE BOARD
Grant Jasmin ..................................................... 1997 $ 108,000 $ --
EXECUTIVE VICE PRESIDENT, 1996 74,200 50,000 20,850
CHIEF OPERATING OFFICER 1995 20,000 -- 26,062(1)
Theodore Richards ................................................ 1997 $ 99,500 $ 4,000 --
VICE PRESIDENT AND 1996 46,000 -- 26,062
CREATIVE DIRECTOR
</TABLE>
- ------------------------
(1) Warrants to purchase Common Stock were issued to Mr. Schulhof and Mr. Jasmin
in their capacities as members of the Board of Directors, in keeping with
the compensation policy for all board members. The warrants are fully vested
as of January 15, 1998. See "--Director Compensation."
EMPLOYMENT AGREEMENTS
The Company presently has no formal employment agreements with any of the
Named Executive Officers.
STOCK OPTION GRANTS AND EXERCISES
The Company has adopted a 1996 Stock Option Plan (the "1996 Plan"). The 1996
Plan was adopted to promote and advance the interests of the Company and its
shareholders by (i) enabling the Company to attract, retain and reward
managerial and other key employees, non-employees and directors and (ii)
strengthening the mutuality of interests between participants in the 1996 Plan
and the shareholders of the Company in its long-term growth, profitability and
financial success by offering stock options.
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<PAGE>
No options under the 1996 Plan were granted to or exercised by any of the
Named Executive Officers during the year ended December 31, 1997.
The following table sets forth information concerning the value of
unexercised options as of December 31, 1997 held by the Named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE- MONEY OPTIONS AT
1997(#) DECEMBER 31, 1997($)(1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nathan M. Schulhof........................................ 44,306 2,606 $ 481,500 $ 22,500
Grant Jasmin.............................................. 44,306 2,606 $ 481,500 $ 22,500
Theodore Richards......................................... 13,031 13,031 $ 112,500 $ 112,500
</TABLE>
- ------------------------
(1) Based upon the difference between the fair market value of the securities
underlying the options at December 31, 1997 ($14.39 per share, as determined
by the Board of Directors) and the exercise price of the options.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of July 15, 1998, and
as of that date as adjusted to reflect the sale of the 2,000,000 Units offered
hereby, with respect to the beneficial ownership of the Company's Common Stock
by (i) each shareholder known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; (ii) all directors of the Company; (iii)
the executive officers named in the Summary Compensation Table; and (iv) all
current executive officers and directors as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon currently exercisable or
convertible securities or securities exercisable or convertible within 60 days
of July 15, 1998 are deemed beneficially owned and outstanding for computing the
percentage owned by the person holding such securities, but are not considered
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each shareholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
shareholder's name.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1)(2) OWNED OFFERING OFFERING
- -------------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Nathan M. Schulhof........................................................ 306,663(3) 28.9% 10.0%
Grant Jasmin.............................................................. 193,293(3) 18.2 6.3
Jerome L. Strom and Rosie Ann Strom....................................... 66,484(4) 6.3 2.2
Robert S. Leff............................................................ 43,871(5) 4.3 1.4
Theodore Richards......................................................... 19,981(6) 2.0 *
Lee M. Gammill............................................................ 6,516(7) * *
Muninderpal Rehki......................................................... 391(8) * *
All Executive Officers and Directors as a Group (7 persons)............... 577,231(9) 46.5 17.8
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of Messrs. Schulhof, Jasmin, Leff, Richards, Gammill and Rehki
is c/o audiohighway.com, 20600 Mariani Avenue, Cupertino, California 95014.
The address of Mr. and Mrs. Strom is 420 Cambridge Avenue, Palo Alto,
California 94306.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock that are beneficially owned by them.
(3) Includes 58,640 shares of Common Stock issuable upon exercise of outstanding
warrants and options exercisable within 60 days of July 15, 1998.
(4) Includes 29,320 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of July 15, 1998 and 26,062 shares of
Common Stock issuable upon conversion of currently convertible outstanding
convertible promissory notes.
(5) Includes 29,971 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of July 15, 1998.
(6) Includes 17,375 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of July 15, 1998.
(7) Includes 6,516 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of July 15, 1998.
(8) Includes 391 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of July 15, 1998.
(9) Includes 232,605 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of July 15,
1998.
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<PAGE>
DESCRIPTION OF SECURITIES
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value.
UNITS
Each Unit consists of one share of Common Stock and one redeemable Warrant.
The Common Stock and Warrants will become immediately separately transferable.
COMMON STOCK
As of July 15, 1998, there were 1,000,742 shares of Common Stock outstanding
held of record by approximately 140 shareholders. There will be 3,261,959 shares
of Common Stock outstanding after giving effect to the sale of the 2,000,000
Units offered hereby and the conversion of certain outstanding convertible
promissory notes into an aggregate of 261,217 shares, which will convert
concurrently with the closing of the offering.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Upon giving proper notice,
shareholders have rights to cumulate their votes in the election of directors
under the California General Corporation Law.
Subject to preferences that may be applicable to the holders of outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors from
time to time. In the event of liquidation, dissolution or winding up of the
Company, and subject to the rights of the holders of outstanding shares of
Preferred Stock, if any, the holders of shares of Common Stock shall be entitled
to receive PRO RATA all of the remaining assets of the Company available for
distribution to its shareholders. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable, and shares of Common Stock to be issued
pursuant to this offering will be, upon issuance, fully paid and nonassessable.
WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at an exercise price of $ per share (150% of the initial public offering
price of the Units). The Warrants will, subject to certain conditions, be
exercisable at any time until the fifth anniversary of the date of this
Prospectus, unless earlier redeemed. The outstanding Warrants are redeemable by
the Company, at a price of $0.25 per Warrant, upon 30 days' prior written
notice, if the closing bid price (as defined in the Warrant Agreement described
below) per share of the Common Stock for the 20 consecutive trading days
immediately preceding the date of notice of redemption equals or exceeds $
(200% of the initial public offering price of the Units). If the Company gives
notice of its intention to redeem, a holder would be forced either to exercise
his or her Warrant before the date specified in the redemption notice or accept
the redemption price.
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and U.S. Stock Transfer
Corporation, as warrant agent (the "Warrant Agent"). The shares of Common Stock
underlying the Warrants, when issued upon exercise of a Warrant, will be fully
paid and nonassessable, and the Company will pay any transfer tax incurred as a
result of the issuance of Common Stock to the holder upon its exercise.
The Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price. Such adjustments will occur in the event,
among others, of a merger, stock split or reverse stock split, stock dividend or
recapitalization. The Company is not required to issue fractional shares upon
the
42
<PAGE>
exercise of a Warrant. The holder of a Warrant will not possess any rights as a
shareholder of the Company until such holder exercises the Warrant.
A Warrant may be exercised upon surrender of the Warrant Certificate on or
before the expiration date of the Warrant at the offices of the Warrant Agent,
with the form of "Election to Purchase" on the reverse side of the Warrant
Certificate Completed and executed as indicated, accompanied by payment of the
exercise price (by certified or bank check payable to the order of the Company)
for the number of shares with respect to which the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of Common Stock (or other securities) underlying the Warrants. The Company has
agreed to use all commercially reasonable efforts to cause a registration
statement with respect to such securities under the Securities Act to be filed
and to become and remain effective in anticipation of and prior to the exercise
of the Warrants and to take such other actions under the laws of various states
as may be required to cause the sale of Common Stock (or other securities) upon
exercise of Warrants to be lawful. If a current registration statement is not in
effect at the time a Warrant is exercised, the Company may at its option redeem
the Warrant by paying to the holder cash equal to the difference between the
market price of the Common Stock on the exercise date and the exercise price of
the Warrant. The Company will not be required to honor the exercise of Warrants
if, in the opinion of the Company's Board of Directors upon advice of counsel,
the sale of securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common Stock issuable upon exercise of the
Warrants. The Warrant holders may be expected to exercise their Warrants at a
time when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Warrants. Furthermore, the terms on which the Company could
obtain additional capital during the life of the Warrants may be adversely
affected.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. As of the date of this
Prospectus, the Board of Directors has the authority, without further action by
the shareholders, to issue shares of Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
voting rights, terms of redemption, redemption prices, liquidation preferences,
number of shares constituting any series or the designation of such series.
Although it presently has no intention to do so, the Board of Directors, without
shareholder approval, could issue Preferred Stock with voting and conversion
rights that could adversely affect the voting power of the holders of Common
Stock. This provision may be deemed to have a potential anti-takeover effect and
the issuance of the Preferred Stock in accordance with such provision may delay
or prevent a change of control of the Company.
EXISTING WARRANTS
As of June 30, 1998 the Company had issued warrants to purchase an aggregate
of 398,979 shares of Common Stock at exercise prices ranging from $1.92 to
$14.39. Each warrant is exercisable into one share of Common Stock, and the
exercise price and number of shares is subject to adjustment proportionately for
any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of stock dividends or any other increase or
43
<PAGE>
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The Company will not be required to issue
fractional shares upon exercise of a warrant. The holder of a warrant does not
possess any rights as a shareholder of the Company until such holder exercised
the warrant.
CONVERTIBLE PROMISSORY NOTES
At June 30, 1998, the Company had issued subordinated convertible promissory
notes in the aggregate principal amount of $3,011,000 bearing interest at 10%
per annum. These promissory notes are subordinate to all other indebtedness,
require no payment until maturity and are due on or before March 31, 2000. The
promissory notes are convertible into Common Stock and may be repaid by the
Company without penalty at any time prior to maturity upon written notice to the
holder. Of the promissory notes, (i) $400,000 in aggregate principal amount are
convertible into Common Stock at 50% of the initial public offering price of the
Units; (ii) $626,000 in aggregate principal amount are convertible into Common
Stock at 75% of the initial public offering price of the Units; and (iii)
$1,985,000 in aggregate principal amount are convertible at fixed conversion
prices ranging from $11.51 to $14.39. Concurrently with the closing of the
offering, these convertible notes will convert into an aggregate of 261,217
shares of Common Stock, assuming an initial public offering price of $13.50. The
Company will not be required to issue fractional shares upon conversion of a
promissory note. The holder of a promissory note does not possess any rights as
a shareholder of the Company until such holder converts the promissory note to
Common Stock.
As of June 30, 1998, the Company also has outstanding a convertible
promissory note in the principal amount of $100,000. This note, which matures on
July 31, 1999, bears interest at 10% per annum and is convertible into Common
Stock at a conversion price of $3.84. It is not anticipated that this note will
convert at the closing of the offering.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussions set forth certain federal income tax consequences,
under current law, relating to the purchase and ownership of the Units and the
Common and Warrants constituting the Units. The discussion is a summary and does
not purport to deal with all aspects of federal taxation that may be applicable
to an investor, nor does it consider specific facts and circumstances that may
be relevant to a particular investor's tax position. Certain holders (such as
deals in securities, insurance companies, tax exempt organizations, foreign
persons and those holding Common Stock or Warrants as part of a straddle or
hedge transaction) may be subject to special rules that are not addressed in
this discussion. This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date hereof, all of which are subject to change. ALL
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THIS OFFERING, INCLUDING THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS.
ALLOCATION OF PURCHASE PRICE
Each Unit as a whole will have a tax basis equal to the cost of the Unit.
The measure of income or loss from certain transactions described below depends
upon the tax basis in each of the Warrant and the Common Stock comprising the
Unit. The tax basis for each of the Warrant and the Common Stock will be
determined by allocating the cost of the Unit between the securities that
comprise the Unit in proportion to the relative fair market values of these
elements at the time of acquisition.
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<PAGE>
EXERCISE AND SALE OF WARRANTS
No gain or loss will be recognized by a holder of a Warrant on the purchase
of shares of Common Stock for cash pursuant to an exercise of a Warrant (except
that gain will be recognized to the extent cash is received in lieu of
fractional shares). The tax basis of Common Stock received upon exercise of a
Warrant will equal the sum of the holder's tax basis for the exercised Warrant
and the exercise price. The holding period of the Common Stock acquired upon the
exercise of the Warrant will begin on the date the Warrant is exercised and the
Common Stock is purchased (i.e., it does not include the period during which the
Warrant was held).
Gain or loss from the sale or other disposition of a Warrant (or loss in the
event the Warrant expires unexercised as discussed below), other than pursuant
to a redemption by the Company, will be capital gain or loss to its holder if
the Common Stock to which the Warrant relates would have been a capital asset in
the hands of such holder. Such capital gain or loss will be long-term capital
gain or loss if the holder has held the Warrant for more than 18 months at the
time of the sale, disposition or lapse. It is unclear whether the redemption of
a Warrant by the Company would generate ordinary or capital gain income.
SALE OF COMMON STOCK
The sale of Common Stock should generally result in the recognition of gain
or loss to the holder thereof in an amount equal to the difference between the
amount realized and such holder's tax basis in the Common Stock. If the Common
Stock constitutes a capital asset in the hands of the holder, gain or loss upon
the sale of the Common Stock will be characterized as long-term or short-term
capital gain or loss, depending on whether the Common Stock has been held for
more than 18 months.
EXPIRATION OF WARRANTS WITHOUT EXERCISE
If a holder of a Warrant allows it to expire without exercise, the
expiration will be treated as a sale or exchange of the Warrant on the
expiration date. The holder will have a taxable loss equal to the amount of such
holder's tax basis in the lapsed Warrant. If the Warrant constitutes a capital
asset in the hands of the holder, such taxable loss will be characterized as
long-term or short-term capital loss, depending upon whether the Warrant was
held for the required long-term holding period.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
U.S. Stock Transfer Corporation, Glendale, California, will serve as the
Transfer Agent and Registrar for the Common Stock and Warrant Agent for the
Warrants.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Company's
securities. Future sales of substantial amounts of Common Stock or Warrants in
the public market could adversely affect market prices prevailing from time to
time. Furthermore, because only a limited number of shares will be available for
sale shortly after this offering as a result of certain contractual and legal
restrictions on resale as described below, sales of substantial amounts of
Common Stock or Warrants in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 3,261,959 shares of Common Stock, assuming no exercise of the
Over-allotment Option and no exercise of the Warrants or any outstanding options
or warrants to purchase Common Stock. Of these shares, the 2,000,000 shares sold
in the Units offered hereby will be freely tradable without restriction or
further registration under the Securities Act (except for any shares purchased
by "affiliates," as that term is defined in Rule 144 under the Securities Act).
The remaining 1,261,959 shares are shares of Restricted Stock, as that term is
defined in Rule 144 promulgated under the Securities Act. Restricted Stock may
be sold in the public market only if registered or if it qualifies for an
exemption from registration under Rules 144 (including Rule 144(k)), which rules
are summarized below or if another exemption from registration is available. The
shares of Restricted Stock are subject to a lock-up agreement with the
Representative (the "Lock-up Agreements") as described below.
Pursuant to the provisions of Rule 144 (including Rule 144(k)), and without
taking into account the Lock-up Agreements, the shares of Restricted Stock would
be available for sale in the public market as follows: (i) 694,060 shares of
Restricted Stock, all of which have been held more than two years as of the date
of this Prospectus, would be eligible for immediate sale at any time after the
date of this Prospectus pursuant to Rule 144(k); (ii) 339,786 Restricted Shares,
all of which have been held more than one year as of the date of this
Prospectus, including all shares held by Affiliates, would be eligible for sale
at any time following 90 days after the date of this Prospectus pursuant to Rule
144; and (iii) the balance of the Restricted Shares would be eligible for sale
under Rule 144 upon expiration of the one year holding period applicable to
Restricted Stock, which expires on various dates between September 1998 and June
1999.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 32,600 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.
All of the outstanding shares of Common Stock held immediately prior to the
effective date of this offering are subject to the Lock-up Agreements with the
Representative. The Company's executive officers, directors and principal
shareholders, owning an aggregate of 407,722 shares of Common Stock, have agreed
that they will not sell or otherwise transfer their shares until one year after
the date of this Prospectus without the prior consent of the Representative. The
holders of the remaining outstanding
46
<PAGE>
shares have agreed that they will not sell or otherwise transfer their shares
during the six month period following the date of this Prospectus without the
prior consent of the Representative. The Representative 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.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the 1996 Option
Plan. Based on the number of options outstanding or shares reserved for issuance
under the 1996 Option Plan, such registration statement would cover
approximately 275,997 shares issuable on exercise of options, of which 81,357
are currently exercisable and 70,324 of which vest between the date hereof and
August 2001. See "Management--Stock Option Plan." Such registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement and either issued prior to the effectiveness of such
registration statement or held by Affiliates will, subject to Rule 144 volume
limitations, be available for sale in the open market, unless such shares are
subject to the Lock-up Agreements described above.
47
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. is acting as Representative, have severally agreed,
pursuant to the terms and conditions of the Underwriting Agreement between the
Company and the several Underwriters (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of Units set forth in the table below at the price set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- --------------------------------------------------------------------------------- ----------
<S> <C>
Paulson Investment Company, Inc..................................................
----------
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase such Units are subject to certain conditions. The Underwriters are
committed to purchase all of the 2,000,000 Units offered by this Prospectus, but
not the 300,000 Units subject to the Over-allotment Option (described below), if
any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representative, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representative. After
the initial public offering of the Units, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted the Underwriters an option, expiring at the close of
business 45 days after the date of this Prospectus, to purchase up to 300,000
additional Units from the Company on the same terms as apply to the sale of the
Units set forth above (the "Over-allotment Option"). The Underwriters may
exercise the option only to cover over-allotments, if any, incurred in the sale
of the Units.
The Representative has informed the Company that it does not expect the
Underwriters to confirm sales of Units offered by this Prospectus on a
discretionary basis.
Until the distribution of the Units is completed, rules of the Securities
and Exchange Commission (the "Commission") may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
securities. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Common Stock
and/or Warrants. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of the Common Stock and/or Warrants.
If the Underwriters create a short position in the Units in connection with the
Offering, I.E., if they sell more Units than are set forth on the cover page of
this Prospectus, the Representative may reduce that short position by purchasing
Common Stock and Warrants in the open market. The Representative may also elect
to reduce any short position by exercising all or part of the Over-allotment
Option described above.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases Units in
the open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock and/or Warrants, they may
48
<PAGE>
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those securities as part of this offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor the Underwriters
makes any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Units,
Common Stock and/or Warrants. In addition, neither the Company nor the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required to be made in respect thereof.
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to two percent of the gross proceeds from the sale of Units
offered hereby, of which $35,000 has already been paid. In the event the
offering is not consummated, any nonaccountable portion of the advanced payment
will be promptly returned to the Company.
The Company has agreed to issue to the Representative the Representative's
Warrants, which entitle the holders to purchase up to an aggregate of 200,000
Units at an exercise price per Unit equal to $ . The Representative's
Warrants are not transferable for one year from the date of issuance, except to
individuals who are either a partner or an officer of an Underwriter, by will or
by the laws of descent and distribution. The Representative's Warrants are not
redeemable by the Company. The Company has agreed to maintain an effective
registration statement with respect to the issuance of the securities underlying
the Representative's Warrants, if necessary, to allow their public resale
without restriction, at all times during the period in which the
Representative's Warrants are exercisable, commencing one year after the date of
this Prospectus. Such securities are being registered on the Registration
Statement of which this Prospectus is a part.
The Company has agreed that, for a period of one year following the closing
of this offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the consent of the Representative. The
Company's officers, directors and the holders of 5% or more of the outstanding
Common Stock (aggregating 407,722 shares) have agreed that for a period of one
year following this offering, they will not offer, sell, contract to sell, grant
any option for the sale or otherwise dispose of any Common Stock of the Company
(other than intra-family transfers or transfers to trusts for estate planning
purposes) without the consent of the Representative, which will not be
unreasonably withheld, and thereafter, will give the Representative prior notice
of sales under Rule 144 for five years from the date of this Prospectus. All
other holders of outstanding Common Stock have similarly agreed, except that the
lock-up period for such holders is six months.
Prior to this offering, there has been no public market for the Company's
securities. Accordingly, the initial public offering price of the Units and the
exercise price of the Warrants have been determined in negotiations between the
Company and the Representative. Among the factors considered in determining the
initial public offering price of the Units and the exercise price of the
Warrants were the history and the prospects of the Company and the industry in
which it operates, the status and development prospects for the Company's
proposed products and services, the experience and qualifications of the
Company's executive officers and the general condition of the securities markets
at the time of the offering.
49
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by its counsel, Grover T. Wickersham, P.C., Palo Alto, California.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Stoel Rives LLP, Portland, Oregon.
EXPERTS
The balance sheet as of December 31, 1997, and the statements of operations,
stockholders' deficit, and cash flows for each of the two years then ended, have
been audited by Grant Thornton LLP, independent certified public accountants, as
set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended with respect to the Units,
Common Stock and Warrants offered hereby. This Prospectus omits certain
information contained in the Registration Statement and the exhibits thereto, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities, reference is hereby
made to the Registration Statement and such exhibits filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 75 Park
Place, 14th Floor, New York, NY 10007, and the Kluczynski Federal Building, 230
South Dearborn Street, Room 3190, Chicago, IL 60604. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission, upon payment of prescribed fees. The SEC maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the SEC's World Wide Web site is http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to herein are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
50
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
audiohighway.com
We have audited the accompanying balance sheet of audiohighway.com (the
"Company"), as of December 31, 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the two years then ended. 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 the Company as of December
31, 1997, and the results of its operations and its cash flows for each of the
two years then ended, in conformity with generally accepted accounting
principles.
San Jose, California
July 23, 1998 (except for Note 7
as to which the date is )
The foregoing auditors' report is in the form which will be signed upon
consummation of the transaction described in Note 7 to the financial statements.
GRANT THORNTON LLP
San Jose, California
July 23, 1998
F-1
<PAGE>
AUDIOHIGHWAY.COM
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 5 $ 236
Accounts receivable................................................ 2 5
Prepaid expenses................................................... 43 51
----------- -----------
Total current assets............................................. 50 292
Property and equipment, net.......................................... 378 356
----------- -----------
$ 428 $ 648
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long term debt............................... $ 610 $ 601
Accounts payable................................................... 824 838
Accrued expenses and other current liabilities..................... 357 395
----------- -----------
Total current liabilities........................................ 1,791 1,834
Long term debt....................................................... 1,082 772
Stockholders' deficit:
Preferred Stock, no par value; 5,000,000 shares authorized; none
issued........................................................... -- --
Common Stock, no par value; 50,000,000 shares authorized; 944,313
and 1,000,742 issued and outstanding............................. 2,321 2,971
Additional paid-in capital......................................... 1,884 3,387
Accumulated deficit................................................ (6,650) (8,316)
----------- -----------
Total stockholders' deficit...................................... (2,445) (1,958)
----------- -----------
$ 428 $ 648
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
AUDIOHIGHWAY.COM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................................... $ -- $ 4 $ -- $ 52
Costs and expenses:
Cost of revenues..................................................... -- 35 -- 29
Sales and marketing.................................................. 850 1,634 603 604
Research and development............................................. 367 677 247 410
General and administrative........................................... 287 157 67 272
--------- --------- --------- ---------
Total costs and expenses........................................... 1,504 2,503 917 1,315
--------- --------- --------- ---------
Loss from operations................................................... (1,504) (2,499) (917) (1,263)
Interest expense....................................................... 77 1,292 586 403
--------- --------- --------- ---------
Net loss........................................................... $ (1,581) $ (3,791) $ (1,503) $ (1,666)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss per share................................... $ (2.10) $ (4.11) $ (1.66) $ (1.67)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and diluted net loss per share.......... 752 923 903 1,001
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net loss..................................................... $ (1,519) $ (2,640) $ (978) $ (1,363)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma basic and diluted net loss per share......................... $ (1.50) $ (2.23) $ (0.84) $ (1.08)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing pro forma basic and diluted net loss per
share................................................................ 1,013 1,184 1,164 1,262
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AUDIOHIGHWAY.COM
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996................................. 654 $ 885 $ -- $ (1,278) $ (393)
Sale of common stock..................................... 151 983 -- -- 983
Issuance of Common Stock for services.................... 27 181 -- -- 181
Issuance of warrants with debt........................... -- -- 1,071 -- 1,071
Net loss................................................. -- -- -- (1,581) (1,581)
----- --------- ----------- ------------ ---------
Balance at December 31, 1996............................... 832 2,049 1,071 (2,859) 261
Sale of common stock..................................... 14 196 -- -- 196
Issuance of Common Stock from exercise of options and
warrants............................................... 93 10 -- -- 10
Issuance of Common Stock for services.................... 5 66 -- -- 66
Issuance of warrants with debt........................... -- -- 813 -- 813
Net loss................................................. -- -- -- (3,791) (3,791)
----- --------- ----------- ------------ ---------
Balance at December 31, 1997............................... 944 2,321 1,884 (6,650) (2,445)
Conversion of Subordinated Notes and accrued interest to
Common Stock (unaudited)............................... 57 650 -- -- 650
Issuance of warrants with debt (unaudited)............... -- -- 1,503 -- 1,503
Net loss (unaudited)..................................... -- -- -- (1,666) (1,666)
----- --------- ----------- ------------ ---------
Balance at June 30, 1998 (unaudited)....................... 1,001 $ 2,971 $ 3,387 $ (8,316) $ (1,958)
----- --------- ----------- ------------ ---------
----- --------- ----------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
AUDIOHIGHWAY.COM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (1,581) $ (3,791) $ (1,503) $ (1,666)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 14 86 41 49
Common Stock issued for services................................... 181 66 25 --
Amortization of debt discounts..................................... 62 1,154 527 300
Changes in assets and liabilities:
Accounts receivable.............................................. -- (2) -- (3)
Prepaid expenses................................................. 48 (31) 4 (8)
Accounts payable................................................. 154 546 106 14
Accrued expenses and other current liabilities................... (68) 163 (3) 97
--------- --------- --------- ---------
Net cash used in operating activities.......................... (1,190) (1,809) (803) (1,217)
Cash flows from investing activities:
Acquisition of property and equipment................................ (293) (159) (97) (27)
Cash flows from financing activities:
Proceeds from issuance of Common Stock............................... 983 206 206 --
Proceeds from issuance of long term debt............................. 884 1,376 321 1,475
--------- --------- --------- ---------
Net cash provided by financing activities...................... 1,867 1,582 527 1,475
--------- --------- --------- ---------
Net change in cash and cash equivalents........................ 384 (386) (373) 231
Cash and cash equivalents at beginning of period....................... 7 391 391 5
--------- --------- --------- ---------
Cash and cash equivalents at end of period............................. $ 391 $ 5 $ 18 $ 236
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the period for:
Interest............................................................. $ 15 $ 23 $ 4 $ 2
Income taxes......................................................... -- -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
audiohighway.com (the "Company") is a global Internet media company that
offers a library of pre-recorded audio content via the World Wide Web (the
"Web"). The Company was incorporated in California in 1994 and, prior to October
1997, was in the development stage. The Company conducts its business within one
industry segment.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of audio
commercials included in its downloaded programming (or "deliveries") and from
the sale of banner advertisements, both on short-term contracts. Advertising
revenues on both banner advertisements and deliveries are recognized in the
period in which the advertisement is delivered, provided that collection of the
resulting receivable is probable. Advertisers are charged on a per impression or
delivery basis up to a maximum as specified in the contract. Standard rates for
advertising generally do not exceed thirty cents per impression or delivery. To
date, the duration of the Company's advertising commitments has not exceeded one
year and the Company does not guarantee a minimum number of impressions or
deliveries. Revenue sharing agreements with advertisers may provide that the
Company receive revenues from electronic commerce transactions. These revenues
are recognized by the Company upon notification from the advertiser of revenues
earned and, to date, have not been significant.
RESEARCH AND DEVELOPMENT
Costs incurred for the development and enhancement of new products and
services are charged to expense as incurred. Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based upon the Company's development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company does not incur any
direct-response advertising costs. Advertising expense totaled $2 for 1996 and
$367 for 1997. Advertising expense totaled $4 and $77 for the six months ended
June 30, 1997 and 1998.
CASH AND CASH EQUIVALENTS
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash
F-6
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and cash equivalents are held in two financial institutions. Accounts receivable
are typically unsecured and are derived from revenues earned from customers
primarily located in the United States. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
At December 31, 1997, one customer accounted for all of the accounts receivable
balance. At June 30, 1998, a different customer accounted for all of the
accounts receivable balance.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally two to five years. For leasehold
improvements, depreciation is computed over the shorter of the lease term or the
estimated useful life of the improvements.
INCOME TAXES
Income taxes are computed using an asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted tax
rates and laws.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
BASIC AND DILUTED NET LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share" during the year ended
December 31, 1997. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of convertible
securities (using the if-
F-7
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
converted method) and shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. Pro forma net
loss per share presents the basic and diluted net loss per share as if the
shares issued in connection with the conversion of debt in the initial public
offering had been outstanding for all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable and trade
payables approximates carrying value due to the short term nature of such
instruments. The fair value of long term obligations including subordinated debt
approximates carrying value based on terms available for similar instruments.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 1998 and for the six months ended
June 30, 1997 and 1998 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for
fair presentation of the financial position at such dates and the results of
operations and cash flows for the periods then ended. Operating results for the
six months ended June 30, 1998 are not necessarily indicative of results that
may be expected for the entire year.
NOTE 2--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- -----------
<S> <C> <C>
Property and equipment:
Computers and equipment................................................................ $ 453 $ 477
Furniture and fixtures................................................................. 8 10
Leasehold improvements................................................................. 22 23
----- -----
483 510
Less: accumulated depreciation......................................................... (105) (154)
----- -----
$ 378 $ 356
----- -----
----- -----
Accrued expenses and other current liabilities:
Employee compensation costs............................................................ $ 216 $ 223
Interest............................................................................... 126 159
Other.................................................................................. 15 13
----- -----
$ 357 $ 395
----- -----
----- -----
</TABLE>
F-8
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3--LONG TERM DEBT
The Company has issued subordinated convertible promissory notes (the
"Notes") in the face amount of $2,142 at December 31, 1997 and $3,011 at June
30, 1998. The Notes, which bear interest at 10%, are convertible into Common
Stock at rates ranging from $6.75 to $14.39 per share. On January 3, 1998, the
Company converted $591 of the Notes and accrued interest of $59 into 56,430
shares of Common Stock. The remaining Notes are all due by March 31, 2000.
Officers and directors of the Company purchased $130 of the Notes, of which none
remain outstanding at June 30, 1998.
The Company has a $100 line of credit with a bank that expires on August 14,
1998. The line bears interest at 9% and is guaranteed by a shareholder. At
December 31, 1997 and June 30, 1998, $99 was outstanding.
The Company has also issued subordinated notes payable in the amount of $119
at December 31, 1997 and $134 at June 30, 1998, to private investors, of which
$100 is convertible into Common Stock at $3.84. These notes are subordinated to
all other indebtedness; require no payments until maturity; bear interest at 9%
to 12% and are due by July 31, 1999.
Contractual maturities of long term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998.............................................................. $ 610
1999.............................................................. 1,082
---------
$ 1,692
---------
---------
</TABLE>
The Company has issued 248,382 warrants as of December 31, 1997 and 398,589
as of June 30, 1998, to purchase shares of Common Stock in connection with the
issuance of the Notes and other long term debt and for guarantees provided by
shareholders. The Company calculated the fair value of the warrants at the date
of issuance and is amortizing this amount as interest expense over the life of
the debt.
The carrying value of long term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- ---------
<S> <C> <C>
Debt principal....................................................... $ 2,360 $ 3,244
Unamortized discount................................................. (668) (1,871)
------ ---------
Carrying value....................................................... $ 1,692 $ 1,373
------ ---------
------ ---------
</TABLE>
NOTE 4--STOCKHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS
The 1996 Stock Option Plan (the "Plan") allows for the issuance of incentive
stock options, non-qualified stock options and stock purchase rights to purchase
shares of the Company's Common Stock. The Plan has authorized 260,620 shares of
which 85,483 remain available for granting at December 31,
F-9
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED)
1997. Under the Plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options and stock
purchase rights may be granted to consultants, employees, directors, and
officers of the Company. Options granted under the Plan are for periods not to
exceed ten years, and must be issued at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock on the date of grant. Options granted to shareholders who own
greater than 10% of the outstanding stock are for periods not to exceed five
years and must be issued at prices not less than 110% of the fair market value
of the stock on the date of grant. Options granted under the Plan generally vest
within 3 to 5 years.
The Company has also granted options and warrants to purchase Common Stock
outside of the Plan to employees, directors and consultants. These instruments
generally vest within 3 to 5 years.
Stock option and warrant activity, excluding warrants issued in connection
with the Notes, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- -----------
<S> <C> <C>
Balance at January 1, 1996.............................................. 185,040 $ 1.42
Granted............................................................... 115,716 5.76
Exercised............................................................. -- --
Cancelled............................................................. -- --
--------- -----------
Balance at December 31, 1996............................................ 300,756 3.07
Granted............................................................... 78,186 13.16
Exercised............................................................. (93,823) 0.12
Cancelled............................................................. (13,031) 3.84
--------- -----------
Balance at December 31, 1997............................................ 272,088 6.98
Granted............................................................... 42,090 14.39
Exercised............................................................. -- --
Cancelled............................................................. (13,031) 14.39
--------- -----------
Balance at June 30, 1998................................................ 301,147 7.69
--------- -----------
--------- -----------
</TABLE>
F-10
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options and warrants
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL TERM NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
- ------------------ ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.92 - $ 5.76 193,902 $ 4.45 5 156,372 $ 4.22
$ 11.51 - $14.39 78,186 $ 13.16 7 11,207 $ 11.51
----------- -----------
272,088 167,579
----------- -----------
----------- -----------
</TABLE>
The following table depicts the pro forma results of operations had
compensation expense been determined based on the fair value at the grant dates,
as prescribed in SFAS No. 123.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net loss
As reported............................................................ $ (1,581) $ (3,791)
Pro forma.............................................................. (1,631) (3,876)
Basic and diluted net loss per share
As reported............................................................ $ (2.10) $ (4.11)
Pro forma.............................................................. (2.17) (4.20)
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant has been determined on the date of grant using the minimum value
method. The weighted average fair value of options and warrants granted to
employees during 1996 and 1997 was $0.36 and $0.75. The following weighted
average assumptions were used to perform the calculations: expected life of 4
years; interest rate 6%, and no dividend yield. The pro forma disclosures may
not be representative of pro forma effects on reported financial results for
future years as the above information does not include the effects of grants
made prior to 1995.
F-11
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1997. The
following table sets forth the primary components of deferred tax assets at
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss and credit carryforwards........................ $ 2,380
Nondeductible allowances and expenses.............................. 18
---------
Gross deferred tax assets.......................................... 2,398
Valuation allowance................................................ (2,398)
---------
$ --
---------
---------
</TABLE>
At December 31, 1997, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1997, the Company had approximately $6,250 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $3,125 of California net operating
loss carryforwards for tax reporting purposes which will expire beginning in
1999.
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event on an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change has occurred.
NOTE 6--COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
The Company has entered into an agreement whereby a vendor is to receive a
royalty up to a maximum of 8% of the revenue generated by deliveries made
directly to the Company's ListenUp Players. As of June 30, 1998, no such
royalties have been accrued.
OPERATING LEASES
The Company leases its operating facilities under operating leases that
expire in 1999. Future minimum lease payments are $319 in 1998 and $310 in 1999.
Rent expense under operating leases totaled $101 in 1996 and $100 in 1997. Rent
expense was $57 and $173 for the six months ended June 30, 1997 and 1998.
NOTE 7--PROPOSED TRANSACTIONS
The Company's Board of Directors has approved a proposed initial public
offering of the Company's Common Stock. In connection with this offering, the
Board of Directors approved a 1 for 3.837 reverse split of the Common Stock. All
references to the number of shares of Common Stock, weighted average common
shares, and per share amounts in the accompanying financial statements reflect
the effect.
F-12
<PAGE>
Artwork for Inside Back Cover: Photograph of the Company's ListenUp Player
resting in the palm of a hand with the phrase "Portable Audio Via The Internet"
superimposed on the photograph.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAVE BEEN NO CHANGES IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Dividend Policy................................ 16
Use of Proceeds................................ 16
Capitalization................................. 17
Dilution....................................... 18
Selected Financial Data........................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 25
Management..................................... 37
Principal Shareholders......................... 41
Description of Securities...................... 42
Shares Eligible for Future Sale................ 46
Underwriting................................... 48
Legal Matters.................................. 50
Experts........................................ 50
Additional Information......................... 50
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 UNITS
[AUDIOHIGHWAY.COM LOGO]
EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE COMMON STOCK PURCHASE WARRANT
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The California Corporations Code provides for the indemnification of
directors, officers, employees and Agents of the corporation under certain
circumstances as set forth in section 317. Section 317 permits a corporation to
indemnify its agents, typically directors and officers, for expenses incurred or
settlements or judgments paid in connection with certain legal proceedings. Only
those legal proceedings arising out of such persons' actions as agents of the
corporation may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case depends upon
whether the agent wins, loses or settles the suit and upon whether a third party
or the corporation itself is the plaintiff. The section provides for mandatory
indemnification, no matter who the plaintiff is, when an agent is successful on
the merits of a suit. In all other cases, indemnification is permissive.
If the agent loses or settles a suit brought by a third party, he or she may
be indemnified for expenses incurred and settlements or judgments paid. Such
indemnification may be authorized upon a finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in the best interests
of the corporation.
If the agent loses or settles a suit brought by or on behalf of the
corporation, his or her right to indemnification is more limited. If he or she
is adjudged liable to the corporation, the court in which such proceeding was
held must determine whether it would be fair and reasonable to indemnify him or
her for expenses which such court shall determine. If the agent settles such a
suit with court approval, he or she may be indemnified for expenses incurred
upon a finding that the agent acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the corporation and, in
addition, that he or she acted with the care, including reasonable inquiry, of
an ordinarily prudent person.
The indemnification discussed above may be authorized by a majority vote of
the disinterested directors or shareholders (the person to be indemnified is
excluded from voting his or her shares) or the court in which the proceeding was
brought. The Company's Board of Directors makes all decisions regarding the
indemnification of its officers and directors on a case-by-case basis.
Any provision in the corporation's Articles of Incorporation or Bylaws or
contained in a shareholder or director resolution that indemnifies its officers
or directors must be consistent with section 317. Moreover, such a provision may
prohibit permissive, but not mandatory, indemnification as described above.
Last, a corporation has the power to purchase indemnity insurance for its agents
even if it would not have the power to indemnify them.
The Company's articles authorize the board of directors to provide
indemnification of its agents through bylaw provisions or indemnification
agreements, or both, in excess of the indemnification otherwise permitted by
section 317, subject to the limits on such excess indemnification set forth in
section 204 of the California Corporations Code.
Insofar as indemnification for liabilities under the Act may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities being registered, excluding the
Representative's nonaccountable expense allowance, all of which expenses will be
paid by the Registrant::
<TABLE>
<CAPTION>
<S> <C> <C>
SEC registration fee.......................................... $ 27,834
NASD filing fees.............................................. 9,935
Accounting fees and expenses.................................. 30,000 *
Legal fees and expenses....................................... 300,000 *
Printing and related expenses................................. 50,000 *
Blue sky legal fees and expenses.............................. 35,000 *
Transfer agent and expenses................................... 5,000 *
Miscellaneous expenses........................................ 17,231 *
---------
Total....................................................... $ 475,000 *
---------
---------
</TABLE>
- ------------------------
* Estimated expenses
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Registrant has issued and sold the
following unregistered securities on the dates and for the consideration
indicated:
On August 16, 1995, the Registrant issued an aggregate of 18,504 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $71,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act.
On September 6, 1995, the Registrant issued an aggregate of 5,212 shares of
common stock to one investors in exchange for consideration of $20,000 in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On October 12, 1995, the Registrant issued an aggregate of 6,516 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $25,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 5,859 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On December 23, 1995, Registrant issued an aggregate of 17,677 shares of
common stock to certain individuals in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) and Rule 506 under the Securities Act.
On December 24, 1995, the Registrant issued an aggregate of 15,029 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $86,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued 1,052 shares of common stock to one individual in exchange for
services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act.
On February 20, 1996, the Registrant issued an aggregate of 12,771 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $73,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 5,838 shares of common stock to certain
individuals in exchange for
II-2
<PAGE>
services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act.
On March 1, 1996, the Registrant issued an aggregate of 6,776 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $39,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act.
On March 1, 1996, Registrant issue to an individual warrants to purchase
6,516 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On March 6, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $15,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On March 8, 1996, the Registrant issued an aggregate of 7,818 shares of
common stock to an individual investor in exchange for consideration of $45,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On April 24, 1996, the Registrant issued an aggregate of 9,382 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $54,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued 391 shares of common stock to one individual in exchange for
services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act.
On April 26, 1996, the Registrant issued an aggregate of 1,824 shares of
common stock to an individual investor in exchange for consideration of $10,500
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On April 30, 1996, the Registrant issued an aggregate of 4,344 shares of
common stock to an individual investor in exchange for consideration of $25,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. On the same date the Registrant issued 434 shares
of common stock to one individual in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) and Rule 506 under the Securities Act.
On May 1, 1996, Registrant issue to an individual warrants to purchase
26,062 shares of common stock in exchange for services performed on the behalf
of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On June 1, 1996, Registrant issue to an individual warrants to purchase
6,516 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On June 20, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $15,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On June 30, 1996, the Registrant issued an aggregate of 72,670 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $418,252 in reliance on the exemption from registration
provided by Section 4(2) and Rule 506 under the Securities Act. On the same date
the Registrant issued an aggregate of 10,487 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
II-3
<PAGE>
On July 1, 1996, the Registrant issued an aggregate of 2,867 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $16,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 10,625 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On September 1, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to certain individual investors in exchange for consideration of
$30,000 in reliance on the exemption from registration provided by Section 4(2)
and Rule 506 under the Securities Act.
On September 30, 1996, Registrant issue to an individual warrants to
purchase 1,629 shares of common stock in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On October 1, 1996, the Registrant issued an aggregate of 148 shares of
common stock to an individual investor in exchange for consideration of computer
equipment in reliance on the exemption from registration provided by Section
4(2) and Rule 506 under the Securities Act.
On October 30, 1996, the Registrant issued an aggregate of 12,032 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $138,500 in reliance on the exemption from registration
provided by Section 4(2) and Rule 506 under the Securities Act. On the same date
the Registrant issued an aggregate of 178 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On November 15, 1996, the Registrant issued an aggregate of 4,795 shares of
common stock to certain individual investors in exchange for consideration of
$55,200 in reliance on the exemption from registration provided by Section 4(2)
and Rule 506 under the Securities Act.
On December 18, 1996, the Registrant issued an aggregate of 2,694 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $20,508 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 4,244 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act.
On December 31, 1996, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On January 3, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due January 3, 1997 in the aggregate principal
amount of $784,500, together with common stock purchase warrants exercisable for
102,228 shares in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On February 17, 1997, Registrant issued an aggregate of 740 shares of common
stock to certain individuals in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On February 28, 1997, Registrant issued an aggregate of 91,217 shares of
common stock to two individuals upon exercise of warrants previously issued to
them in exchange for performed on the behalf of the Company in reliance on the
exemption from registration provided by Section 4(2) under the Securities Act.
II-4
<PAGE>
On March 15, 1997, Registrant issued an aggregate of 2,606 shares of common
stock to an individual upon exercise of warrants previously issued to them in
exchange for performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) under the Securities Act.
On March 29, 1997, the Registrant issued an aggregate of 6,620 shares of
common stock to certain individual investors in exchange for consideration of
$95,250 in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act.
On March 31, 1996, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On April 10, 1997, the Registrant issued an aggregate of 4,325 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $62,230 in reliance on the exemption from registration provided
by Section 4(2) under the Securities Act. On the same date the Registrant issued
an aggregate of 1,518 shares of common stock to certain individuals in exchange
for services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act.
On April 22, 1997, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $37,500
in reliance on the exemption from registration provided by Section 4(2) under
the Securities Act.
On June 30, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999 in the aggregate principal
amount of $236,248, together with common stock purchase warrants exercisable for
16,419 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On June 30, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On August 17, 1997, Registrant issued an aggregate of 1,043 shares of common
stock to an individual in exchange for services performed on the behalf of the
Company in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act.
On September 1, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due September 1, 1999 in the aggregate
principal amount of $250,500, together with common stock purchase warrants
exercisable for 17,410 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act.
On September 30, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due September 30, 1999 in the aggregate
principal amount of $586,125, together with common stock purchase warrants
exercisable for 40,735 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act.
On September 30, 1997, Registrant issue to an individual warrants to
purchase 4,072 shares of common stock in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On November 25, 1997, Registrant issued an aggregate of 525 shares of common
stock to an individual in exchange for services performed on the behalf of the
Company in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act.
On December 23, 1997, Registrant issued an aggregate of 1,134 shares of
common stock to certain individuals in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
II-5
<PAGE>
On December 31, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due December 31, 1999 in the aggregate
principal amount of $283,750, together with common stock purchase warrants
exercisable for 19,720 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act.
On December 31, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On March 31, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due March 31, 1999 in the aggregate principal
amount of $419,000, together with common stock purchase warrants exercisable for
29,120 shares in reliance on the exemption from registration provided by Section
4(2) under the Securities Act.
On March 31, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance in the exemption from registration provided by Section
4(2) under the Securities Act.
On May 1, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due May 1, 2000 in the aggregate principal
amount of $400,000, together with common stock purchase warrants exercisable for
59,260 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On May 31, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999 in the aggregate principal
amount of $285,000 together with common stock purchase warrants exercisable for
28,148 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
On June 30, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999, in the aggregate principal
amount of $341,000, together with common stock purchase warrants exercisable for
21,334 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act.
II-6
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1.1 Articles of Incorporation of the Registrant
3.1.2 Certificate of Amendment of Articles of Incorporation of the Registrant
3.1.3(1) Certificate of Amendment of Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2 Form of Warrant Agreement among the Registrant and U.S. Stock Transfer
Corporation, as Warrant Agent, including the form of Warrant
4.3 Form of Representative's Warrants
5.1(1) Opinion of Grover T. Wickersham, P.C.
10.1 Office Building Lease dated June 15, 1994 between Information Highway Media
Corporation (audiohighway.com) and Eldon Hoffman for premises located at
20600 Mariani Ave., Cupertino, California
10.2 Standard Sublease dated September 16, 1997 between Audio Highway
(audiohighway.com) and Packeteer, Inc. for premises located at 10495 DeAnza
Boulevard, Cupertino, California
10.3 High Speed Services agreement dated April 3, 1998 between Audio Highway and
UUNET Technologies, Inc.
10.4 Edge Information Systems Mission Critical Tricord Maitenance Agreement dated
March 28, 1997 between Audio Highway and Edge Information Systems, Inc.
10.5 Settlement Agreement and Mutual Release dated April 24, 1998 between Tricord
Systems, Inc. and Audio Highway
10.6 Mobile Audio Delivery Agreement dated July 13, 1998 between Sycom
Technologies, Inc. and Audio Highway
23.1 Consent of Grant Thornton LLP, independent auditors (see page II-10)
23.2(1) Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-9)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) To be filed by amendment.
II-7
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; notwithstanding the foregoing, any increase
or decrease in volume of securities offered and any deviation from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include additional or changed material information on the plan
of distribution, and PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is on Form S-8, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That for purposes of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) That for purposes of determining liability under the Securities Act,
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 Company 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.
(5) That for purposes of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(7) To provide the Underwriters, at the closing specified in the
Underwriting Agreement Certificates representing the Units in such
denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cupertino, California, on July 24, 1998.
<TABLE>
<S> <C> <C>
AUDIOHIGHWAY.COM
By: /s/ NATHAN M. SCHULHOF
-----------------------------------------
Nathan M. Schulhof
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
NOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Nathan M. Schulhof and Grant Jasmin, and
each of them, his attorneys-in-fact and agents, each with full power of
substitution, for him/her and in his/her name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement on Form
SB-2, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
with this Registration Statement, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that any of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ NATHAN M. SCHULHOF Officer and Director
- ------------------------------ (Principal Executive July 24, 1998
Nathan M. Schulhof Officer)
/s/ GREGORY SUTYAK Chief Financial Officer
- ------------------------------ (Principal Financial and July 24, 1998
Gregory Sutyak Accounting Officer)
/s/ GRANT JASMIN
- ------------------------------ Director July 24, 1998
Grant Jasmin
/s/ ROBERT S. LEFF
- ------------------------------ Director July 24, 1998
Robert S. Leff
/s/ LEE M. GAMMILL
- ------------------------------ Director July 24, 1998
Lee M. Gammill
/s/ MUNINDERPAL REHKI
- ------------------------------ Director July 24, 1998
Muninderpal Rehki
</TABLE>
II-9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated July 23, 1998, accompanying the financial
statements of audiohighway.com contained in this Registration Statement and
Prospectus, which will be signed upon consummation of the transaction described
in Note 7 to the Financial Statements. We consent to the use of the
aforementioned report in this Registration Statement and Prospectus, and to the
use of our name as it appears under the captions "Selected Financial Data" and
"Experts."
GRANT THORNTON LLP
San Jose, California
July 23, 1998
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1.1 Articles of Incorporation of the Registrant
3.1.2 Certificate of Amendment of Articles of Incorporation of the Registrant
3.1.3(1) Certificate of Amendment of Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2 Form of Warrant Agreement among the Registrant and U.S. Stock Transfer Corporation, as Warrant
Agent, including the form of Warrant
4.3 Form of Representative's Warrants
5.1(1) Opinion of Grover T. Wickersham, P.C.
10.1 Office Building Lease dated June 15, 1995 between Information Highway Media Corporation
(audiohighway.com) and Eldon Hoffman for premises located at
20600 Mariana Ave., Cupertino, California
10.2 Standard Sublease dated September 16, 1997 between Audio Highway Media (audiohighway.com) and
Packeteer, Inc. for premises located at 10495 DeAnza Boulevard, Cupertino, California
10.3 High Speed Services agreement dated April 3, 1998 between Audio Highway and UUNET Technologies, Inc.
10.4 Edge Information Systems Mission Critical Tricord Maintenance Agreement dated March 28, 1997 between
Audio Highway and Edge Information Systems, Inc.
10.5 Settlement Agreement and Mutual Release dated April 24, 199? between Tricord Systems, Inc. and Audio
Highway
10.6 Mobile Audio Delivery Agreement dated July 13, 199? between Sycom Technologies, Inc. and Audio
Highway
23.1 Consent of Grant Thornton LLP, independent auditors (see page II-10)
23.2(1) Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-9)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) To be filed by amendment
<PAGE>
Exhibit 1.1
2,000,000 Units
audiohighway.com
UNDERWRITING AGREEMENT
____________, 1998
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 SW Front Avenue
Portland, Oregon 97204
Gentlemen:
audiohighway.com, a California corporation (the "Company"), proposes
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as Representative (the "Representative") an
aggregate of 2,000,000 Units (the "Firm Units"). Each Unit will consist of
one share of the Company's Common Stock ("Common Stock") and one Purchase
Warrant substantially in the form filed as an exhibit to the Registration
Statement (hereinafter defined) ("Warrants"). The respective number of the
Firm Units to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Company also proposes to
grant to the Representative an option to purchase in aggregate up to 300,000
additional Units, identical to the Firm Units, (the "Option Units") as set
forth below.
As the Representative, you have advised the Company (a) that you
are authorized to enter into this Agreement for yourself as Representative
and on behalf of the several Underwriters, and (b) that the several
Underwriters are willing, acting severally and not jointly, to purchase the
numbers of Firm Units set forth opposite their respective names in Schedule
I. The Firm Units and the Option Units (to the extent the aforementioned
option is exercised) are herein collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No. 333-_____)
with respect to the Units has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and revised,
have heretofore been delivered by the Company to you. Such registration
statement, together with any registration statement filed by the Company
pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred
to below, has become effective under the Act and no post-effective amendment
to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means (a) the form of prospectus first filed with
the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered by
the Company to the Underwriters for delivery to purchasers of the Units,
together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it
becomes effective is herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of California,
with corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. The Company does
not own and never has owned a controlling interest in any other corporation
or other business entity that has or ever has had any material assets,
liabilities or operations. The Company is duly qualified to transact business
in all jurisdictions in which the conduct of its business requires such
qualification.
(c) The outstanding shares of each class or series of capital
stock of the Company have been duly authorized and validly issued and are
fully paid and non-assessable and have been issued and sold by the Company in
compliance in all material respects with applicable securities laws; the
issuance and sale of the Units have been duly authorized by all necessary
corporate action and, when issued and paid for as contemplated herein, the
Units will be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any security of the
Company or the issue and sale thereof. Neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated by this
Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of Common
Stock or other securities of the Company.
<PAGE>
(d) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. The Common Stock conforms and the
Warrants and the Representative's Warrant will conform to the description
thereof contained in the Registration Statement. The forms of certificates
for the securities comprising the Units conform to the requirements of the
corporate law of California.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Units nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated therein
by, and will conform, to the requirements of the Act and the Rules and
Regulations. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and do
not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and
will not contain, any untrue statement of material fact; and do not omit, and
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information contained in
or omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter
through the Representative, specifically for use in the preparation thereof.
(f) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows of
the Company at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data of the Company
included in the Registration Statement presents fairly the information shown
therein and such data has been compiled on a basis consistent with the
financial statements presented therein and the books and records of the
Company.
(g) Grant Thornton LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise which if determined adversely to the
Company might result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or to prevent the
<PAGE>
consummation of the transactions contemplated hereby, except as set forth in
the Registration Statement.
(i) The Company has good and marketable title to all properties
and assets, tangible and intangible, reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material. The Company's ownership
rights in its patents, patent licenses and other material technology is
consistent with (i) the description thereof in the Registration Statement,
and (ii) the business needs of the Company. All of the leases and subleases
under which the Company holds properties are in full force and effect (with
only such exceptions as are commonly accepted by prudent companies engaged in
the Company's business) and the Company has not received notice of any
material claim of any sort that has been asserted by anyone materially
adverse to the rights of the Company under any of such leases or subleases,
or affecting or questioning the rights of the Company to the continued
possession of the leased or subleased premises or property under any such
lease or sublease.
(j) The Company has filed all federal, state, local and foreign
income tax returns which have been required to be filed and have paid all
taxes indicated by said returns and all assessments received by it to the
extent that such taxes have become due and are not being contested in good
faith. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may have been amended or supplemented,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered
into by the Company, other than transactions in the ordinary course of
business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company has no material
contingent obligations which are not disclosed in the Company's financial
statements or elsewhere in the Prospectus which are included in the
Registration Statement.
(l) The Company is not, nor, with the giving of notice or lapse of
time or both, will it be, in violation of or in default under its Certificate
of Incorporation or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise of the
Company or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of,
or constitute a
<PAGE>
default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which any member of the Company is a party, or of the
Certificate of Incorporation or by-laws of the Company or any order, rule or
regulation applicable to the Company of any court or of any regulatory body
or administrative agency or other governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by
the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD")
or such additional steps as may be necessary to qualify the Units for public
offering by the Underwriters under state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(n) The Company holds all material patents, patent rights
trademarks, trade names, copyrights, trade secrets and licenses of any of the
foregoing (collectively, "Intellectual Property Rights") that are necessary
to the conduct of its businesses; there is no claim pending or, to the best
knowledge of the Company, threatened against any member of the Company
alleging any infringement of Intellectual Property Rights, or any violation
of the terms of any licence relating to Intellectual Property Rights, nor
does the Company know of any basis for any such claim. The Company knows of
no material infringement by others of Intellectual Property Rights owned by
or licensed to any member of the Company. The Company has obtained, is in
compliance in all material respect with and maintains in full force and
effect all material licenses, certificates, permits, orders or other, similar
authorizations granted or issued by any governmental agency (collectively
"Government Permits") required to conduct its business as it is presently
conducted. No proceeding to revoke, limit or otherwise materially change any
Government Permit has been commenced or, to the Company's best knowledge, is
threatened against the Company, and the Company has no reason to anticipate
that any such proceeding will be commenced against the Company. Except as
disclosed or contemplated in the Prospectus, the Company has no reason to
believe that any pending application for a Government Permit will be denied
or limited in a manner inconsistent with the Company's business plan as
described in the Prospectus.
(o) The Company is in all material respects in compliance with all
applicable Environmental Laws. The Company has no knowledge of any past,
present or, as anticipated by the Company, future events, conditions,
activities, investigation, studies, plans or proposals that (i) would
interfere with or prevent compliance with any Environmental Law by the
Company or (ii) could reasonably be expected to give rise to any common law
or other liability, or otherwise form the basis of a claim, action, suit,
proceeding, hearing or investigation, involving the Company and related in
any way to Hazardous Substances or Environmental Laws. Except for the
prudent and safe use and management of Hazardous Substances in the ordinary
course of the Company's business, (i) no Hazardous Substance is or has been
used, treated, stored, generated, manufactured or otherwise handled on or at
any Facility and (ii) to the Company's best knowledge, no Hazardous
Substance has otherwise come to be located in, on or under any Facility. No
Hazardous Substances are stored at any
<PAGE>
Facility except in quantities necessary to satisfy the reasonably anticipated
use or consumption by the Company. No litigation, claim, proceeding or
governmental investigation is pending regarding any environmental matter for
which the Company has been served or otherwise notified or, to the knowledge
of the Company threatened or asserted against the Company, or the officers or
directors of any such member in their capacities as such, or any Facility or
the Company's business. There are no orders, judgments or decrees of any
court or of any governmental agency or instrumentality under any
Environmental Law which specifically apply to the Company, any Facility or
any of the Company's operations. The Company has not received from a
governmental authority or other person (i) any notice that it is a
potentially responsible person for any Contaminated site or (ii) any request
for information about a site alleged to be Contaminated or regarding the
disposal of Hazardous Substances. There is no litigation or proceeding
against any other person by the Company regarding any environmental matter.
The Company has disclosed in the Prospectus or made available to the
Underwriters and their counsel true, complete and correct copies of any
reports, studies, investigations, audits, analysis, tests or monitoring in
the possession of or initiated by the Company pertaining to any environmental
matter relating to the Company, its past or present operations or any
Facility.
For the purposes of the foregoing paragraph, "Environmental Laws" means
any applicable federal, state or local statute, regulation, code, rule,
ordinance, order, judgment, decree, injunction or common law pertaining in
any way to the protection of human health or the environment, including
without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution
Control Act and any similar or comparable state or local law; "Hazardous
Substance" means any hazardous, toxic, radioactive or infectious substance,
material or waste as defined, listed or regulated under any Environmental
Law; "Contaminated" means the actual existence on or under any real property
of Hazardous Substances, if the existence of such Hazardous Substances
triggers a requirement to perform any investigatory, remedial, removal or
other response action under any Environmental Laws or if such response action
legally could be required by any governmental authority; "Facility" means
any property currently owned, leased or occupied by the Company.
(p) Neither the Company, nor to the Company's best knowledge, any
of its affiliates, has taken or intends to take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of the shares of Common Stock to facilitate the sale or resale
of the Units.
(q) The Company is not an "investment company" within the meaning
of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with
<PAGE>
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and as is
customary for companies engaged in similar industries.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability; the Company has not incurred
and does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such qualification.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changes in
any material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the Department.
(v) The Company is in material compliance with all laws, rules,
regulations, orders of any court or administrative agency, operating licenses
or other requirements imposed by any governmental body applicable to it,
including, without limitation, all applicable laws, rules, regulations,
licenses or other governmental standards applicable to the its business; and
the conduct of the business of the Company, as described in the Prospectus,
will not cause the Company to be in violation of any such requirements.
(w) Each of the Warrants and the Representative's Warrants (as
defined in Paragraph (d) of Section 2 hereof) have been authorized for
issuance to the purchasers thereof or to the Representative or its designees,
as the case may be, and will, when issued, possess
<PAGE>
rights, privileges, and characteristics as represented in the most recent
form of Warrants or Representative's Warrants, as the case may be, filed as
an exhibit to the Registration Statement; the securities to be issued upon
exercise of the Warrants and the Representative's Warrants, when issued and
delivered against payment therefor in accordance with the terms thereof, will
be duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization
and issuance of the Warrants and the Representative's Warrants, and the
securities to be issued upon their exercise, have been validly and
sufficiently taken.
(x) Except as disclosed in the Prospectus, neither the Company nor
any of its officers, directors or affiliates have caused any person, other
than the Underwriters, to be entitled to reimbursement of any kind,
including, without limitation, any compensation that would be includable as
underwriter compensation under the NASD's Corporate Financing Rule with
respect to the offering of the Units, as a result of the consummation of such
offering based on any activity of such person as a finder, agent, broker,
investment adviser or other financial service provider.
2. PURCHASE, SALE AND DELIVERY OF THE UNITS.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $______ per Unit, the number of Firm
Units set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be made
in New York Clearing House funds and, at the option of the Representative, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by the Company against either uncertificated
delivery of Firm Units or of certificates therefor (which delivery, if
certificated, shall take place in such location in New York, New York as may
be specified by the Representative) to the Representative for the several
accounts of the Underwriters. Such payment is to be made at the offices of
the Representative at the address set forth on the first page of this
agreement, at 7:00 a.m., Pacific time, on the third business day after the
date of this Agreement or at such other time and date not later than five
business days thereafter as you and the Company shall agree upon, such time
and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not
permitted by law or executive order to be closed.) Except to the extent
uncertificated Firm Units are delivered at closing, the certificates for the
Firm Units will be delivered in such denominations and in such registrations
as the Representative requests in writing not later than the second full
business day prior to the Closing Date, and will be made available for
inspection by the Representative at least one business day prior to the
Closing Date.
<PAGE>
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Representative to
purchase the Option Units at the price per Unit as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the Closing
Date and (ii) only once thereafter within 45 days after the date of this
Agreement, by the Representative to the Company setting forth the number of
Option Units as to which the Representative is exercising the option, the
names and denominations in which the Option Units are to be registered and
the time and date at which certificate representing such Units are to be
delivered. The time and date at which certificates for Option Units are to
be delivered shall be determined by the Representative but shall not be
earlier than three nor later than 10 full business days after the exercise of
such option, nor in any event prior to the Closing Date (such time and date
being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the
notice of exercise shall set the Closing Date as the Option Closing Date.
The option with respect to the Option Units granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Units by the
Underwriters. The Representative may cancel such option at any time prior to
its expiration by giving written notice of such cancellation to the Company.
To the extent, if any, that the option is exercised, payment for the Option
Units shall be made on the Option Closing Date in New York Clearing House
funds and, at the option of the Representative, by certified or bank
cashier's check drawn to the order of the Company for the Option Units to be
sold by the Company or bank wire to an account specified by the Company
against delivery of certificates therefor at the offices of Paulson
Investment Company, Inc. set forth on the first page of this Agreement.
(d) In addition to the sums payable to the Representative as
provided elsewhere herein, the Representative shall be entitled to receive at
the Closing, for themselves alone and not as Representative of the
Underwriters, as additional compensation for their services, purchase
warrants (the "Representative's Warrants") for the purchase of up to 200,000
Units at a price of $_____ per Unit, upon the terms and subject to adjustment
and conversion as described in the form of Representative's Warrants filed as
an exhibit to the Registration Statement.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Units as soon as the Representative deems it advisable
to do so. The Firm Units are to be initially offered to the public at the
initial public offering price set forth in the Prospectus. The
Representative may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option
Units are purchased pursuant to Section 2 hereof, the Representative will
offer them to the public on the foregoing terms.
It is further understood that you will act as the Representative
for the Underwriters in the offering and sale of the Units in accordance with
an Agreement Among Underwriters entered into by you and the several other
Underwriters.
<PAGE>
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A
of the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representative containing information previously omitted
at the time of effectiveness of the Registration Statement in reliance on
Rule 430A of the Rules and Regulations, and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representative shall not previously have been advised and furnished with a
copy or to which the Representative shall have reasonably objected in writing
or which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (A) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of
any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or
of the institution of any proceedings for that purpose. The Company will use
its best efforts to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Units for sale under the securities laws of such
jurisdictions as the Representative may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction where it is not
now so qualified or required to file such a consent. The Company will, from
time to time, prepare and file such statements, reports, and other documents,
as are or may be required to continue such qualifications in effect for so
long a period as the Representative may reasonably request for distribution
of the Units.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary
Prospectus as the Representative may reasonably request. The Company will
deliver to, or upon the order of, the Representative during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representative may reasonably request. The Company will deliver to the
Representative at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representative such number of copies
of the Registration Statement (including such number of copies of the
exhibits filed
<PAGE>
therewith that may reasonably be requested), and of all amendments thereto,
as the Representative may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of
the Units as contemplated in this Agreement and the Prospectus. If during
the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, not misleading, or, if it is
necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in
the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail, covering
a period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representative copies of annual reports and copies of
all other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver to
the Representative similar reports with respect to significant subsidiaries,
as that term is defined in the Rules and Regulations, which are not
consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivatives of
Common Stock (or agreement therefor) will be made for a period of one year
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of the
Representative, which consent will not be unreasonably withheld.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Units on The Nasdaq National Market.
<PAGE>
(j) The Company has caused each officer and director and each
person who owns, beneficially or of record, 5% or more of the Common Stock
outstanding immediately prior to this offering to furnish to you, on or prior
to the date of this agreement, a letter or letters, in form and substance
satisfactory to the Underwriters ("Lockup Agreements"), pursuant to which
each such person shall agree (A) not to offer, sell, sell short or otherwise
dispose of any shares of Common Stock or other capital stock of the Company,
or any other securities convertible, exchangeable or exercisable for Common
Stock or derivatives of Common Stock owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of one
year after the date of this Agreement, directly or indirectly, except with
the prior written consent of the Representative, provided, however, that, on
or after the 61st day following the effective date of the date of this
Agreement, each such person may, without restriction imposed hereby, sell or
otherwise dispose of a number of shares not greater than ten percent of the
number of shares owned by such person on the date of this Agreement; and (B)
to give prior written notice to the Representative for a period of one year
from the effective date of the Registration Statement, with respect to any
sales of Common Stock of the Company pursuant to Rule 144 under the
Securities Act or any similar rule.
(k) The Company shall apply the net proceeds of its sale of the
Units as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Units and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Units in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock and a Warrant Agent for the Warrants.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price of
any securities of the Company.
5. COSTS AND EXPENSES.
(a) The Representative shall be entitled to reimbursement from the
Company, for itself alone and not as Representative of the Underwriters, to a
non-accountable expense allowance equal to 2% of the aggregate initial public
offering price of the Firm Units and any Option Units purchased by the
Underwriters. The Representative shall be entitled to withhold this
allowance on the Closing Date related to the purchase of the Firm Units or
the Option Units, as the case may be.
<PAGE>
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses,
the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky
Survey and any supplements or amendments thereto; the filing fees of the
Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the NASD) of the
terms of the sale of the Units; the Listing Fee of The Nasdaq Stock Market;
and the expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Units
under State securities or Blue Sky laws. Any transfer taxes imposed on the
sale of the Units to the several Underwriters will be paid by the Company.
The Company agrees to pay all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters,
incident to the offer and sale of directed Units by the Underwriters to
employees and persons having business relationships with the Company. The
Company shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD regulation and
State securities or Blue Sky laws) except that, if this Agreement shall not
be consummated, then the Company shall reimburse the several Underwriters for
accountable out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with investigating, marketing and
proposing to market the Units or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Units.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Units on the Closing Date and the Option Units, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of
the Company contained herein, and to the performance by the Company of their
covenants and obligations hereunder and to the following additional
conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made, and any
request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representative and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction,
<PAGE>
restraining order, or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which
would prevent the issuance of the Units.
(b) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Grover T.
Wickersham, P.C., counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; the
Company is duly qualified to transact business in all jurisdictions in which
the conduct of its business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business
of the Company.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and non-assessable; all of the securities of the
Company conform to the description thereof contained in the Prospectus; the
certificates for the Common Stock and Warrants are in due and proper form;
the shares of Common Stock to be sold by the Company pursuant to this
Agreement, including shares of Common Stock to be sold as a part of the
Option Units, have been duly authorized and, upon issuance and delivery
thereof as contemplated in this Agreement and the Registration Statement,
will be validly issued, fully paid and non-assessable; no preemptive rights
of stockholders exist with respect to any of the Common Stock or the issuance
or sale thereof pursuant to any applicable statute or the provisions of the
Company's Articles of Incorporation or By-laws or, to such counsel's best
knowledge, pursuant to any contractual obligation. The Warrants and the
Representative's Warrants have been authorized for issuance to the purchasers
of Units or the Representative, as the case may be, and will, when issued,
possess rights, privileges, and characteristics as represented in the most
recent form of Warrants or Representative's Warrants, as the case may be,
filed as an exhibit to the Registration Statement; the securities to be
issued upon exercise of the Representative's Warrants, when issued and
delivered against payment therefor in accordance with the terms of the
Representative's Warrants, will be duly and validly issued, fully paid,
nonassessable and free of preemptive rights, and all corporate action
required to be taken for the authorization and issuance of the Warrants, the
Representative's Warrants, and the securities to be issued upon their
exercise, has been validly and sufficiently taken.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or
any securities convertible or exchangeable into or evidencing the right to
purchase or subscribe for any
<PAGE>
shares of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company or any
other person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of, any of the Units
or the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the
filing of the Registration Statement, to require registration under the Act
of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under
the Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects
with the requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements and related schedules therein).
(vi) The statements under the captions "Shares Eligible for
Future Sale" and "Description of Securities" in the Prospectus and in Item __
of the Registration Statement, insofar as such statements constitute a
summary of documents referred to therein or matters of law, fairly summarize
in all material respects the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are not so
filed or described as required, and such contracts and documents as are
summarized in the Registration Statement or the Prospectus are fairly
summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Articles of Incorporation or By-laws of the
Company, or any agreement or instrument known to such counsel to which the
Company is a party or by which the Company may be bound.
(x) Each of this Agreement and the Warrant Agreement by and
among the Company, the Warrantholders (defined therein) and Registrar and
Transfer Company, as trustee, has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative
or other governmental body is necessary in
<PAGE>
connection with the execution and delivery of this Agreement and the
consummation of the transactions herein contemplated (other than as may be
required by the NASD or as required by State securities and Blue Sky laws as
to which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than California or Federal laws on local
counsel in such jurisdictions, provided that in each case such counsel shall
state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above,
the opinion of Grover T. Wickersham, P.C. shall also include a statement to
the effect that nothing has come to the attention of such counsel that has
caused him to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not, and (ii) the Prospectus, or any supplement thereto, on the date it was
filed pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make
the statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein).
(c) The Representative shall have received from Stoel Rives LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In
rendering such opinion Stoel Rives LLP may rely as to all matters governed
other than by the laws of the State of Oregon or Federal laws on the opinion
of counsel referred to in Paragraph (b) of this Section 6. In addition to
the matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel that has
caused them to believe that (i) the Registration Statement, or any amendment
thereto, as of the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A under
the Act) as of the Closing Date or the Option Closing Date, as the case may
be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact, necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With
<PAGE>
respect to such statement, Stoel Rives LLP may state that their belief is
based upon the procedures set forth therein, but is without independent check
and verification.
(d) The Representative shall have received at or prior to the
Closing Date from Stoel Rives LLP a memorandum or summary, in form and
substance satisfactory to the Representative, with respect to the
qualification for offering and sale by the Underwriters of the Units under
the State securities or Blue Sky laws of such jurisdictions as the
Representative may reasonably have designated to the Company.
(e) The Representative, on behalf of the several Underwriters,
shall have received, on each of the dates hereof, the Closing Date and the
Option Closing Date, as the case may be, a letter dated the date hereof, the
Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to the Representative, of Grant Thornton LLP
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined
by them and included in the Registration Statement comply in form in all
material respects with the applicable accounting requirements of the Act and
the related published Rules and Regulations and containing such other
statements and information as is ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
(f) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the
case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or
the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a
<PAGE>
supplement to or an amendment of the Prospectus which has not been so set
forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as
the Representative may reasonably have requested.
(h) The Firm Units and Option Units, if any, have been approved
for designation upon notice of issuance on the Nasdaq National Market.
(i) The Lockup Agreements described in Section 4(j) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Stoel Rives LLP,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as
the case may be.
In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5 and
8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of
the Units required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
<PAGE>
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to
which such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading;
and will reimburse each Underwriter and each such controlling person upon
demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding or
in responding to a subpoena or governmental inquiry related to the offering
of the Units, whether or not such Underwriter or controlling person is a
party to any action or proceeding; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement
will be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who controls
the Company within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
under which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however, that
each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Company by or
through the Representative specifically for use in the preparation thereof.
This indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
<PAGE>
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which
such notice would have related and was materially prejudiced by the failure
to give such notice, but the failure to give such notice shall not relieve
the indemnifying party or parties from any liability which it or they may
have to the indemnified party for contribution or otherwise than on account
of the provisions of Section 8(a) or (b). In case any such proceeding shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days of
presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, (ii) the
named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees and expenses of more
than one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent
of the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party
is an actual or potential party to such claim, action or proceeding) unless
such settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim, action
or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such
<PAGE>
indemnified party as a result of such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion
as is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 8(d) were determined
by pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions applicable to the Units purchased by such
Underwriter, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing party
and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
<PAGE>
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Units and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor
to any Underwriter, or to the Company, its directors or officers, or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the
Units which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company such amounts as may be agreed upon
and upon the terms set forth herein, the Firm Units or Option Units, as the
case may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as such Representative, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Units or Option Units, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
Units with respect to which such default shall occur does not exceed 10% of
the Firm Units or Option Units, as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Units or Option Units, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Units or Option Units,
as the case may be, which such defaulting Underwriter or Underwriters failed
to purchase, or (b) if the aggregate number of Firm Units or Option Units, as
the case may be, with respect to which such default shall occur exceeds 10%
of the Firm Units or Option Units, as the case may be, covered hereby, the
Company or you as the Representative of the Underwriters will have the right,
by written notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representative, may determine in order that
the required changes in the Registration Statement or in the Prospectus or in
any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action
taken under this Section 9 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
<PAGE>
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Paulson
Investment Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204,
Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW 5th
Avenue, Portland, Oregon 97204, Attention: John J. Halle; if to the Company,
to audiohighway.com, 20600 Mariani Avenue, Cupertino, California 95014
Attention: Nathan M. Schulhof; with a copy to Grover T. Wickersham, P.C., 430
Cambridge Avenue, Suite 100, Palo Alto, California, 94306, Attention: Grover
T. Wickersham.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Units are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change
or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries taken as a whole, whether or
not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make it impracticable to market
the Units or to enforce contracts for the sale of the Units, (iii) the Dow
Jones Industrial Average shall have fallen by 15 percent or more from its
closing price on the day immediately preceding the date that the Registration
Statement is declared effective by the Commission, (iv) suspension of trading
in securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or numbers
of days of trading) for securities on either such Exchange, (v) the
enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority which
in your opinion materially and adversely affects or may materially and
adversely affect the business or operations of the Company, (vi) declaration
of a banking moratorium by United States or New York State authorities, (vii)
any downgrading in the rating of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Exchange Act); (viii) the suspension of
trading of the Common Stock or the Warrants by the Commission on the Nasdaq
Stock Market or (ix) the taking of any action by any governmental
<PAGE>
body or agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities markets in
the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. No purchaser of any of the Units from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the
only information furnished or to be furnished by any Underwriter to the
Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), legends
required by Item 502(d) of Regulation S-K under the Act and the information
under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants
in this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the
Company or its directors or officers and (c) delivery of and payment for the
Units under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in
Multnomah county, Oregon to the exclusion of all other courts that might have
jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
<PAGE>
Very truly yours,
audiohighway.com
By:
-------------------------------
Nathan M. Schulhof, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By:
-----------------------------------
Authorized Officer
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Units
Underwriter to be Purchased
----------- --------------------
<S> <C>
Paulson Investment Company, Inc.
--------------------
Total 2,000,000
</TABLE>
<PAGE>
Exhibit 3.1.1
1890748
ENDORSED
FILED
IN THE OFFICE OF THE SECRETARY OF STATE
OF THE STATE OF CALIFORNIA
JUN 13 1994
TONY MILLER, ACTING SECRETARY OF STATE
ARTICLES OF INCORPORATION
OF
INFORMATION HIGHWAY MEDIA CORPORATION
ONE: The name of this corporation is Information Highway Media Corporation.
TWO: The purpose of this corporation is to engage in amy lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE: The name and address in this state of the corporation's initial agent
for service of process is:
Grant Jasmin
1378 Cordilleras
Sunnyvale, CA 94087
FOUR: This corporation is authorized to issue 50,000,000 shares of common
stock, no par value. The corporation shall also have the authority to issue
5,000,000 shares of preferred stock with terms, rights, preferences and
privileges to be determined by the Board of Directors at the time of issuance.
FIVE: The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
SIX: The corporation is authorized to indemnify the directors and officers of
the corporation to the fullest extent permissible under California law.
IN WITNESS WHEREOF, the undersigned, has executed these Articles of
Incorporation.
/s/
----------------------------
Grant Jasmin
<PAGE>
Exhibit 3.1.2
A473548
ENDORSED
FILED
IN THE OFFICE OF THE SECRETARY OF STATE
OF THE STATE OF CALIFORNIA
MAR 19 1996
BILL JONES, SECRETARY OF STATE
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Nathan Schulhof and Grant Jasmin certify as follows:
1. They are the President and the Secretary, respectively, of Information
Highway Media Corporation, a California Corporation.
2. Article ONE of the Articles of Incorporation of this corporation is amended
to read as follows:
ONE: The name of this corporation is Audio Highway.
3. The foregoing amendment of Articles of Incorporation has been duly approved
by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly approved
by the required vote of shareholders in accordance with Section 902 of the
Corporations Code. The total number of outstanding shares of the corporation is
2,247,984. The number of shares voting in favor of the amendment equaled or
exceed the vote required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: March 8, 1996
/s/
- -------------------------------
Nathan Schulhof, President
/s/
- ------------------------------
Grant Jasmin, Secretary
<PAGE>
BY-LAWS OF
INFORMATION HIGHWAY MEDIA CORPORATION
a California Corporation
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office for the transaction of
business of the corporation is hereby fixed and located at 20600 Mariani Ave.,
City of Cupertino, County of Santa Clara, State of California. The location
may be changed by approval of a majority of the authorized Directors, and
additional offices may be established and maintained at such other place or
places, either within or without California, as the Board of Directors may from
time to time designate.
SECTION 2. OTHER OFFICES. Branch or subordinate offices may at any time
be established by the Board of Directors at any place or places where the
corporation is qualified to do business.
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 1. RESPONSIBILITY OF BOARD OF DIRECTORS. Subject to the
provisions of the General Corporation Law and to any limitations in the Articles
of Incorporation of the corporation relating to action required to be approved
by the Shareholders, as that term is defined in Section 153 of the California
Corporations Code, or by the outstanding shares, as that term is defined in
Section 152 of the Code, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the Board of Directors. The Board may delegate the management of the day-to-day
operation of the business of the corporation to a management company or other
person, provided that the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised under the ultimate direction
of the Board.
SECTION 2. STANDARD OF CARE. Each Director shall perform the duties of a
Director, including the duties as a member of any committee of the Board upon
which the Director may serve, in good faith, in a manner such Director believes
to be in the best interests of the corporation, and with such care, including
reasonable inquiry, as an ordinary prudent person in a like position would use
under similar circumstances. (Sec. 309)
SECTION 3. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
Directors shall be not less than 4 nor more than 7 with the exact number to be
fixed, from time to time, by resolution of the Board of Directors or until
changed by a duly adopted amendment to the Articles of Incorporation or by an
amendment to this by-law adopted by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote, as provided in Sec. 212.
SECTION 4. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the Shareholders to hold office until the next
annual meeting. Each Director,
<PAGE>
including a Director elected to fill a vacancy, shall hold office until a
successor has been elected and qualified.
SECTION 5. VACANCIES. Vacancies in the Board of Directors may be filled
by a majority of the remaining Directors, though less than a quorum, or by a
sole remaining Director, except that a vacancy created by the removal of a
Director by the vote or written consent of the Shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each Director so elected shall hold office until the next annual meeting
of the Shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in the event of the death, resignation, or removal of any Director, or if the
Board of Directors by resolution declares vacant the office of a Director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of Directors is increased, or if the shareholders
fail, at any meeting of shareholders at which any Director or Directors are
elected, to elect the number of Directors to be voted for at that meeting
The Shareholders may elect a Director or Directors at any time to fill any
vacancy or vacancies not filled by the Directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any Director may resign effective on giving written notice to the Chairman
of the Board, the Chief Executive Officer (CEO), the President, the Secretary,
or the Board of Directors, unless the notice specifies a later time for that
resignation to become effective. If the resignation of a Director is effective
at a future time, the Board of Directors may elect a successor to take office
when the resignation becomes effective.
No reduction of the authorized number of Directors shall have the effect
of removing any Director before that Director's term of office expires.
SECTION 6. REMOVAL OF DIRECTORS. The entire Board of Directors or any
individual Director may be removed from office as provided by Secs. 302, 303 and
304 of the Corporations Code of the State of California. In such case, the
remaining Board members may elect a successor Director to fill such vacancy for
the remaining unexpired term of the Director so removed.
SECTION 7. NOTICE, PLACE AND MANNER OF MEETINGS. Meetings of the Board of
Directors may be called by the Chairman of the Board, or the Chief Executive
Officer (CEO), or the President, or the Secretary, or any two (2) Directors and
shall be held at the principal executive office of the corporation, unless some
other place is designated in the notice of the meeting. Members of the Board
may participate in a meeting through use of a conference telephone or similar
communications equipment so long as all members participating in such a meeting
can hear one
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another. Accurate minutes of any meeting of the Board or any committee thereof,
shall be maintained as required by Sec. 1500 of the Code by the Secretary or
other Officer designated for that purpose.
SECTION 8. SPECIAL MEETINGS - NOTICES - WAIVERS. Special meetings of the
Board may be called at any time by the CEO, or the President, or the Secretary
or by any two (2) Directors, or by one (1) Director if only one is provided.
At least forty-eight (48) hours notice of the time and place of special
meetings shall be delivered personally to the Directors or personally
communicates to them by a corporate Officer by telephone, telegraph, fax, U.S.
mail, courier or delivery service. If the notice is sent to a Director by
letter, it shall be addressed to him or her at his or her address as it is
shown upon the records of the corporation, or if it is not so shown on such
records or is not readily ascertainable, at the place in which the meetings of
the Directors are regularly held. In case such notice is mailed, it shall be
deposited in the United States mail, postage prepaid, in the place in which the
principal executive office of the corporation is located at least four (4)
calendar days prior to the time of the holding of the meeting. Such mailing,
telegraphing, telephoning or delivery as above provided shall be due, legal and
personal notice to such Director.
When all of the Directors are present at any Directors' meeting, however
called or noticed, and either (i) sign a written consent thereto on the records
of such meeting, or, (ii) if a majority of the Directors are present and if
those not present sign a waiver of notice of such meeting or a consent to
holding the meeting or an approval of the minutes thereof, whether prior to or
after the holding of such meeting, which said waiver, consent or approval shall
be filed with the Secretary of the corporation, or (iii) if a Director attends a
meeting without notice but without protesting, prior thereto or at its
commencement, the lack of notice, then the transactions thereof are as valid as
if had at a meeting regularly called and noticed.
SECTION 9. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting and with the same force and effect as if taken by a unanimous vote of
Directors, if authorized by a writing signed individually or collectively by all
members of the Board. Such consent shall be filed with the regular minutes of
the Board.
SECTION 10. QUORUM. A majority of the number of Directors in office
at the beginning of any meeting shall constitute a quorum for the transaction
of business. The action of a majority of the Directors present at any
meeting at which there is a quorum, when duly assembled, is valid as a
corporate act; provided that a minority of the Directors, in the absence of a
quorum, may adjourn from time to time, but may not transact any business. A
meeting at which a quorum is initially present may continue to transact
business, notwithstanding the withdrawal of Directors, if any action taken is
approved by a majority of the required quorum for such meeting.
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SECTION 11. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given to absent Directors if the time and place
be fixed at the meeting adjourned and held within twenty-four (24) hours, but if
adjourned more than twenty-four (24) hours, notice shall be given to all
Directors not present at the time of the adjournment.
SECTION 12. COMPENSATION OF DIRECTORS. Directors, as such, shall not
receive any stated salary for their services, but by resolution of the Board a
fixed sum and expense of attendance if any, may be allowed for attendance at
such regular and special meeting of the Board; provided that nothing herein
contained shall be construed to preclude any Director from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 13. COMMITTEES. Committees of the Board may be appointed by
resolution passed by a majority of the whole Board. Committees shall be
composed of one (1) or more members of the Board, and shall have such powers as
the Board as may be expressly delegated to it by resolution of the Board of
Directors, except those powers expressly made non-delegable by Sec. 311.
SECTION 14. ADVISORY DIRECTORS. The Board of Directors from time to time
may elect one or more persons to be Advisory Directors who shall not by such
appointment be members of the Board of Directors. Advisory Directors shall be
available from time to time to perform special assignments specified by the
President, to attend meetings of the Board of Directors upon invitation and to
furnish consultation to the Board. The period during which the title shall be
held may be prescribed by the Board of Directors. If no period is prescribed,
the title shall be held at the pleasure of the Board.
SECTION 15. RESIGNATIONS. Any Director may resign effective upon giving
written notice to the Chairman of the Board, the CEO, the President, the
Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The Officers of the corporation shall be a Chief
Executive Officer (CEO), a President, a Chief Operating Officer, a Secretary,
and a Chief Financial Officer (CFO). The corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other Officers as may be appointed in accordance with the provisions of
Section 3 of this Article III. Any number of offices may be held by the same
person.
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SECTION 2. ELECTION. The Officers of the corporation, except such Officers
as may be appointed in accordance with the provisions of Section 3 or Section 5
of this Article, shall be chosen annually by the Board of Directors, and each
shall hold office until he or she shall resign or shall be removed or otherwise
disqualified to serve, or a successor shall be elected and qualified.
SECTION 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint
such other Officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority and perform such duties
as are provided in the By-Laws or as the Board of Directors may from time to
time determine.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an Officer under any contract of employment, any Officer may be removed,
either with or without cause, by the Board of Directors, at any regular or
special meeting of the Board, or, except in case of an Officer chosen by the
Board of Directors, by any Officer upon whom such power of removal may be
conferred by the Board of Directors.
Any Officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Officer is a
party.
SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the By-Laws for regular appointments to that office.
SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at meetings of the Board of
Directors and exercise and perform such other powers and duties as may be
from time to time assigned by the Board of Directors or prescribed by the
By-Laws. If there is no Chief Executive Officer, the Chairman of the Board
shall in addition be the Chief Executive Officer of the corporation and shall
have the powers and duties prescribed in Section 7 of this Article III.
SECTION 7. CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers,
if any, as may be given by the Board of Directors to the Chairman of the Board,
if there be such an officer, the Chief Executive Officer of the corporation
shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and Officers of the
corporation, and shall have the general powers and duties of management usually
vested in the office of Chief Executive Officer of a corporation, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
the By-Laws.
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SECTION 8. PRESIDENT. The President shall preside at all meetings of the
Shareholders and in the absence of the Chairman of the Board, or if there be
none, at all meetings of the Board of Directors. The President shall have such
other powers and duties as may be prescribed by the Board of Directors or the
By-Laws.
SECTION 9. CHIEF OPERATING OFFICER. Subject to such supervisory powers, if
any, as may be given by the Board of Directors to the Chairman of the Board, if
there be such an officer, the Chief Operating Officer shall be responsible for
the day to day operations of the corporation. The Chief Operating Officer shall
be ex officio a member of all the standing committees, including the Executive
Committee. The Chief Operating Officer shall have such other powers and duties
as may be prescribed by the Board of Directors or the By-Laws.
SECTION 10. VICE PRESIDENT. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to, all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the By-Laws.
SECTION 11. SECRETARY. The Secretary shall keep, or cause to be kept, a
book of minutes at the principal office or such other place as the Board of
Directors may order, of all meetings of Directors and Shareholders, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of shares present or represented at Shareholders' meetings
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent, a share register, or
duplicate share register, showing the names of the Shareholders and their
addresses; the number and classes of shares held by each; the number and date of
certificates issued for the same; and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by the By-Laws or by
law to be given. He or she shall keep the seal of the corporation in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board of Directors or by the By-Laws.
SECTION 12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained in accordance with
generally accepted accounting principles, adequate and correct accounts of
the properties and business transactions of the corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, earnings (or surplus) and shares. The books of account shall at all
reasonable times be open to inspection by any Director.
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This Officer shall deposit all moneys and other valuables in the name
and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. He or she shall disburse the funds of
the corporation as may be ordered by the Board of Directors, shall render to
the President and Directors, whenever they request it, an account of all of
his or her transactions and of the financial condition of the corporation,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or the By-Laws.
ARTICLE IV
SHAREHOLDERS' MEETINGS
SECTION 1. PLACE OF MEETINGS. All meetings of the Shareholders shall be
held at the principal executive office of the corporation unless some other
appropriate and convenient location be designated for that purpose from time to
time by the Board of Directors.
SECTION 2. ANNUAL MEETINGS. The annual meetings of the Shareholders shall
be held, each year, at the time and on the day set by the Board of Directors
each year. At the annual meeting, the Shareholders shall elect a Board of
Directors, consider reports of the affairs of the corporation and transact such
other business as may be properly brought before the meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of the Shareholders may be
called at any time by the Board of Directors, the Chairman of the Board, the
CEO, the President, the Secretary, or by one or more Shareholders holding not
less than one-tenth (1/10) of the voting power of the corporation. Except as
next provided, notice shall be given as for the annual meeting.
Upon receipt of a written request addressed to the Chairman, the CEO,
President, or Secretary, mailed or delivered personally to such Officer by
any person (other than the Board) entitled to call a special meeting of
Shareholders, such Officer shall cause notice to be given, to the
Shareholders entitled to vote, that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than sixty (60) days after the receipt of such
request. If such notice is not given within twenty (20) days after receipt
of such request, the persons calling the meeting may give notice thereof in
the manner provided by these By-Laws or apply to the Superior Court as
provided in Sec. 305(c).
SECTION 4. NOTICE OF MEETINGS - REPORTS. Notice of meetings, annual or
special, shall be given in writing not less than ten (10) nor more than sixty
(60) days before the date of the meeting to Shareholders entitled to vote
thereat. Such notice shall be given by the Secretary or the Assistant
Secretary, or if there be no such officer, or in the case of his or her neglect
or refusal, by any Director or Shareholder.
Such notices or any reports shall be given personally or by mail or by
other means of written communication as provided in Sec. 601 of the Code and
shall be sent to the Shareholder's
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address appearing on the books of the corporation, or supplied by him or her to
the corporation for the purpose of notice, and in the absence thereof, as
provided in Sec. 601 of the Code.
Notice of any meeting of Shareholders shall specify the place, the day and
the hour of meeting, and (1) in case of a special meeting, the general nature of
the business to be transacted and no other business may be transacted, or (2) in
the case of an annual meeting, those matters which the Board at date of mailing,
intends to present for action by the Shareholders. At any meetings where
Directors are to be elected, notice shall include the names of the nominees, if
any, intended at date of notice to be presented by management for election.
If a Shareholder supplies no address, notice shall be deemed to have been
given if mailed to the place where the principal executive office of the
corporation, in California, is situated, or published at least once in some
newspaper of general circulation in the County of said principal office.
Notice shall be deemed given at the time it is delivered personally or
deposited in the mail or sent by other means of written communication. The
Officer giving such notice or report shall prepare and file an affidavit or
declaration thereof.
When a meeting is adjourned for forty-five (45) days or more, notice of the
adjourned meeting shall be given as in case of an original meeting. Save, as
aforesaid, it shall not be necessary to give any notice of adjournment or of the
business to be transacted at an adjourned meeting other than by announcement at
the meeting at which such adjournment is taken.
SECTION 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of Shareholders, however called and noticed, shall
be valid as though had at a meeting duly held after regular call and notice, if
a quorum be present either in person or by proxy, and if, either before or after
the meeting, each of the Shareholders entitled to vote, not present in person or
by proxy, sign a written waiver of notice, or a consent to the holding of such
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance shall constitute a waiver of notice, unless
objection shall be made as provided in Sec. 601(e).
SECTION 6. SHAREHOLDERS ACTING WITHOUT A MEETING - DIRECTORS. Any action
which may be taken at a meeting of the Shareholders, may be taken without a
meeting or notice of meeting if authorized by a writing signed by all of the
Shareholders entitled to vote at a meeting for such purpose, and filed with the
Secretary of the corporation, provided, further, that while ordinarily Directors
can only be elected by unanimous written consent under Sec. 603(d), if the
Directors fail to fill a vacancy, then a Director to fill that vacancy may be
elected by the written consent of persons holding a majority of shares entitled
to vote for the election of Directors.
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SECTION 7. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise provided in
the Corporations Code or the Articles, any action which may be taken at any
annual or special meeting of Shareholders may be taken without a meeting and
without prior notice, if a consent in writing, setting forth the action so
taken, signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
Unless the consents of all Shareholders entitled to vote have been
solicited in writing,
(1) Notice of any Shareholder approval pursuant to Secs. 310, 317,
1201 or 2007 without a meeting by less than unanimous written consent shall
be given at least ten (10) days before the consummation of the action
authorized by such approval, and
(2) Prompt notice shall be given of the taking of any other
corporation action approved by Shareholders without a meeting by less than
unanimous written consent, to each of those Shareholders entitled to vote
who have not consented in writing.
Any Shareholder giving a written consent, or the Shareholder's
proxyholders, or a transferee of the shares may revoke the consent by a writing
received by the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary of the corporation, but may not do so thereafter. Such revocation
is effective upon its receipt by the Secretary of the corporation.
SECTION 8. QUORUM. The holders of a majority of the shares entitled to
vote thereat, present in person, or represented by proxy, shall constitute a
quorum at all meetings of the Shareholders for the transaction of business
except as otherwise provided by law, by the Articles of Incorporation, or by
these By-Laws. If, however, such majority shall not be present or represented
at any meeting of the Shareholders, the Shareholders entitled to vote thereat,
present in person, or by proxy, shall have the power to adjourn the meeting from
time to time, until the requisite amount of voting shares shall be present. At
such adjourned meeting at which the requisite amount of voting shares shall be
represented, any business may be transacted which might have been transacted at
a meeting as originally notified.
If a quorum be initially present, the Shareholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken is approved by a
majority of the Shareholders required to initially constitute a quorum.
SECTION 9. VOTING. Only persons in whose names shares entitled to vote
stand on the stock records of the corporation on the day of any meeting of
Shareholders, unless some other day be fixed by the Board of Directors for the
determination of Shareholders of record, and then on such other day, shall be
entitled to vote at such meeting.
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Provided the candidate's name has been placed in nomination prior to the
voting and one or more Shareholder has given notice at the meeting prior to the
voting of the Shareholder's intent to cumulate the Shareholder's votes, every
Shareholder entitled to vote at any election for Directors may cumulate their
votes and give one candidate a number of votes equal to the number of Directors
to be elected multiplied by the number of votes to which his or her shares are
entitled, or distribute his or her votes on the same principle among as many
candidates as he or she thinks fit.
The candidates receiving the highest number of votes up to the number of
Directors to be elected are elected.
The Board of Directors may fix a time in the future not exceeding thirty
(30) days preceding the date of any meeting of Shareholders or the date fixed
for the payment of any dividend or distribution, or for the allotment of
rights, or when any change or conversion or exchange of shares shall go into
effect, as a record date for the determination of the Shareholders entitled
to notice of and to vote at any such meeting, or entitled to receive any such
dividend or distribution, or any allotment of rights, or to exercise the
rights in respect to any such change, conversion or exchange of shares. In
such case only Shareholders of record on the date so fixed shall be entitled
to notice of and to vote at such meeting, or to receive such dividends,
distribution or allotment of rights, or to exercise such rights, as the case
may be notwithstanding any transfer of any share on the books of the
corporation after any record date fixed as aforesaid. The Board of Directors
may close the books of the corporation against transfers of shares during the
whole or any part of such period.
SECTION 10. PROXIES. Every Shareholder entitled to vote, or to execute
consents, may do so, either in person or by written proxy, executed in
accordance with the provisions of Secs. 604 and 705 of the Code and filed with
the Secretary of the corporation.
SECTION 11. ORGANIZATION. The President, or in the absence of the
President, the CEO, the Chairman of the Board or the Secretary shall call the
meeting of the Shareholders to order, and shall act as chairman of the meeting.
In the absence of the President and all officers, Shareholders shall appoint a
chairman for such meeting. The Secretary of the Corporation shall act as
Secretary of all meetings of the Shareholders, but in the absence of the
Secretary at any meeting of the Shareholders, the presiding Officer may appoint
any person to act as Secretary of the meeting.
SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of
Shareholders the Board of Directors may, if they so elect, appoint inspectors of
election to act at such meeting or any adjournment thereof. If inspectors of
election be not so appointed, or if any persons so appointed fail to appear or
refuse to act, the chairman of any such meeting may, and on the request of any
Shareholder or his or her proxy shall, make such appointment at the meeting in
which case the number of inspectors shall be either one (1) or three (3) as
determined by a majority of the Shareholders represented at the meeting.
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ARTICLE V
CERTIFICATES AND TRANSFER OF SHARES
SECTION 1. CERTIFICATES FOR SHARES. Certificates for shares shall be of
such form and device as the Board of Directors may designate and shall state the
name of the record holder of the shares represented thereby; its number; date of
issuance; the number of shares for which it is issued; a statement of the
rights, privileges, preferences and restrictions, if any; a statement as to the
redemption or conversion, if any; a statement of liens or restrictions upon
transfer or voting, if any; if the shares be assessable or, if assessments are
collectible by personal action, a plain statement of such facts.
All certificates shall be signed in the name of the corporation by the
Chairman of the Board or Vice Chairman of the Board or the President or Vice
President and by the Chief Financial Officer or an Assistant Treasurer or the
Secretary or any Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the Shareholder.
Any or all of the signatures on the certificate may be facsimile. In case
any Officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on a certificate shall have ceased to be that Officer,
transfer agent, or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an Officer,
transfer agent, or registrar at the date of issue.
SECTION 2. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a
certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of that fact and shall, if the Directors so require, give the
corporation a bond of indemnity, in form and with one or more sureties
satisfactory to the Board, in at least double the value of the stock represented
by said certificate, whereupon a new certificate may be issued in the same tenor
and for the same number of shares as the one alleged to be lost or destroyed.
SECTION 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
appoint one or more transfer agents or transfer clerks, and one or more
registrars, which shall be an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the corporation may necessitate and the Board of Directors may
designate.
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SECTION 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE. In order that the
corporation may determine the Shareholders entitled to notice of any meeting or
to vote or entitled to receive payment of any dividend or other distribution or
allotment of any rights or entitled to exercise any rights in respect of any
other lawful action, the Board may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days prior to the date of
such meeting nor more than sixty (60) days prior to any other action.
If no record date is fixed, the record date for determining Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held. The record date for
determining Shareholders entitled to give consent to corporate action in writing
without a meeting, when no prior action by the Board is necessary, shall be the
day on which the first written consent is given.
The record date for determining Shareholders for any other purpose shall be
at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
SECTION 6. LEGEND CONDITION. In the event any shares of this corporation
are issued pursuant to a permit or exemption therefrom requiring the imposition
of a legend condition, the person or persons issuing or transferring said shares
shall make sure said legend appears on the certificate and shall not be required
to transfer any shares free of such legend unless an amendment to such permit
or a new permit be first issued so authorizing such a deletion.
ARTICLE VI
RECORDS - REPORTS - INSPECTION
SECTION 1. RECORDS. The corporation shall maintain, in accordance with
generally accepted accounting principles, adequate and correct accounts, books
and records of its business and properties. All of such books, records and
accounts shall be kept at its principal executive office in the State of
California, as fixed by the Board of Directors from time to time.
SECTION 2. INSPECTION OF BOOKS AND RECORDS. All books and records provided
for in Sec. 1500 shall be open to inspection of the Directors and Shareholders
from time to time and in the manner provided in said Sec. 1600-1602.
SECTION 3. CERTIFICATION AND INSPECTION OF BY-LAWS. The original or a
copy of these By-Laws, as amended or otherwise altered to date, certified by
the Secretary, shall be kept at the corporation's principal executive office and
shall be open to inspection by the Shareholders of the corporation at all
reasonable times during office hours, as provided in Sec. 213 of the
Corporations Code.
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SECTION 4. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 5. CONTRACTS, ETC. - HOW EXECUTED. The Board of Directors, except
as in the By-Laws otherwise provided, may authorize any Officer or Officers,
agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the corporation. Such authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors,
no Officer, agent or employee shall have any power or authority to bind the
corporation by any contract or agreement, or to pledge its credit, or to render
it liable for any purpose or to any amount, except as provided in Sec. 313 of
the Corporations Code.
ARTICLE VII
ANNUAL REPORTS
SECTION 1. REPORT TO SHAREHOLDERS, DUE DATE. The Board of Directors shall
cause an annual report to be sent to the Shareholders not later than one hundred
twenty (120) days after the close of the fiscal or calendar year adopted by the
corporation. This report shall be sent at least fifteen (15) days before the
annual meeting of Shareholders to be held during the next fiscal year and in the
manner specified in Section 4 of Article IV of these By-Laws for giving notice
to Shareholders of the corporation. The annual report shall contain a balance
sheet as of the end of the fiscal year and an income statement and statement of
changes in financial position for the fiscal year, accompanied by any report of
independent accountants or, if there is no such report, the certificate of an
authorized Officer of the corporation that the statements were prepared without
audit from the books and records of the corporation.
SECTION 2. WAIVER. The annual report to Shareholders referred to in
Section 1501 of the California General Corporation Law is expressly dispensed
with so long as this corporation shall have less than one hundred (100)
Shareholders. However, nothing herein shall be interpreted as prohibiting the
Board of Directors from issuing annual or other periodic reports to the
Shareholders of the corporation as they consider appropriate.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
SECTION 1. AMENDMENT BY SHAREHOLDERS. New By-Laws may be adopted or
these By-Laws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the Articles of Incorporation of the corporation set forth the
number of authorized Directors of the corporation, the authorized number of
Directors may be changed only by an amendment of the Articles of Incorporation.
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SECTION 2. POWERS OF DIRECTORS. Subject to the right of the Shareholders
to adopt, amend or repeal By-Laws, as provided in Section I of this Article
VIII, and the limitations of Sec. 204(a)(5) and Sec. 212, the Board of Directors
may adopt, amend or repeal any of these By-Laws other than a By-Law, or
amendment thereof changing the authorized number of Directors.
SECTION 3. RECORD OF AMENDMENTS. Whenever an amendment or new By-Law is
adopted, it shall be copied in the book of By-Laws with the original By-Laws, in
the appropriate place. If any By-Law is repealed, the fact of repeal with the
date of the meeting at which the repeal was enacted or written assent was filed
shall be stated in said book.
ARTICLE IX
CORPORATE SEAL
The corporate seal shall be circular in form, and shall have inscribed
thereon the name of the corporation, the date of its incorporation, and the word
"California."
ARTICLE X
MISCELLANEOUS
SECTION 1. REFERENCES TO CODE SECTIONS. "Sec." references herein refer to
the equivalent Sections of the General Corporation Law effective January 1,
1977, as amended.
SECTION 2. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other
corporations standing in the name of this corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
corporation by the Chairman of the Board, the CEO or the President and the
Secretary or an Assistant Secretary.
SECTION 3. SUBSIDIARY CORPORATIONS. Shares of this corporation owned by a
subsidiary shall not be entitled to vote on any matter. A subsidiary for these
purposes is defined as a corporation, the shares of which possessing more than
25% of the total combined voting power of all classes of shares entitled to
vote, are owned directly or indirectly through one (1) or more subsidiaries.
SECTION 4. INDEMNIFICATION AND LIABILITY. The liability of the directors
of the corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the corporation and shareholders through bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code. In any event, the corporation shall have the right to
purchase, and maintain insurance on
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behalf of any such persons whether or not the corporation would have the power
to indemnify such person against the liability insured against.
SECTION 5. ACCOUNTING YEAR. The accounting year of the corporation shall
be fixed by resolution of the Board of Directors.
15
<PAGE>
CERTIFICATE OF ADOPTION OF BY-LAWS
ADOPTION BY INCORPORATOR(S) OR FIRST DIRECTOR(S)
The undersigned person(s) named in the Articles of Incorporation as the
Incorporator(s) or First Director(s) of the above-named corporation hereby adopt
the same as the By-Laws of said corporation.
Executed this 14th day of June, 1994
/s/ Nathan M. Schulhof
-----------------------------
Name
CERTIFICATE BY SECRETARY
I DO HEREBY CERTIFY AS FOLLOWS:
That I am the duly elected, qualified and acting Secretary of the above
named corporation, that the foregoing By-Laws were adopted as the By-Laws of
said corporation on the date set forth above by the person(s) named in the
Articles of Incorporation as the Incorporation(s) or First Director(s) of
said corporation.
IN WITNESS HEREOF, I have hereunto set my hand and fixed the corporate seal
this 14th day of June, 1994.
/s/ Grant Jasmin
------------------------------
Secretary
CERTIFICATE BY SECRETARY OF ADOPTION BY SHAREHOLDERS' VOTE
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of the above
named corporation, and that the above and foregoing Code of By-Laws was
submitted to the Shareholders at their first meeting and recorded in the minutes
thereof, was ratified by the vote of Shareholders entitled to exercise the
majority of the voting power of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand this 14th day of June,
1994.
/s/ Grant Jasmin
------------------------------
Secretary
<PAGE>
WARRANT AGREEMENT
between
audiohighway.com
and
------------------------------------
Dated as of , 1998
---------
<PAGE> This Agreement, dated as of ________, 1998, is between
audiohighway.com, a California corporation (the "Company") and
__________________________, a ___________ _________, (the "Warrant Agent").
The Company, at or about the time that it is entering into this
Agreement, proposes to issue and sell to public investors up to 2,300,000
Units ("Units"). Each Unit consists of one share of Common Stock of the
Company ("Common Stock") and one Warrant (collectively, the "Warrants"), each
Warrant exercisable to purchase one share of Common Stock for $____, upon the
terms and conditions and subject to adjustment in certain circumstances, all
as set forth in this Agreement.
The Company proposes to issue to the Representative of the
Underwriters in the public offering of Units referred to above warrants to
purchase up to 150,000 additional Units.
The Company wishes to retain the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing so to act, in connection with
the issuance, transfer, exchange and replacement of the certificates
evidencing the Warrants to be issued under this Agreement (the "Warrant
Certificates") and the exercise of the Warrants;
The Company and the Warrant Agent wish to enter into this Agreement
to set forth the terms and conditions of the Warrants and the rights of the
holders thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT
The Company appoints the Warrant Agent to act as agent for the
Company in accordance with the instructions in this Agreement and the Warrant
Agent accepts such appointment.
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<PAGE>
Section 2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES
The Warrant Certificates (and the Form of Election to Purchase and
the Form of Assignment to be printed on the reverse thereof) shall be in
registered form only and shall be substantially of the tenor and purport
recited in Exhibit A hereto, and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may
deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law, or with any rule or
regulation made pursuant thereto, or with any rule or regulation of any stock
exchange on which the Common Stock or the Warrants may be listed or any
automated quotation system, or to conform to usage. Each Warrant Certificate
shall entitle the registered holder thereof, subject to the provisions of
this Agreement and of the Warrant Certificate, to purchase, on or before the
close of business on ________, 2003 (the "Expiration Date"), one fully paid
and non-assessable share of Common Stock for each Warrant evidenced by such
Warrant Certificate, subject to adjustments as provided in Sections 6 hereof,
for $____ (the "Exercise Price"). Each Warrant Certificate issued as a part
of a Unit offered to the public as described in the recitals, above, shall be
dated ________, 1998; each other Warrant Certificate shall be dated the date
on which the Warrant Agent receives valid issuance instructions from the
Company or a transferring holder of a Warrant Certificate or, if such
instructions specify another date, such other date.
For purposes of this Agreement, the term "close of business" on any
given date shall mean 5:00 p.m., Eastern time, on such date; provided,
however, that if such date is not a business day, it shall mean 5:00 p.m.,
Eastern time, on the next succeeding business day. For purposes of this
Agreement, the term "business day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in New York, New York are
authorized or obligated by law to be closed.
Each Warrant Certificate shall be executed on behalf of the Company
by the Chairman of the Board or its President or a Vice President, either
manually or by facsimile signature printed thereon, and have affixed thereto
the Company's seal or a facsimile thereof which shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. Each Warrant Certificate shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose
unless so countersigned. In case any officer of the Company who shall have
signed any Warrant Certificate shall cease to be such officer of the Company
before countersignature by the Warrant Agent and issue and delivery thereof
by the Company, such Warrant Certificate, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificate had not ceased to be
such officer of the Company.
Section 3. SUBSEQUENT ISSUE OF WARRANT CERTIFICATES
Subsequent to their original issuance, no Warrant Certificates
shall be reissued except (i) Warrant Certificates issued upon transfer
thereof in accordance with Section 4 hereof, (ii) Warrant Certificates issued
upon any combination, split-up or exchange of Warrant Certificates pursuant
to Section 4 hereof, (iii) Warrant Certificates issued in replacement of
mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section
5 hereof, (iv) Warrant Certificates issued upon the partial exercise of
Warrant Certificates pursuant to Section 7 hereof, and (v) Warrant
Certificates issued to reflect any adjustment or change in the Exercise Price
or the number or kind of shares purchasable thereunder pursuant to Section 22
hereof. The Warrant Agent is hereby irrevocably authorized to countersign
and deliver, in accordance with the provisions of said Sections 4, 5, 7 and
22, the new Warrant Certificates required for purposes thereof, and the
Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant Certificates duly executed on behalf of the Company for
such purposes.
Section 4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES
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<PAGE>
The Warrant Agent will keep or cause to be kept books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the
respective holders of the Warrant Certificates and the number of Warrants
evidenced by each such Warrant Certificate.
The Warrant Agent shall, from time to time, register the transfer
of any outstanding Warrants upon the books to be maintained by the Warrant
Agent for that purpose, upon surrender of the Warrant Certificate evidencing
such Warrants, with the Form of Assignment duly filled in and executed with
such signature guaranteed by a banking institution or NASD member and such
supporting documentation as the Warrant Agent or the Company may reasonably
require, to the Warrant Agent at its stock transfer office in _____________,
______________ at any time on or before the Expiration Date, and upon payment
to the Warrant Agent for the account of the Company of an amount equal to any
applicable transfer tax. Payment of the amount of such tax may be made in
cash, or by certified or official bank check, payable in lawful money of the
United States of America to the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the
surrendered Warrant Certificate and countersign and deliver to the transferee
a new Warrant Certificate for the number of full Warrants transferred to such
transferee; PROVIDED, HOWEVER, that in case the registered holder of any
Warrant Certificate shall elect to transfer fewer than all of the Warrants
evidenced by such Warrant Certificate, the Warrant Agent in addition shall
promptly countersign and deliver to such registered holder a new Warrant
Certificate or Certificates for the number of full Warrants not so
transferred.
Any Warrant Certificate or Certificates may be exchanged at the
option of the holder thereof for another Warrant Certificate or Certificates
of different denominations, of like tenor and representing in the aggregate
the same number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business
on the date hereof and prior to the close of business on the Expiration Date.
The Warrant Agent shall promptly cancel the surrendered Warrant Certificate
and deliver the new Warrant Certificate pursuant to the provisions of this
Section.
Section 5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES
Upon receipt by the Company and the Warrant Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of any Warrant Certificate, and in the case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to
them of all reasonable expenses incidental thereto, and, in the case of
mutilation, upon surrender and cancellation of the Warrant Certificate, the
Warrant Agent shall countersign and deliver a new Warrant Certificate of like
tenor for the same number of Warrants.
Section 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND EXERCISE
PRICE
The number and kind of securities or other property purchasable
upon exercise of a Warrant shall be subject to adjustment from time to time
upon the occurrence, after the date hereof, of any of the following events:
A. In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of capital stock on its outstanding Common Stock, (2)
subdivide its outstanding shares of Common Stock into a greater number of
such shares or (3) combine its outstanding shares of Common Stock into a
smaller number of such shares, the total number of shares of Common Stock
purchasable upon the exercise of each Warrant outstanding immediately prior
thereto shall be adjusted so that the holder of any Warrant Certificate
thereafter surrendered for exercise shall be entitled to receive at the same
aggregate Exercise Price the number of shares of capital stock (of one or
more
3
<PAGE>
classes) which such holder would have owned or have been entitled to
receive immediately following the happening of any of the events described
above had such Warrant been exercised in full immediately prior to the record
date with respect to such event. Any adjustment made pursuant to this
Subsection shall, in the case of a stock dividend or distribution, become
effective as of the record date therefor and, in the case of a subdivision or
combination, be made as of the effective date thereof. If, as a result of an
adjustment made pursuant to this Subsection, the holder of any Warrant
Certificate thereafter surrendered for exercise shall become entitled to
receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company (whose determination shall be conclusive
and shall be evidenced by a Board resolution filed with the Warrant Agent)
shall determine the allocation of the adjusted Exercise Price between or
among shares of such classes of capital stock.
B. In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in Subsection A. above or Subsection E.
below), any Warrantholder, upon exercise of Warrants, shall be entitled to
receive, in substitution for the Common Stock to which he would have become
entitled upon exercise immediately prior to such reorganization or
reclassification, the shares (of any class or classes) or other securities or
property of the Company (or cash) that he would have been entitled to receive
at the same aggregate Exercise Price upon such reorganization or
reclassification if such Warrants had been exercised immediately prior to the
record date with respect to such event; and in any such case, appropriate
provision (as determined by the Board of Directors of the Company, whose
determination shall be conclusive and shall be evidenced by a certified Board
resolution filed with the Warrant Agent) shall be made for the application of
this Section 6 with respect to the rights and interests thereafter of the
Warrantholders (including but not limited to the allocation of the Exercise
Price between or among shares of classes of capital stock), to the end that
this Section 6 (including the adjustments of the number of shares of Common
Stock or other securities purchasable and the Exercise Price thereof) shall
thereafter be reflected, as nearly as reasonably practicable, in all
subsequent exercises of the Warrants for any shares or securities or other
property (or cash) thereafter deliverable upon the exercise of the Warrants.
C. Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant is adjusted as provided in this
Section 6, the Company will promptly file with the Warrant Agent a
certificate signed by a Chairman or co-Chairman of the Board or the President
or a Vice President of the Company and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company setting
forth the number and kind of securities or other property purchasable upon
exercise of a Warrant, as so adjusted, stating that such adjustments in the
number or kind of shares or other securities or property conform to the
requirements of this Section 6, and setting forth a brief statement of the
facts accounting for such adjustments. Promptly after receipt of such
certificate, the Company, or the Warrant Agent at the Company's request, will
deliver, by first-class, postage prepaid mail, a brief summary thereof (to be
supplied by the Company) to the registered holders of the outstanding Warrant
Certificates; PROVIDED, HOWEVER, that failure to file or to give any notice
required under this Subsection, or any defect therein, shall not affect the
legality or validity of any such adjustments under this Section 6; and
PROVIDED, FURTHER, that, where appropriate, such notice may be given in
advance and included as part of the notice required to be given pursuant to
Section 12 hereof.
D. In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
corporation formed by such consolidation or merger or the corporation which
shall have acquired such assets, as the case may be, shall execute and
deliver to the Warrant Agent a supplemental warrant agreement providing that
the holder of each Warrant then outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, solely the kind and amount of shares of stock and other securities
and property (or cash) receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock of the Company
for which such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be as nearly equivalent as may be
4
<PAGE>
practicable to the adjustments provided in this Section. The above provision
of this Subsection shall similarly apply to successive consolidations,
mergers, sales or transfers.
The Warrant Agent shall not be under any responsibility to
determine the correctness of any provision contained in any such supplemental
warrant agreement relating to either the kind or amount of shares of stock or
securities or property (or cash) purchasable by holders of Warrant
Certificates upon the exercise of their Warrants after any such
consolidation, merger, sale or transfer or of any adjustment to be made with
respect thereto, but subject to the provisions of Section 20 hereof, may
accept as conclusive evidence of the correctness of any such provisions, and
shall be protected in relying upon, a certificate of a firm of independent
certified public accountants (who may be the accountants regularly employed
by the Company) with respect thereto.
E. Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind
of shares as are stated in the similar Warrant Certificates initially
issuable pursuant to this Warrant Agreement.
F. The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee
of said Board, and not disapproved by the Warrant Agent, to make any
computation required under this Section, and a certificate signed by such
firm shall, in the absence of fraud or gross negligence, be conclusive
evidence of the correctness of any computation made under this Section.
G. For the purpose of this Section, the term "Common Stock" shall mean
(i) the Common Stock or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. In the event that at any time as a result of an
adjustment made pursuant to this Section, the holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive any
shares of capital stock of the Company other than shares of Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in this Section, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
H. The Company may, from time to time and to the extent permitted by
law, reduce the exercise price of the Warrants by any amount for a period of
not less than 20 days. If the Company so reduces the exercise price of the
Warrants, it will give not less than 15 days' notice of such decrease, which
notice may be in the form of a press release, and shall take such other steps
as may be required under applicable law in connection with any offers or
sales of securities at the reduced price.
Section 7. EXERCISE AND REDEMPTION OF WARRANTS
Unless the Warrants have been redeemed as provided in this Section
7, the registered holder of any Warrant Certificate may exercise the Warrants
evidenced thereby, in whole at any time or in part from time to time at or
prior to the close of business, on the Expiration Date, subject to the
provisions of Section 9, at which time the Warrant Certificates shall be and
become wholly void and of no value. Warrants may be exercised by their
holders or redeemed by the Company as follows:
A. Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the
Warrant Agent at its stock transfer office in _____________, ______________,
together with payment to the Company of the Exercise Price (as of the date of
such surrender) of the Warrants then being exercised and an amount equal to
any applicable transfer tax and, if requested by the Company, any other taxes
or governmental charges which the Company may be required by law to collect
in respect of such exercise. Payment of the
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<PAGE>
Exercise Price and other amounts may be made by wire transfer of good funds,
or by certified or bank cashier's check, payable in lawful money of the
United States of America to the order of the Company. No adjustment shall be
made for any cash dividends, whether paid or declared, on any securities
issuable upon exercise of a Warrant.
B. Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and of an amount equal to any
applicable taxes or government charges as aforesaid), the Warrant Agent shall
promptly request from the Transfer Agent with respect to the securities to be
issued and deliver to or upon the order of the registered holder of such
Warrant Certificate, in such name or names as such registered holder may
designate, a certificate or certificates for the number of full shares of the
securities to be purchased, together with cash made available by the Company
pursuant to Section 8 hereof in respect of any fraction of a share of such
securities otherwise issuable upon such exercise. If the Warrant is then
exercisable to purchase property other than securities, the Warrant Agent
shall take appropriate steps to cause such property to be delivered to or
upon the order of the registered holder of such Warrant Certificate. In
addition, if it is required by law and upon instruction by the Company, the
Warrant Agent will deliver to each Warrantholder a prospectus which complies
with the provisions of Section 9 of the Securities Act of 1933 and the
Company agrees to supply Warrant Agent with sufficient number of prospectuses
to effectuate that purpose.
C. In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent shall promptly countersign and deliver to the
registered holder of such Warrant Certificate, or to his duly authorized
assigns, a new Warrant Certificate or Certificates evidencing the number of
Warrants that were not so exercised.
D. Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was
duly surrendered in proper form and payment of the Exercise Price (and of any
applicable taxes or other governmental charges) was made; PROVIDED, HOWEVER,
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares as of, and the certificate for such
shares shall be dated, the next succeeding business day on which the stock
transfer books of the Company are open (whether before, on or after the
Expiration Date) and the Warrant Agent shall be under no duty to deliver the
certificate for such shares until such date. The Company covenants and
agrees that it shall not cause its stock transfer books to be closed for a
period of more than 20 consecutive business days except upon consolidation,
merger, sale of all or substantially all of its assets, dissolution or
liquidation or as otherwise provided by law.
E. The Warrants outstanding at the time of a redemption may be
redeemed at the option of the Company, in whole or in part on a pro-rata
basis, at any time if, at the time notice of such redemption is given by the
Company as provided in Paragraph F, below, the Daily Price has exceeded
$_____ for the twenty consecutive trading days immediately preceding the date
of such notice, at a price equal to $0.25 per Warrant (the "Redemption
Price"). For the purpose of the foregoing sentence, the term "Daily Price"
shall mean, for any relevant day, the closing bid price on that day as
reported by the principal exchange or quotation system on which prices for
the Common Stock are reported. On the redemption date the holders of record
of redeemed Warrants shall be entitled to payment of the Redemption Price
upon surrender of such redeemed Warrants to the Company at the principal
office of the Warrant Agent in _____________, ______________.
F. Notice of redemption of Warrants shall be given at least 30 days
prior to the redemption date by mailing, by registered or certified mail,
return receipt requested, a copy of such notice to the Warrant Agent and to
all of the holders of record of Warrants at their respective addresses
appearing on the books or transfer records of the Company or such other
address designated in writing by the holder of record to the Warrant Agent
not less than 40 days prior to the redemption date.
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<PAGE>
G. From and after the redemption date, all rights of the
Warrantholders (except the right to receive the Redemption Price) shall
terminate, but only if (a) no later than one day prior to the redemption date
the Company shall have irrevocably deposited with the Warrant Agent as paying
agent a sufficient amount to pay on the redemption date the Redemption Price
for all Warrants called for redemption and (b) the notice of redemption shall
have stated the name and address of the Warrant Agent and the intention of
the Company to deposit such amount with the Warrant Agent no later than one
day prior to the redemption date.
H. The Warrant Agent shall pay to the holders of record of redeemed
Warrants all monies received by the Warrant Agent for the redemption of
Warrants to which the holders of record of such redeemed Warrants who shall
have surrendered their Warrants are entitled.
I. Any amounts deposited with the Warrant Agent that are not required
for redemption of Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent that shall be unclaimed after six months
after the redemption date may be withdrawn by the Company, and thereafter the
holders of the Warrants called for redemption for which such funds were
deposited shall look solely to the Company for payment. The Company shall be
entitled to the interest, if any, on funds deposited with the Warrant Agent
and the holders of redeemed Warrants shall have no right to any such interest.
J. If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the holder of any Warrants called for redemption may
at the option of the holder (a) by notice to the Company declare the notice
of redemption a nullity as to such holder, or (b) maintain an action against
the Company for the Redemption Price. If the holder brings such an action,
the Company will pay reasonable attorneys' fees of the holder. If the holder
fails to bring an action against the Company for the Redemption Price within
60 days after the redemption date, the holder shall be deemed to have elected
to declare the notice of redemption to be a nullity as to such holder and
such notice shall be without any force or effect as to such holder. Except
as otherwise specifically provided in this Paragraph J, a notice of
redemption, once mailed by the Company as provided in Paragraph F shall be
irrevocable.
Section 8. FRACTIONAL INTERESTS
The Company shall not be required to issue any Warrant Certificate
evidencing a fraction of a Warrant or to issue fractions of shares of
securities on the exercise of the Warrants. If any fraction (calculated to
the nearest one-hundredth) of a Warrant or a share of securities would,
except for the provisions of this Section, be issuable on the exercise of any
Warrant, the Company shall, at its option, either purchase such fraction for
an amount in cash equal to the current value of such fraction computed on the
basis of the closing market price (as quoted on NASDAQ) on the trading day
immediately preceding the day upon which such Warrant Certificate was
surrendered for exercise in accordance with Section 7 hereof or issue the
required fractional Warrant or share. By accepting a Warrant Certificate,
the holder thereof expressly waives any right to receive a Warrant
Certificate evidencing any fraction of a Warrant or to receive any fractional
share of securities upon exercise of a Warrant, except as expressly provided
in this Section 8.
Section 9. RESERVATION OF EQUITY SECURITIES
The Company covenants that it will at all times reserve and keep
available, free from any pre-emptive rights, out of its authorized and
unissued equity securities, solely for the purpose of issue upon exercise of
the Warrants, such number of shares of equity securities of the Company as
shall then be issuable upon the exercise of all outstanding Warrants ("Equity
Securities"). The Company covenants that all Equity Securities which shall
be so issuable shall, upon such issue, be duly authorized, validly issued,
fully paid and non-assessable.
The Company covenants that if any equity securities, required to be
reserved for the purpose of issue upon exercise of the Warrants hereunder,
require registration with or approval of any governmental authority
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under any federal or state law before such shares may be issued upon exercise
of Warrants, the Company will use all commercially reasonable efforts to
cause such securities to be duly registered, or approved, as the case may be,
and, to the extent practicable, take all such action in anticipation of and
prior to the exercise of the Warrants, including, without limitation, filing
any and all post-effective amendments to the Company's Registration Statement
on Form SB-2 (Registration No. 333-50721) necessary to permit a public
offering of the securities underlying the Warrants at any and all times
during the term of this Agreement, PROVIDED, HOWEVER, that in no event shall
such securities be issued, and the Company is authorized to refuse to honor
the exercise of any Warrant, if such exercise would result in the opinion of
the Company's Board of Directors, upon advice of counsel, in the violation of
any law; and PROVIDED FURTHER that, in the case of a Warrant exercisable
solely for securities listed on a securities exchange or for which there are
at least two independent market makers, in lieu of obtaining such
registration or approval, the Company may elect to redeem Warrants submitted
to the Warrant Agent for exercise for a price equal to the difference between
the aggregate low asked price, or closing price, as the case may be, of the
securities for which such Warrant is exercisable on the date of such
submission and the Exercise Price of such Warrants; in the event of such
redemption, the Company will pay to the holder of such Warrants the
above-described redemption price in cash within 10 business days after
receipt of notice from the Warrant Agent that such Warrants have been
submitted for exercise.
Section 10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE
Before taking any action that would cause an adjustment pursuant to
Section 6 hereof reducing the portion of the Exercise Price required to
purchase one share of capital stock below the then par value (if any) of a
share of such capital stock, the Company will use its best efforts to take
any corporate action which, in the opinion of its counsel, may be necessary
in order that the Company may validly and legally issue fully paid and
non-assessable shares of such capital stock.
Section 11. PAYMENT OF TAXES
The Company covenants and agrees that it will pay when due and
payable any and all federal and state documentary stamp and other original
issue taxes which may be payable in respect of the original issuance of the
Warrant Certificates, or any shares of Common Stock or other securities upon
the exercise of Warrants. The Company shall not, however, be required (i) to
pay any tax which may be payable in respect of any transfer involved in the
transfer and delivery of Warrant Certificates or the issuance or delivery of
certificates for Common Stock or other securities in a name other than that
of the registered holder of the Warrant Certificate surrendered for purchase
or (ii) to issue or deliver any certificate for shares of Common Stock or
other securities upon the exercise of any Warrant Certificate until any such
tax shall have been paid, all such tax being payable by the holder of such
Warrant Certificate at the time of surrender.
Section 12. NOTICE OF CERTAIN CORPORATE ACTION
In case the Company after the date hereof shall propose (i) to
offer to the holders of Common Stock, generally, rights to subscribe to or
purchase any additional shares of any class of its capital stock, any
evidences of its indebtedness or assets, or any other rights or options or
(ii) to effect any reclassification of Common Stock (other than a
reclassification involving merely the subdivision or combination of
outstanding shares of Common Stock) or any capital reorganization, or any
consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required, or any sale,
transfer or other disposition of its property and assets substantially as an
entirety, or the liquidation, voluntary or involuntary dissolution or
winding-up of the Company, then, in each such case, the Company shall file
with the Warrant Agent and the Company, or the Warrant Agent on its behalf,
shall mail (by first-class, postage prepaid mail) to all registered holders
of the Warrant Certificates notice of such proposed action, which notice
shall specify the date on which the books of the Company shall close or a
record be taken for such offer of rights or options, or the date on which
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such reclassification, reorganization, consolidation, merger, sale, transfer,
other disposition, liquidation, voluntary or involuntary dissolution or
winding-up shall take place or commence, as the case may be, and which shall
also specify any record date for determination of holders of Common Stock
entitled to vote thereon or participate therein and shall set forth such
facts with respect thereto as shall be reasonably necessary to indicate any
adjustments in the Exercise Price and the number or kind of shares or other
securities purchasable upon exercise of Warrants which will be required as a
result of such action. Such notice shall be filed and mailed in the case of
any action covered by clause (i) above, at least ten days prior to the record
date for determining holders of the Common Stock for purposes of such action
or, if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record are to be entitled to such offering; and, in
the case of any action covered by clause (ii) above, at least 20 days prior
to the earlier of the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation,
voluntary or involuntary dissolution or winding-up is expected to become
effective and the date on which it is expected that holders of shares of
Common Stock of record on such date shall be entitled to exchange their
shares for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer,
other disposition, liquidation, voluntary or involuntary dissolution or
winding-up.
Failure to give any such notice or any defect therein shall not
affect the legality or validity of any transaction listed in this Section 12.
Section 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES, ETC.
The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of securities or other
property through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its stock
transfer office. Copies of this Agreement may be obtained upon written
request addressed to the Warrant Agent at its stock transfer office in
_____________, ______________.
Section 14. WARRANTHOLDER NOT DEEMED A STOCKHOLDER
No Warrantholder, as such, shall be entitled to vote, receive
dividends or be deemed the holder of Common Stock or any other securities of
the Company which may at any time be issuable on the exercise of the Warrants
represented thereby for any purpose whatever, nor shall anything contained
herein or in any Warrant Certificate be construed to confer upon any
Warrantholder, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice
of meetings or other actions affecting stockholders (except as provided in
Section 12 hereof), or to receive dividend or subscription rights, or
otherwise, until such Warrant Certificate shall have been exercised in
accordance with the provisions hereof and the receipt of the Exercise Price
and any other amounts payable upon such exercise by the Warrant Agent.
Section 15. RIGHT OF ACTION
All rights of action in respect to this Agreement are vested in the
respective registered holders of the Warrant Certificates; and any registered
holder of any Warrant Certificate, without the consent of the Warrant Agent
or of any other holder of a Warrant Certificate, may, in his own behalf for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or otherwise in
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respect of, his right to exercise the Warrants evidenced by such Warrant
Certificate, for the purchase of shares of the Common Stock in the manner
provided in the Warrant Certificate and in this Agreement.
Section 16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES
Every holder of a Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent and with every other
holder of a Warrant Certificate that:
A. the Warrant Certificates are transferable on the registry books of
the Warrant Agent only upon the terms and conditions set forth in this
Agreement; and
B. the Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner of the
Warrant (notwithstanding any notation of ownership or other writing thereon
made by anyone other than the Company or the Warrant Agent) for all purposes
whatever and neither the Company nor the Warrant Agent shall be affected by
any notice to the contrary.
Section 17. CANCELLATION OF WARRANT CERTIFICATES
In the event that the Company shall purchase or otherwise acquire
any Warrant Certificate or Certificates after the issuance thereof, such
Warrant Certificate or Certificates shall thereupon be delivered to the
Warrant Agent and be canceled by it and retired. The Warrant Agent shall
also cancel any Warrant Certificate delivered to it for exercise, in whole or
in part, or delivered to it for transfer, split-up, combination or exchange.
Warrant Certificates so canceled shall be delivered by the Warrant Agent to
the Company from time to time, or disposed of in accordance with the
instructions of the Company.
Section 18. CONCERNING THE WARRANT AGENT
The Company agrees to pay to the Warrant Agent from time to time,
on demand of the Warrant Agent, reasonable compensation for all services
rendered by it hereunder and also its reasonable expenses, including counsel
fees, and other disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties hereunder. The
Company also agrees to indemnify the Warrant Agent for, and to hold it
harmless against, any loss, liability or expense, incurred without gross
negligence, bad faith or willful misconduct on the part of the Warrant Agent,
arising out of or in connection with the acceptance and administration of
this Agreement.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of
any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a
successor warrant agent under the provisions of Section 21 hereof. In case
at the time such successor to the Warrant Agent shall succeed to the agency
created by this Agreement, any of the Warrant Certificates shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrant Certificates so countersigned; and in case at that time any of the
Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor Warrant Agent;
and in all
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such cases such Warrant Certificates shall have the full force provided in
the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been
countersigned but not delivered, the Warrant Agent may adopt the
countersignature under its prior name and deliver Warrant Certificates so
countersigned; and in case at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name; and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.
Section 20. DUTIES OF WARRANT AGENT
The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Warrant Certificates, by their acceptance thereof,
shall be bound:
A. The Warrant Agent may consult with counsel satisfactory to it (who
may be counsel for the Company or the Warrant Agent's in-house counsel), and
the opinion of such counsel shall be full and complete authorization and
protection to the Warrant Agent as to any action taken, suffered or omitted
by it in good faith and in accordance with such opinion; PROVIDED, HOWEVER,
that the Warrant Agent shall have exercised reasonable care in the selection
of such counsel. Fees and expenses of such counsel, to the extent reasonable,
shall be paid by the Company.
B. Whenever in the performance of its duties under this Agreement, the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by a Chairman or co-Chairman of the Board
or the President or a Vice President or the Secretary of the Company and
delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
C. The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature on the Warrant Certificates
and such statements or recitals as describe the Warrant Agent or action taken
or to be taken by it) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the
Company only.
E. The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Warrant
Certificate; nor shall it be responsible for the making of any change in the
number of shares of Common Stock for which a Warrant is exercisable required
under the provisions of Section 6 or responsible for the manner, method or
amount of any such change or the ascertaining of the existence of facts that
would require any such adjustment or change (except with respect to the
exercise of Warrant Certificates after actual notice of any adjustment of the
Exercise Price); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
shares of Common Stock to be issued pursuant to this Agreement or any
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Warrant Certificate or as to whether any shares of Common Stock will, when
issued, be validly issued, fully paid and non-assessable.
F. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred. All rights of
action under this Agreement or under any of the Warrants may be enforced by
the Warrant Agent without the possession of any of the Warrants or the
production thereof at any trial or other proceeding relative thereto, and any
such action, suit or proceeding instituted by the Warrant Agent shall be
brought in its name as Warrant Agent, and any recovery of judgment shall be
for the ratable benefit of the registered holders of the Warrant
Certificates, as their respective rights or interests may appear.
G. The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal
entity.
H. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.
I. The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
J. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys, agents or employees and the Warrant Agent shall not
be answerable or accountable for any act, default, neglect or misconduct of
any such attorneys, agents or employees or for any loss to the Company
resulting from such neglect or misconduct; PROVIDED, HOWEVER, that reasonable
care shall have been exercised in the selection and continued employment of
such attorneys, agents and employees.
K. The Warrant Agent will not incur any liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action taken,
or any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument
reasonably believed by the Warrant Agent to be genuine and to have been
signed, sent or presented by the proper party or parties.
L. The Warrant Agent will act hereunder solely as agent of the Company
in a ministerial capacity, and its duties will be determined solely by the
provisions hereof. The Warrant Agent will not be liable for anything which
it may do or refrain from doing in connection with this Agreement except for
its own negligence, bad faith or willful conduct.
Section 21. CHANGE OF WARRANT AGENT
The Warrant Agent may resign and be discharged from its duties
under this Agreement upon 30 days' prior notice in writing mailed, by
registered or certified mail, to the Company. The Company may remove the
Warrant Agent or any successor warrant agent upon 30 days' prior notice in
writing, mailed to the Warrant Agent or successor warrant agent, as the case
may be, by registered or certified mail. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the
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Warrant Agent and shall, within 15 days following such appointment, give
notice thereof in writing to each registered holder of the Warrant
Certificates. If the Company shall fail to make such appointment within a
period of 15 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent, then the Company agrees to perform the duties of
the Warrant Agent hereunder until a successor Warrant Agent is appointed.
After appointment and execution of a copy of this Agreement in effect at that
time, the successor Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent, within a reasonable
time, any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose.
Failure to give any notice provided for in this Section, however, or any
defect therein shall not affect the legality or validity of the resignation
or removal of the Warrant Agent or the appointment of the successor warrant
agent, as the case may be.
Section 22. ISSUANCE OF NEW WARRANT CERTIFICATES
Notwithstanding any of the provisions of this Agreement or the
several Warrant Certificates to the contrary, the Company may, at its option,
issue new Warrant Certificates in such form as may be approved by its Board
of Directors to reflect any adjustment or change in the Exercise Price or the
number or kind of shares purchasable under the several Warrant Certificates
made in accordance with the provisions of this Agreement.
Section 23. NOTICES
Notice or demand pursuant to this Agreement to be given or made on
the Company by the Warrant Agent or by the registered holder of any Warrant
Certificate shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed
in writing by the Company with the Warrant Agent) as follows:
audiohighway.com
20600 Mariani Avenue
Cupertino, California 95014
Subject to the provisions of Section 21, any notice pursuant to
this Agreement to be given or made by the Company or by the holder of any
Warrant Certificate to or on the Warrant Agent shall be sufficiently given or
made if sent by first-class or registered mail, postage prepaid, addressed
(until another address is filed in
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writing by the Warrant Agent with the Company) as follows:
-----------------------------
-----------------------------
-----------------------------
Attention: Corporate Trust Department
Any notice or demand authorized to be given or made to the
registered holder of any Warrant Certificate under this Agreement shall be
sufficiently given or made if sent by first-class or registered mail, postage
prepaid, to the last address of such holder as it shall appear on the
registers maintained by the Warrant Agent.
Section 24. MODIFICATION OF AGREEMENT
The Warrant Agent may, without the consent or concurrence of the
Warrantholders, by supplemental agreement or otherwise, concur with the
Company in making any changes or corrections in this Agreement that the
Warrant Agent shall have been advised by counsel (who may be counsel for the
Company) are necessary or desirable to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained, or to make any other provisions in regard to
matters or questions arising hereunder and which shall not be inconsistent
with the provisions of the Warrant Certificates and which shall not adversely
affect the interests of the Warrantholders. As of the date hereof, this
Agreement contains the entire and only agreement, understanding,
representation, condition, warranty or covenant between the parties hereto
with respect to the matters herein, supersedes any and all other agreements
between the parties hereto relating to such matters, and may be modified or
amended only by a written agreement signed by both parties hereto pursuant to
the authority granted by the first sentence of this Section.
Section 25. SUCCESSORS
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
Section 26. CALIFORNIA CONTRACT
This Agreement and each Warrant Certificate issued hereunder shall
be deemed to be a contract made under the laws of the State of California and
for all purposes shall be construed in accordance with the laws of said State.
Section 27. TERMINATION
This Agreement shall terminate as of the close of business on the
Expiration Date, or such earlier date upon which all Warrants shall have been
exercised or redeemed, except that the Warrant Agent shall account to the
Company as to all Warrants outstanding and all cash held by it as of the
close of business on the Expiration Date.
Section 28. BENEFITS OF THIS AGREEMENT
Nothing in this Agreement or in the Warrant Certificates shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent, and their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this
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Agreement; but this Agreement shall be for the sole and exclusive benefit of
the Company, the Warrant Agent, their respective successors and assigns
hereunder and the registered holders of the Warrant Certificates.
Section 29. DESCRIPTIVE HEADINGS
The descriptive headings of the several Sections of this Agreement
are inserted for convenience only and shall not control or affect the meaning
or construction of any of the provisions hereof.
Section 30. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each
of which shall be an original, but such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
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be duly executed, all as of the day and year first above written.
audiohighway.com
By:
-------------------------
Title:
------------------
By:
-------------------------
Title:
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EXHIBIT A
VOID AFTER 5 P.M. PACIFIC TIME ON _______, 2003
WARRANTS TO PURCHASE COMMON STOCK
W_____ _________ Warrants
audiohighway.com
CUSIP ___________
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of Warrants
("Warrants") set forth above. Each Warrant entitles the holder thereof to
purchase from audiohighway.com, a corporation incorporated under the laws of
the State of California ("Company"), subject to the terms and conditions set
forth hereinafter and in the Warrant Agreement hereinafter more fully
described (the "Warrant Agreement") referred to, at any time on or before the
close of business on ___________, 2003 or, if such Warrant is redeemed as
provided in the Warrant Agreement, at any time prior to the effective time of
such redemption (the "Expiration Date"), one fully paid and non-assessable
share of Common Stock Stock of the Company ("Common Stock") upon presentation
and surrender of this Warrant Certificate, with the instructions for the
registration and delivery of Common Stock filled in, at the stock transfer
office in __________,____________, of ________________________, Warrant Agent
of the Company ("Warrant Agent") or of its successor warrant agent or, if
there be no successor warrant agent, at the corporate offices of the Company,
and upon payment of the Exercise Price (as defined in the Warrant Agreement)
and any applicable taxes paid either in cash, or by certified or official
bank check, payable in lawful money of the United States of America to the
order of the Company. Each Warrant initially entitles the holder to purchase
one share of Common Stock for $7.50. The number and kind of securities or
other property for which the Warrants are exercisable are subject to further
adjustment in certain events, such as mergers, splits, stock dividends,
recapitalizations and the like, to prevent dilution. The Company may redeem
any or all outstanding and unexercised Warrants at any time if the Daily
Price has exceeded $____ for twenty consecutive trading days immediately
preceeding the date of notice of such redemption, upon 30 days notice, at a
price equal to $0.25 per Warrant. For the purpose of the foregoing sentence,
the term "Daily Price" shall mean, for any relevant day, the closing bid
price on that day as reported by the principal exchange or quotation system
on which prices for the Common Stock are reported. All Warrants not
theretofore exercised or redeemed will expire on ________, 2003.
This Warrant Certificate is subject to all of the terms, provisions
and conditions of the Warrant Agreement, dated as of ________, 1998 ("Warrant
Agreement"), between the Company and the Warrant Agent, to all of which
terms, provisions and conditions the registered holder of this Warrant
Certificate consents by acceptance hereof. The Warrant Agreement is
incorporated herein by reference and made a part hereof and reference is made
to the Warrant Agreement for a full description of the rights, limitations of
rights, obligations, duties and immunities of the Warrant Agent, the Company
and the holders of the Warrant Certificates. Copies of the Warrant Agreement
are available for inspection at the stock transfer office of the Warrant
Agent or may be obtained upon written request addressed to the Company at 1
Deer Park Drive, Suite 1, Monmouth Junction, California 08852, Attention:
Controller.
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The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in
the Warrant Agreement.
In certain cases, the sale of securities by the Company upon
exercise of Warrants would violate the securities laws of the United States,
certain states thereof or other jurisdictions. The Company has agreed to use
its best efforts to cause a registration statement to continue to be
effective during the term of the Warrants with respect to such sales under
the Securities Act of 1933, and to take such action under the laws of various
states as may be required to cause the sale of securities upon exercise to be
lawful. However, the Company will not be required to honor the exercise of
Warrants if, in the opinion of the Board of Directors, upon advice of
counsel, the sale of securities upon such exercise would be unlawful. In
certain cases, the Company may, but is not required to, purchase Warrants
submitted for exercise for a cash price equal to the difference between the
market price of the securities obtainable upon such exercise and the exercise
price of such Warrants.
This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the
absence of any successor warrant agent, at the corporate offices of the
Company, may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered. If the Warrants evidenced by
this Warrant Certificate shall be exercised in part, the holder hereof shall
be entitled to receive upon surrender hereof another Warrant Certificate or
Certificates evidencing the number of Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled
to vote, receive dividends or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose whatever, nor shall anything contained in the
Warrant Agreement or herein be construed to confer upon the holder of this
Warrant Certificate, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof or give or withhold consent
to any corporate action (whether upon any matter submitted to stockholders at
any meeting thereof, or give or withhold consent to any merger,
recapitalization, issuance of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, conveyance or
otherwise) or to receive notice of meetings or other actions affecting
stockholders (except as provided in the Warrant Agreement) or to receive
dividends or subscription rights or otherwise until the Warrants evidenced by
this Warrant Certificate shall have been exercised and the Common Stock
purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for the Company's Common
Stock or other class of stock purchasable upon the exercise of the Warrants
evidenced by this Warrant Certificate are closed for any purpose, the Company
shall not be required to make delivery of certificates for shares purchasable
upon such transfer until the date of the reopening of said transfer books.
Every holder of this Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent, and with every other
holder of a Warrant Certificate that:
(a) this Warrant Certificate is transferable on the registry books of
the Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and
(b) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner
hereof (notwithstanding any notation of ownership or other writing thereon
made by anyone other than the Company or the Warrant Agent) for all purposes
whatever and neither the Company nor the Warrant Agent shall be affected by
any notice to the contrary.
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The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise
of Warrants evidenced by this Warrant Certificate until any tax which may be
payable in respect thereof by the holder of this Warrant Certificate pursuant
to the Warrant Agreement shall have been paid, such tax being payable by the
holder of this Warrant Certificate at the time of surrender.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the proper officers of the
Company and its corporate seal.
Dated:
audiohighway.com
By:
----------------------
Chief Executive Officer
Attest:
-------------------------
Secretary
Countersigned
- ----------------------------------------
By:
-------------------------
Authorized Officer
iii
<PAGE>
Exhibit 4.3
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
audiohighway.com
PURCHASE WARRANT
Issued To:
PAULSON INVESTMENT COMPANY, INC.
Exercisable To Purchase
200,000 Units
of
audiohighway.com
Void after , 2003
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is
entitled to purchase, and the Company promises and agrees to sell and issue
to the Warrantholder, at any time on or after __________, 1999 and on or
before __________, 2003, up to 200,000 Units (hereinafter defined) at the
Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Cashless Exercise" means an exercise of Warrants in which, in lieu
of payment of the Exercise Price, the Holder elects to receive a lesser
number of Securities such that the value of the Securities that such Holder
would otherwise have been entitled to receive but has agreed not to receive,
as determined by the closing price of such Securities on the date of exercise
or, if such date is not a trading day, on the next prior trading day, is
equal to the Exercise Price with respect to such exercise. A Holder may only
elect a Cashless Exercise if the Securities issuable by the Company on such
exercise are publicly traded securities.
(c) "Closing Date" means the date on which the Offering is closed.
(d) "Commission" means the Securities and Exchange Commission.
(e) "Common Stock" means the common stock, no par value, of the Company.
(f) "Company" means audiohighway.com, a California corporation.
(g) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in
Section 6 hereof, except Warrantholder's Expenses.
(h) "Effective Date" means the date on which the Registration Statement
is declared effective by the Commission.
(i) "Exercise Price" means the price at which the Warrantholder may
purchase one Unit upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $____ per
Unit.
(j) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(k) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
<PAGE>
(l) "Registration Statement" means the Company's registration statement
(File No. 333-_____) as amended on the Closing Date.
(m) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(n) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(o) "Unit" means one share of Common Stock and one Unit Warrant.
(p) "Unit Warrant" means a warrant to purchase one share of Common Stock
issued pursuant to the Warrant Agreement.
(q) "Warrant Agreement" means that certain Warrant Agreement, dated as
of ________, 1998, by and between the Company and ______________________.
(r) "Warrant Certificate" means a certificate evidencing the Warrant.
(s) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(t) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or
agent in connection with an offering described in Section 6 hereof multiplied
by a fraction the numerator of which is the aggregate sales price of the
Securities sold by such underwriter, underwriting syndicate, or agent in such
offering and the denominator of which is the aggregate sales price of all of
the securities sold by such underwriter, underwriting syndicate, or agent in
such offering and (ii) all out-of-pocket expenses of the Warrantholder,
except for the fees and disbursements of one firm retained as legal counsel
for the Warrantholder that will be paid by the Company.
(u) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any
certificate obtained upon transfer or partial exercise of the Warrant
evidenced by any such certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and
ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date
by surrendering this Warrant Certificate, together with appropriate
instructions, duly executed by the Warrantholder or by its duly authorized
attorney, at the office of the Company, 20600 Mariani Avenue, Cupertino,
California 95014, or at such other office or agency as the Company may
designate. The date on which such instructions are received by the Company
shall be the date of exercise. If the Holder has elected a Cashless
Exercise, such instructions shall so state. Upon receipt of notice of
exercise, the Company shall immediately instruct its transfer agent to
prepare certificates for the
<PAGE>
Securities to be received by the Warrantholder upon completion of the Warrant
exercise. When such certificates are prepared, the Company shall notify the
Warrantholder and deliver such certificates to the Warrantholder or as per
the Warrantholder's instructions immediately upon payment in full by the
Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased, if any. If the
Warrantholder shall represent and warrant that all applicable registration
and prospectus delivery requirements for their sale have been complied with
upon sale of the Securities received upon exercise of the Warrant, such
certificates shall not bear a legend with respect to the Securities Act of
1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver
to the Warrantholder a new Warrant Certificate (dated the date hereof), in
form and tenor similar to this Warrant Certificate, evidencing that portion
of the Warrant not exercised. The Securities to be obtained on exercise of
the Warrant will be deemed to have been issued, and any person exercising the
Warrants will be deemed to have become a holder of record of those
Securities, as of the date of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of the
Securities are subject to adjustment from time to time upon the happening of
certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are divided
into a greater number of shares or a dividend in stock is paid on the Common
Stock, the number of shares of Common Stock for which the Warrant is then
partially exercisable will be proportionately increased and the Exercise
Price will be proportionately reduced; and, conversely, if the outstanding
shares of Common Stock are combined into a smaller number of shares of Common
Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately reduced and the Exercise Price will be
proportionately increased. The increases and reductions provided for in this
subsection 3(a) will be made with the intent and, as nearly as practicable,
the effect that neither the percentage of the total equity of the Company
obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or
other change in the capital structure of the Company, then, as a condition of
such change, lawful and adequate provision will be made so that the holder of
this Warrant Certificate will have the right thereafter to receive upon the
exercise of the Warrant the kind and amount of shares of stock or other
securities or property to which he would have been entitled if, immediately
prior to such event, he had held the number of shares of Common Stock
obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to
the end that the provisions set forth herein will thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The
<PAGE>
Company will not permit any change in its capital structure to occur
unless the issuer of the shares of stock or other securities to be received
by the holder of this Warrant Certificate, if not the Company, agrees to be
bound by and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise
of the Warrant, the Company will promptly determine the new number of such
shares or other securities or property purchasable upon exercise of the
Warrant and (i) prepare and retain on file a statement describing in
reasonable detail the method used in arriving at the new number of such
shares or other securities or property purchasable upon exercise of the
Warrant and (ii) cause a copy of such statement to be mailed to the
Warrantholder within thirty (30) days after the date of the event giving rise
to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will
pay, in lieu of fractional shares, a cash payment therefor on the basis of
the mean between the bid and asked prices of the Common Stock in the
over-the-counter market or the closing price on a national securities
exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of the
Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment
of the Common Stock provided in this Section 3 will also apply to the
securities to which the Warrantholder or his assignee is entitled under this
subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of
shares of Common Stock or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for exercise.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise
of the Warrant will be duly and validly issued in accordance with their
terms, and the Company will pay all documentary and transfer taxes, if any,
in respect of the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT
CERTIFICATE.
<PAGE>
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary
of the Effective Date (the "Registration Period"). The Company will also
file such applications and other documents necessary to permit the sale of
the Securities to the public during the Registration Period in those states
in which the Units were qualified for sale in the Offering or such other
states as the Company and the Warrantholder agree to. In order to comply
with the provisions of this Section 6(a), the Company is not required to file
more than one registration statement. No registration right of any kind,
"piggyback" or otherwise, will last longer than five years from the Effective
Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be
entirely in the control and at the discretion of the Company. The Company
will file such post-effective amendments and supplements as may be necessary
to maintain the currency of the registration statement during the period of
its use. In addition, if the Warrantholder participating in the registration
is advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns
raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably
request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at least
50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration
pursuant to this Section 6, addressed to the Warrantholders and any
Participating Underwriter, (ii) furnish an appropriate letter from the
independent public accountants of the Company, addressed to the
Warrantholders and any Participating Underwriter, and (iii) make
representations and warranties to the Warrantholders and any Participating
Underwriter. A request pursuant to this subsection (e) may be made on three
occasions. The documents required to be delivered pursuant to this
subsection (e) will be dated within ten days of the request and will be, in
form and substance, equivalent to similar documents furnished to the
underwriters in connection with the Offering, with such changes as may be
appropriate in light of changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will indemnify
and hold harmless each selling Warrantholder, any person who controls any
selling Warrantholder
<PAGE>
within the meaning of the Act, and any Participating Underwriter against any
losses, claims, damages, or liabilities, joint or several, to which any
Warrantholder, controlling person, or Participating Underwriter may be
subject under the Act or otherwise; and it will reimburse each Warrantholder,
each controlling person, and each Participating Underwriter for any legal or
other expenses reasonably incurred by the Warrantholder, controlling person,
or Participating Underwriter in connection with investigating or defending
any such loss, claim, damage, liability, or action, insofar as such losses,
claims, damages, or liabilities, joint or several (or actions in respect
thereof), arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained, on the effective date
thereof, in any such registration statement or any preliminary prospectus or
final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; PROVIDED, HOWEVER, that the Company will not be
liable in any case to the extent that any loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in any registration statement,
preliminary prospectus, final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information
furnished by a Warrantholder for use in the preparation thereof. The
indemnity agreement contained in this subparagraph (a) will not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Company, such approval not to be
unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed any registration
statement or other filing or any amendment or supplement thereto, and any
person who controls the Company within the meaning of the Act, against any
losses, claims, damages, or liabilities to which the Company or any such
director, officer, or controlling person may become subject under the Act or
otherwise, and will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said registration
statement, any preliminary or final prospectus, or other filing, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in said registration statement,
preliminary or final prospectus, or other filing, or amendment or supplement,
in reliance upon and in conformity with written information furnished by such
Warrantholder for use in the preparation thereof; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subparagraph (b) will not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Warrantholder, such approval not to be
unreasonably withheld.
<PAGE>
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, notify the indemnifying party of the commencement
thereof; but the omission to notify the indemnifying party will not relieve
it from any liability that it may have to any indemnified party otherwise
than under subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party; and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
other than reasonable costs of investigation.
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant
may not be sold, transferred, assigned or hypothecated for a one-year period
after the Effective Date except to underwriters of the Offering or to
individuals who are either a partner or an officer of such an underwriter or
by will or by operation of law. The Warrant may be divided or combined, upon
request to the Company by the Warrantholder, into a certificate or
certificates evidencing the same aggregate number of Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to
the Company, be entitled to receive such quarterly or annual reports as the
Company distributes to its shareholders.
10. NOTICE. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail; and if served
will be addressed as follows:
If to the Company:
audiohighway.com
20600 Mariani Avenue
Cupertino, California 95014
Attn: Treasurer
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
<PAGE>
Any notice so given by mail will be deemed effectively given 48 hours
after mailing when deposited in the United States mail, registered or
certified mail, return receipt requested, postage prepaid and addressed as
specified above. Any party may by written notice to the other specify a
different address for notice purposes.
11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without
reference to conflict of laws principles thereunder. All disputes relating
to this Warrant Certificate shall be tried before the courts of Oregon
located in Multnomah County, Oregon to the exclusion of all other courts that
might have jurisdiction.
<PAGE>
Dated as of , 1998
---------------
audiohighway.com
By:
-------------------------------------
---------------------
President
Agreed and Accepted as of , 1998
-------------
PAULSON INVESTMENT COMPANY, INC.
By:
-------------------------------------
Lorraine Maxfield
Senior Vice President -- Research
<PAGE>
[LETTERHEAD]
July 30, 1996
Mr. Nathan Schulhof
Audio Highway
20600 Mariani Drive, Ste. 200
Cupertino, CA 95014
RE: LEASE PROPOSAL FOR SUITE 200 (3,819 RSF)
20600 MARIANI DRIVE, CUPERTINO
Dear Nathan:
MacMillan, Moore and Buchanan, Inc. (Broker) has been authorized on behalf of
Eldon "Bud" Hoffman (Landlord) to submit this proposal for the continuation
of your organization's occupancy of Suite 200 at 20600 Mariani Drive,
Cupertino.
The following outlines the terms of this proposal:
BASE RENT
$2.20 per rentable square foot, full service.
COMMENCEMENT
September 1, 1996
TERM
Two (2) years
JANITORIAL SERVICE
Five (5) days per week.
PARKING
Tenant shall be permitted to park 11 cars on a non-exclusive basis in
the areas designated by Landlord for parking.
<PAGE>
*Accepted with the modifications specified herein and attached hereto.
A) Landlord at landlords expense, shall make the following repairs by
September 1, 1996:
1) Fix all roof leaks and paint and repair interior damage caused by same.
2) Repair exhaust fans in bathrooms.
3) Repair ceiling lights as necessary.
4) Repair HVAC as needed.
B) Landlord, at landlord's expense shall make the following improvement no
later than September 1, 1997:
1) Replace all carpeting exclusive of the CEO's office with new carpet of
a grade and color mutually agreed to by both parties.
C) Tenant at tenant's sole cost shall be allowed to:
1) Place a small satellite antenna on the roof.
2) Add additional data lines in the basement.
PAGE 3 OF 3
<PAGE>
All other Terms and Conditions, with the exception of any options or rights
to expand or extend, shall remain as stated in the Lease dated July 16, 1994
between Audio Highway (formerly Information Media Highway), Tenant, and Eldon
"Bud" Hoffman, Landlord.
The terms and conditions contained here shall expire at 5:00 p.m. on
Wednesday, July 31, 1996.
This letter shall not constitute a formal and binding agreement. This letter
reflects our present understanding of the discussions and negotiations we
have had regarding the terms and conditions of the proposed transaction, and
we expect that the definitive agreement which is negotiated will be generally
consistent with this letter. This letter shall not, however, create any
legal rights or obligations between us. It is intended that all legal rights
and obligations of each of us shall then only be those which are set forth in
the definitive agreement. Further, it is subject to prior lease or sale of
the building or premises.
Sincerely,
MacMillan, Moore & Buchanan, Inc.
Ann Adrian Philip H. Trautman
AGREED AND ACCEPTED
LANDLORD: TENANT:
Eldon "Bud" Hoffman Audio Highway
By: By: N.M. Schulhof
----------------------- -----------------------
Title: Title: President
-------------------- --------------------
Date: Date: 7/30/96
--------------------- ---------------------
Page 2 of 3
<PAGE>
[LETTERHEAD]
This lease between Eldon (Bud) Hoffman
-------------------------------------------------------------
an individual
-----------------------------------------------------------------------------
("Landlord"), and Information Highway Media Corporation
-------------------------------------------------------------
a California Corporation . ("Tenant"), is
--------------------------------------------------------------
dated June 15, , 1994
-------------------------------------------------------------------- --
1. LEASE OF PREMISES.
In consideration of the Rent (as defined at Section 5.4) and the provisions
of this Lease. Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown by diagonal lines on the floor plan attached hereto as Exhibit
"A," and further described at Section 2l. The Premises are located within the
Building and Project described in Section 2m. Tenant shall have the
non-exclusive right (unless otherwise provided herein) in common with
Landlord, other tenants, subtenants and invitees, to use of the Common Areas
(as defined at Section 2e).
2. DEFINITIONS
As used in this Lease, the following terms shall have the following meanings:
a. BASE RENT (INITIAL): $ 84,334.56 per year.
-------------
b. BASE YEAR: The calendar year of 1994
---------------------------------------------
c. BROKER(S)
Landlord's: CB Commercial
-----------------------------------------------------------
Tenant's: Ann Adrian - w/MacMillan Moore & Buchanan
-------------------------------------------------------------
In the event that CB Commercial Real Estate Group, Inc. represents both
Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely
advised of the dual representation and that they consent to the same, and
that they do not expect said broker to disclose to either of them the
confidential information of the other party.
d. COMMENCEMENT DATE: July 15th, 1994
----------------------------------------------------------
e. COMMON AREAS: the building lobbies, common corridors and hallways,
restrooms, garage and parking areas, stairways, elevators and other
generally understood public or common areas. Landlord shall have the right
to regulate or restrict the use of the Common Areas.
f. EXPENSE STOP: (fill in if applicable): $ 4.08 Annual (See Addendum - item#5.3
--------------------------------------
for detail)
-------------
g. EXPIRATION DATE: July 14, 1996 , unless otherwise sooner
-----------------------------------
terminated in accordance with the provisions of this Lease.
h. INDEX (SECTION 5.2): United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index for All Urban Consumers, San Francisco/
--------------------
Oakland/San Jose Average, Subgroup "All
-------------------
Items" (1967=100).
i. LANDLORD'S MAILING ADDRESS: 10495 N. DeAnza, Cupertino, CA 95014
-------------------------------------------------
TENANT'S MAILING ADDRESS: 20600 Mariani Avenue, Cupertino, CA 95014
---------------------------------------------------
j. MONTHLY INSTALLMENTS OF BASE RENT (INITIAL): $ 7,027.88 per month.
------------------
k. PARKING: Tenant shall be permitted, upon payment of the then prevailing
monthly rate (as set by Landlord from time to time) to park 14
-----------------
cars on a non-exclusive basis in the area(s) designated by Landlord for
parking. Tenant shall abide by any and all parking regulations and rules
established from time to time by Landlord or Landlord's parking operator.
l. PREMISES: that portion of the Building containing approximately 3,819
-------------
square feet of Rentable Area, shown by diagonal lines on Exhibit "A,"
located on the 2nd floor of the Building and known as Suite 200 .
------------ ----------
m. PROJECT: the building of which the Premises are a part (the "Building")
and any other buildings or improvements on the real property (the "Property")
located at 20600 Mariani Avenue, Cupertino, CA 95014 and further
--------------------------------------------------------
described at Exhibit "B." The Project is known as The Any Mountain Building
---------------------------
<PAGE>
[LETTERHEAD]
TABLE OF CONTENTS
<TABLE>
PAGE
<S> <C>
Article 1 LEASE OF PREMISES.......................................... 1
Article 2 DEFINITIONS................................................ 1
Article 3 EXHIBITS AND ADDENDA....................................... 2
Article 4 DELIVERY OF POSSESSION..................................... 2
Article 5 RENT....................................................... 2
Article 6 INTEREST AND LATE CHARGES.................................. 4
Article 7 SECURITY DEPOSIT........................................... 4
Article 8 TENANTS USE OF THE PREMISES................................ 4
Article 9 SERVICES AND UTILITIES..................................... 5
Article 10 CONDITION OF THE PREMISES.................................. 5
Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE...................... 5
Article 12 ALTERATIONS AND ADDITIONS.................................. 6
Article 13 LEASEHOLD IMPROVEMENTS: TENANT'S PROPERTY.................. 6
Article 14 RULES AND REGULATIONS...................................... 7
Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD........................ 7
Article 16 ASSIGNMENT AND SUBLETTING.................................. 7
Article 17 HOLDING OVER............................................... 8
Article 18 SURRENDER OF PREMISES...................................... 8
Article 19 DESTRUCTION OR DAMAGE...................................... 8
Article 20 EMINENT DOMAIN............................................. 8
Article 21 INDEMNIFICATION............................................ 9
Article 22 TENANTS INSURANCE.......................................... 9
Article 23 WAIVER OF SUBROGATION...................................... 10
Article 24 SUBORDINATION AND ATTORNMENT............................... 10
Article 25 TENANT ESTOPPEL CERTIFICATES............................... 10
Article 26 TRANSFER OF LANDLORD'S INTEREST............................ 10
Article 27 DEFAULT.................................................... 10
Article 28 BROKERAGE FEES............................................. 11
Article 29 NOTICES.................................................... 11
Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS...................... 11
Article 31 RELOCATION OF PREMISES..................................... 11
Article 32 QUIET ENJOYMENT............................................ 12
Article 33 OBSERVANCE OF LAW.......................................... 12
Article 34 FORCE MAJEURE.............................................. 12
Article 35 CURING TENANTS DEFAULTS.................................... 12
Article 36 SIGN CONTROL............................................... 12
Article 37 MISCELLANEOUS.............................................. 12
</TABLE>
<PAGE>
Commercial Building
This lease between Eldon (Bud) Hoffman
-------------------------------------------------------------
an individual
- -------------------------------------------------------------------------------
("Landlord"), and Information Highway Media Corporation
-------------------------------------------------------------
a California Corporation . ("Tenant"), is
--------------------------------------------------------------
dated June 15, . 1994
-------------------------------------------------------------------- --
1. LEASE OF PREMISES.
In consideration of the Rent (as defined at Section 5.4) and the provisions
of this Lease. Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown by diagonal lines on the floor plan attached hereto as Exhibit
"A," and further described at Section 2l. The Premises are located within the
Building and Project described in Section 2m. Tenant shall have the
non-exclusive right (unless otherwise provided herein) in common with
Landlord, other tenants, subtenants and invitees, to use of the Common Areas
(as defined at Section 2e).
2. DEFINITIONS
As used in this Lease, the following terms shall have the following meanings:
a. BASE RENT (INITIAL): $ 84,334.56 per year.
--------------------------------------------
b. BASE YEAR: The calendar year of 1994
---------------------------------------------
c. BROKER(S)
Landlord's: CB Commercial
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Tenant's: Ann Adrian - w/MacMillan Moore & Buchanan
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In the event that CB Commercial Real Estate Group, Inc. represents both
Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely
advised of the dual representation and that they consent to the same, and
that they do not expect said broker to disclose to either of them the
confidential information of the other party.
d. COMMENCEMENT DATE: July 15th, 1994
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e. COMMON AREAS: the building lobbies, common corridors and hallways,
restrooms, garage and parking areas, stairways, elevators and other
generally understood public or common areas. Landlord shall have the right
to regulate or restrict the use of the Common Areas.
f. EXPENSE STOP: (fill in if applicable):
$ 4.08 Annual (See Addendum - item#5.3 for detail)
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g. EXPIRATION DATE: July 14, 1996 , unless otherwise sooner
-----------------------------------
terminated in accordance with the provisions of this Lease.
h. INDEX (SECTION 5.2): United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index for All Urban Consumers, San Francisco/
--------------------
Oakland/San Jose Average, Subgroup "All
------------------------------------------------
items" (1967=100).
i. LANDLORD'S MAILING ADDRESS: 10495 N. DeAnza, Cupertino, CA 95014
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TENANT'S MAILING ADDRESS: 20600 Mariani Avenue, Cupertino, CA 95014
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j. MONTHLY INSTALLMENTS OF BASE RENT (INITIAL): $ 7,027.88 per month.
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k. PARKING: Tenant shall be permitted, upon payment of the then prevailing
monthly rate (as set by Landlord from time to time) to park 14
-----------------
cars on a non-exclusive basis in the area(s) designated by Landlord for
parking. Tenant shall abide by any and all parking regulations and rules
established from time to time by Landlord or Landlord's parking operator.
l. PREMISES: that portion of the Building containing approximately 3,819
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square feet of Rentable Area, shown by diagonal lines on Exhibit "A,"
located on the 2nd floor of the Building and known as Suite 200 .
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m. PROJECT: the building of which the Premises are a part (the "Building")
and any other buildings or improvements on the real property (the "Property")
located at 20600 Mariani Avenue, Cupertino, CA 95014 and further
--------------------------------------------------------
described at Exhibit "B." The Project is known as The Any Mountain Building
---------------------------
n. RENTABLE AREA: as to both the Premises and the Project, the respective
measurements of floor area as may from time to time be subject to lease by
Tenant and all tenants of the Project, respectively, as determined by
Landlord and applied on a consistent basis throughout the Project.
(1)
<PAGE>
q. TENANT'S FIRST ADJUSTMENT DATE (SECTION 5.2): the first day of the
calendar month following the Commencement Date plus 12 months.
r. TENANT'S PROPORTIONATE SHARE: 44.2%. Such share is a fraction, the
numerator of which is the Rentable Area of the Premises, and the
denominator of which is the Rentable Area of the Project as determined
by Landlord from time to time. The Project consists of 1 building(s)
containing a total Rentable Area of 8,633 square feet.
s. TENANT'S USE CLAUSE (ARTICLE 8): General Office and all legally allowed
uses with Landlord approval.
t. TERM: the period commencing on the Commencement Date and expiring at
midnight on the Expiration Date.
3. EXHIBITS AND ADDENDA.
The exhibits and addenda listed below (unless lined out) are incorporated by
reference in this Lease:
a. Exhibit "A"--Floor Plan showing the Premises.
b. Exhibit "B"--Site Plan of the Project.
f. Addenda:
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4. DELIVERY OF POSSESSION.
If for any reason Landlord does not deliver possession of the Premises to
Tenant on the Commencement Date, Landlord shall not be subject to any
liability for such failure, the Expiration Date shall not change and the
validity of this Lease shall not be impaired, but Rent shall be abated until
delivery of possession. "Delivery of possession" shall be deemed to occur on
the date Landlord completes Landlord's Work as defined in Exhibit "C". If
Landlord permits Tenant to enter into possession of the Premises before the
Commencement Date, such possession shall be subject to the provisions of this
Lease, including, without limitation, the payment of Rent.
5. RENT.
5.1 PAYMENT OF BASE RENT. Tenant agrees to pay the Base Rent for the
Premises. Monthly Installments of Base Rent shall be payable in advance on
the first day of each calendar month of the Term. If the Term begins (or
ends) on other than the first (or last) day of a calendar month, the Base
Rent for the partial month shall be prorated on a per diem basis. Tenant shall
pay Landlord the first Monthly Installment of Base Rent when Tenant executes
the Lease.
5.2 ADJUSTED BASE RENT.
a. The Base Rent (and the corresponding Monthly Installments of Base
Rent) set forth at Section 2a shall be adjusted annually (the
"Adjustment Date"), commencing on Tenant's First Adjustment Date,
Adjustments, if any, shall be based upon increases (if any) in the
Index. The Index in publication three (3) months before the
Commencement Date shall be the "Base Index." The Index in publication
three (3) months before each Adjustment Date shall be the "Comparison
Index." As of each Adjustment Date, the Base Rent payable during the
ensuring twelve-month period shall be determined by increasing the
initial Base Rent by a percentage equal to the percentage increase, if
any, in the Comparison Index over the Base Index. If the Comparison
Index for any Adjustment Date is equal to or less than the Comparison
Index for the preceding Adjustment Date (or the Base Index, in the case
of First Adjustment Date), the Base Rent for the ensuing twelve-month
period shall remain the amount of Base Rent payable during the
preceding twelve-month period. When the Base Rent payable as of each
Adjustment Date is determined, Landlord shall promptly give Tenant
written notice of such adjusted Base Rent and the manner in which it
was computed. The Base Rent as so adjusted from time to time shall be
the "Base Rent" for all purposes under this Lease.
b. If at any Adjustment Date the Index no longer exists in the form
described in this Lease, Landlord may substitute any substantially
equivalent official index published by the Bureau of Labor Statistics
or its successor. Landlord shall use any appropriate conversion factors
to accomplish such substitution. The substitute index shall then become
the "Index" hereunder.
5.3 PROJECT OPERATING COSTS.
a. In order that the Rent payable during the Term reflect any increase
in Project Operating Costs, Tenant agrees to pay to Landlord as Rent,
Tenant's Proportionate Share of all increases in costs, expenses and
obligations attributable to the Project and its operation, all as
provided below.
b. If during any calendar year during the Term, Project Operating Costs
exceed the Project Operating Costs for the Base Year, Tenant shall pay
to Landlord, in addition to the Base Rent and all other payments due
under this Lease, an amount equal to Tenant's Proportionate Share of
such excess Project Operating Costs in accordance with the provisions
of this Section 5.3b.
(2)
<PAGE>
(1) The term "Project Operating Costs" shall include all those items
described in the following subparagraphs (a) and (b).
(a) All taxes, assessments, water and sewer charges and other similar
governmental charges levied on or attributable to the Building or
Project or their operation, including without limitation, (i) real
property taxes or assessments levied or assessed against the Building
or Project, (ii) assessments or charges levied or assessed against the
Building or Project by any redevelopment agency, (iii) any tax measured
by gross rentals received from the leasing of the Premises, Building or
Project, excluding any net income, franchise, capital stock, estate or
inheritance taxes imposed by the State or federal government or their
agencies, branches or departments; provided that if at any time during
the Term any governmental entity levies, assesses or imposes on
Landlord any (1) general or special, ad valorem or specific, excise,
capital levy or other tax, assessment, levy or charge directly on the
Rent received under this Lease or on the rent received under any other
leases of space in the Building or Project, or (2) any license fee,
excise or franchise tax, assessment, levy or charge measured by or
based, in whole or in part, upon such rent, or (3) any transfer,
transaction, or similar tax, assessment, levy or charge based directly
or indirectly upon the transaction represented by this Lease or such
other leases, or (4) any occupancy, use, per capita or other tax,
assessment, levy or charge based directly or indirectly upon the use or
occupancy of the Premises or other premises within the Building or
Project, then any such taxes, assessments, levies and charges shall be
deemed to be included in the term Project Operating Costs. If at any
time during the Term the assessed valuation of, or taxes on, the
Project are not based on a completed Project having at least eighty-five
percent (85%) of the Rentable Area occupied, then the "taxes" component
of Project Operating Costs shall be adjusted by Landlord to reasonably
approximate the taxes which would have been payable if the Project were
completed and at least eighty-five percent (85%) occupied.
(b) Operating costs incurred by Landlord in maintaining and operating the
Building and Project, including without limitation the following: costs
of (1) utilities; (2) supplies; (3) insurance (including public
liability, property damage, earthquake, and fire and extended coverage
insurance for the full replacement cost of the Building and Project as
required by Landlord or its lenders for the Project; (4) services of
independent contractors; (5) compensation (including employment taxes
and fringe benefits) of all persons who perform duties connected with
the operation, maintenance, repair or overhaul of the Building or
Project, and equipment, improvements and facilities located within the
Project, including without limitation engineers, janitors, painters,
floor waxers, window washers, security and parking personnel and
gardeners (but excluding persons performing services not uniformly
available to or performed for substantially all Building or Project
tenants); (6) operation and maintenance of a room for delivery and
distribution of mail to tenants of the Building or Project as required
by the U.S. Postal Service (including, without limitation, an amount
equal to the fair market rental value of the mail room premises); (7)
management of the Building or Project, whether managed by Landlord or
an independent contractor (including, without limitation, an amount
equal to the fair market value of any on-site manager's office); (8)
rental expenses for (or a reasonable depreciation allowance on)
personal property used in the maintenance, operation or repair of the
Building or Project; (9) costs, expenditures or charges (whether
capitalized or not) required by any governmental or quasi-governmental
authority; (10) amortization of capital expenses (including financing
costs) (i) required by a governmental entity for energy conservation or
life safety purposes, or (ii) made by Landlord to reduce Project
Operating Costs; and (11) any other costs or expenses incurred by
Landlord under this Lease and not otherwise reimbursed by tenants of
the Project. If at any time during the Term, less than eighty-five
percent (85%) of the Rentable Area of the Project is occupied, the
"operating costs" component of Project Operating Costs shall be
adjusted by Landlord to reasonably approximate the operating costs
which would have been incurred if the Project had been at least
eighty-five percent (85%) occupied.
(2) Tenant's Proportionate Share of Project Operating Costs shall be payable
by Tenant to Landlord as follows:
(a) Beginning with the calendar year following the Base Year and for
each calendar year thereafter ("Comparison Year"), Tenant shall pay
Landlord an amount equal to Tenant's Proportionate Share of the Project
Operating Costs incurred by Landlord in the Comparison Year which
exceeds the total amount of Project Operating Costs payable by Landlord
for the Base Year. This excess is referred to as the "Excess Expenses."
(b) To provide for current payments of Excess Expenses, Tenant shall,
at Landlord's request, pay as additional rent during each Comparison
Year, an amount equal to Tenant's Proportionate Share of the Excess
Expenses payable during such Comparison Year, as estimated by Landlord
from time to time. Such payments shall be made in monthly installments,
commencing on the first day of the month following the month in which
Landlord notifies Tenant of the amount it is to pay hereunder and
continuing until the first day of the month following the month in
which Landlord gives Tenant a new notice of estimated Excess Expenses.
It is the intention hereunder to estimate from time to time the amount
of the Excess Expenses for each Comparison Year and Tenant's
Proportionate Share thereof, and then to make an adjustment in the
following year based on the actual Excess Expenses incurred for that
Comparison Year.
(c) On or before April 1 of each Comparison Year after the first
Comparison Year (or as soon thereafter as is practical), Landlord shall
deliver to Tenant a statement setting forth Tenant's Proportionate
Share of the Excess Expenses for the preceding Comparison Year. If
Tenant's Proportionate Share of the actual Excess Expenses for the
previous Comparison Year exceeds the total of the estimated monthly
payments made by Tenant for such year, Tenant shall pay Landlord the
amount of the deficiency within ten (10) days of the receipt of the
statement. If such total exceeds Tenant's Proportionate Share of the
actual Excess Expenses for such Comparison Year, then Landlord shall
credit against Tenant's next ensuing monthly installment(s) of
additional rent an amount equal to the difference until the credit is
exhausted. If a credit line is due from Landlord on the Expiration
Date, Landlord shall pay Tenant the amount of the credit. The
obligations of Tenant and Landlord to make payments required under this
Section 5.3 shall survive the Expiration Date.
(d) Tenant's Proportionate Share of Excess Expenses in any Comparison
Year having less than 365 days shall be appropriately prorated.
(e) If any dispute arises as to the amount of any additional rent due
hereunder, Tenant shall have the right after reasonable notice and at
reasonable times to inspect Landlord's accounting records at Landlord's
accounting office and, if after such inspection Tenant still disputes
the amount of additional rent owed, a certification as to the proper
amount shall be made by Landlord's certified public accountant, which
certification shall be final and conclusive. Tenant agrees to pay the
cost of such certification unless it is determined that Landlord's
original statement overstated Project Operating Costs by more than five
percent (5%).
<PAGE>
(4) If Tenant fails to maintain the Premises in good order,
condition and repair, Landlord shall give Tenant notice to do such
acts as are reasonably required to so maintain the Premises. If
Tenant fails to promptly commence such work and diligently prosecute
it to completion, then Landlord shall have the right to do such acts
and expand such funds at the expense of Tenant as are reasonably
required to perform such work. Any amount so expended by Landlord
shall be paid by Tenant promptly after demand with interest at the
prime commercial rate then being charged by Bank of America NT & SA
plus two percent (2%) per annum, from the date of such work, but not
to exceed the maximum rate then allowed by law. Landlord shall have
no liability to Tenant for any damage, inconvenience or interference
with the use of the Premises by Tenant as a result of performing any
such work.
c. COMPLIANCE WITH LAW. Landlord and Tenant shall each do all acts
required to comply with all applicable laws, ordinances, and rules of
any public authority relating to their respective maintenance
obligations as set forth herein.
d. WAIVER BY TENANT. Tenant expressly waivers the benefits of any
statute now or hereafter in effect which would otherwise afford the
Tenant the right to make repairs at Landlord's expense or to terminate
this Lease because of Landlord's failure to keep the Premises in good
order, condition and repair.
e. LOAD AND EQUIPMENT LIMITS. Tenant shall not place a load upon any
floor of the Premises which exceeds the load per square foot which such
floor was designed to carry, as determined by Landlord or Landlord's
structural engineer. The cost of any such determination made by
Landlord's structural engineer shall be paid for by Tenant upon demand.
Tenant shall not install business machines or mechanical equipment
which cause noise or vibration to such a degree as to be objectionable
to Landlord or other Building tenants.
f. Except as otherwise expressly provided in this Lease, Landlord shall
have no liability to Tenant nor shall Tenant's obligations under this
Lease be reduced or abated in any manner whatsoever by reason of any
inconvenience, annoyance, interruption or injury to business arising
from Landlord's making any repairs or changes which Landlord is
required or permitted by this Lease or by any other tenant's lease or
required by law to make in or to any portion of the Project, Building
or the Premises, Landlord shall nevertheless use reasonable efforts to
minimize any interference with Tenant's business in the Premises.
g. Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Building's
mechanical, electrical, plumbing, HVAC or other systems serving,
located in, or passing through the Premises.
h. Upon the expiration or earlier termination of this Lease, Tenant
shall return the Premises to Landlord clean and in the same condition
as on the date Tenant took possession, except for normal wear and tear.
Any damage to the Premises, including any structural damage, resulting
from Tenant's use or from the removal of Tenant's fixtures, furnishings
and equipment pursuant to Section 13b shall be repaired by Tenant at
Tenant's expense.
12. ALTERATIONS AND ADDITIONS.
a. Tenant shall not make any additions, alterations or improvements
except minor alterations not to exceed [illegible] to the Premises
without obtaining the prior written consent of Landlord. Landlord's
consent may be conditioned on Tenant's removing any such additions,
alterations or improvements upon the expiration of the Term and
restoring the Premises to the same condition as on the date Tenant took
possession. All work with respect to any addition, alteration or
improvement shall be done in a good and workmanlike manner by properly
qualified and licensed personnel approved by Landlord, and such work
shall be diligently prosecuted to completion. Landlord may, at
Landlord's option, require that any such work be performed by
Landlord's contractor, in which case the cost of such work shall be
paid for before commencement of the work. Tenant shall pay to Landlord
upon completion of any such work by Landlord's contractor, an
administrative fee of fifteen percent (15%) of the cost of the work.
b. Tenant shall pay the costs of any work done on the Premises pursuant
to Section 12a, and shall keep the Premises, Building and Project free
and clear of liens of any kind. Tenant shall indemnify, defend against
and keep Landlord free and harmless from all liability, loss, damage
costs, attorneys' fees and any other expense incurred on account of
claims by any person performing work or furnishing materials or
supplies for Tenant or any person claiming under Tenant.
Tenant shall keep Tenant's leasehold interest, and any additions or
improvements which are or become the property of Landlord under this
Lease, free and clear of all attachment or judgment liens. Before the
actual commencement of any work for which a claim or lien may be filed,
Tenant shall give Landlord notice of the intended commencement date a
sufficient time before that date to enable Landlord to post notices of
non-responsibility or any other notices which Landlord deems necessary
for the proper protection of Landlord's interest in the Premises,
Building or the Project, and the Landlord shall have the right to enter
the Premises and post such notices at any reasonable time.
c. Landlord may require, at Landlord's sole option, that Tenant provide
to Landlord, at Tenant's expense, a lien and completion bond in an
amount equal to at least one and one-half (1 1/2) times the total
estimated cost of any additions, alterations or improvements to be made
in or to the Premises, to protect Landlord against any liability for
mechanic's and materialmen's liens and to insure timely completion of
the work. Nothing contained in this Section 12c shall relieve Tenant of
its obligation under Section 12b to keep the Premises, Building and
Project free of all liens.
d. Unless their removal is required by Landlord as provided in Section
12a, all additions, alterations and improvements made to the Premises
shall become the property of Landlord and be surrendered with the
Premises upon the expiration of the Term; provided, however, Tenant's
equipment, machinery and trade fixtures which can be removed without
damage to the Premises shall remain the property of Tenant and may be
removed, subject to the provisions of Section 13b.
13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY.
a. All fixtures, equipment, improvements and appurtenances attached to
or built into the Premises at the commencement of or during the Term,
whether or not by or at the expense of Tenant ("Leasehold
Improvements"), shall be and remain a part of the Premises, shall be
the property of Landlord and shall not be removed by Tenant, except as
expressly provided in Section 13b.
<PAGE>
b. All removable partitions, business and trade fixtures, machinery and
equipment, communications equipment and office equipment located in the
Premises and acquired by or for the account of Tenant, without expense
to Landlord, which can be removed without structural damage to the
Building, and all furniture, furnishings and other articles of movable
personal property owned by Tenant and located in the Premises
(collectively "Tenant's Property") shall be and shall remain the
property of Tenant and may be removed by Tenant at any time during the
Term: provided that if any of Tenant's Property is removed, Tenant
shall promptly repair any damage to the Premises or to the Building
resulting from such removal.
14. RULES AND REGULATIONS.
Tenant agrees to comply with (and cause its agents, contractors, employees
and invitees to comply with) the rules and regulations attached hereto as
Exhibit "D" and with such reasonable modifications thereof and additions
thereto as Landlord may from time to time make. Landlord shall not be
responsible for any violation of said rules and regulations by other tenants
or occupants of the Building or Project.
15. CERTAIN RIGHTS RESERVED BY LANDLORD.
Landlord reserves the following rights, exercisable without liability to
Tenant for (a) damage or injury to property, person or business, (b) causing
an actual or constructive eviction from the Premises, or (c) disturbing
Tenant's use or possession of the Premises:
a. To name the Building and Project and to change the name or street
address of the Building or Project;
b. To install and maintain all signs on the exterior and interior of
the Building and Project;
c. To have pass keys to the Premises and all doors within the Premises,
excluding Tenant's vaults and safes;
d. At any time during the Term, and on reasonable prior notice to
Tenant, to inspect the Premises, and to show the Premises to any
prospective purchaser or mortgagee of the Project, or to any assignee
of any mortgage on the Project, or to others having an interest in the
Project or Landlord, and during the last six months of the Term, to
show the Premises to prospective tenants thereof; and
e. To enter the Premises for the purpose of making inspections,
repairs, alterations, additions or improvements to the Premises or the
Building (including, without limitation, checking, calibrating,
adjusting or balancing controls and other parts of the HVAC system),
and to take all steps as may be necessary or desirable for the safety,
protection, maintenance or preservation of the Premises or the Building
or Landlord's interest therein, or as may be necessary or desirable for
the operation or improvement of the Building or in order to comply with
laws, orders or requirements of governmental or other authority
Landlord agrees to use its best efforts (except in an emergency) to
minimize interference with Tenant's business in the Premises in the
course of any such entry.
16. ASSIGNMENT AND SUBLETTING.
No assignment of this Lease or sublease of all or any part of the Premises
shall be permitted, except as provided in this Article 16.
a. Tenant shall not, without the prior written consent of Landlord,
assign or hypothecate this Lease or any interest herein or sublet the
Premises or any part thereof, or permit the use of the Premises by any
party other than Tenant. Any of the foregoing acts without such consent
shall be void and shall, at the option of Landlord, terminate this
Lease. This Lease shall not, nor shall any interest of Tenant herein, be
assignable by operation of law without the written consent of Landlord.
b. If at any time or from time to time during the Term Tenant desires
to assign this Lease or sublet all or any part of the Premises, Tenant
shall give notice to Landlord setting forth the terms and provisions of
the proposed assignment or sublease, and the identity of the proposed
assignee or subtenant. Tenant shall promptly supply Landlord with such
information concerning the business background and financial condition
of such proposed assignee or subtenant as Landlord may reasonably
request. Landlord shall have the option, exercisable by notice given to
Tenant within twenty (20) days after Tenant's notice is given, either
to sublet such space from Tenant at the rental and on the other terms
set forth in this Lease for the term set forth in Tenant's notice, or,
in the case of an assignment, to terminate this Lease. If Landlord does
not exercise such option, Tenant may assign the Lease or sublet such
space to such proposed assignee or subtenant on the following further
conditions:
(1) Landlord shall have the right to approve such proposed assignee
or subtenant, which approval shall not be unreasonably withheld;
(2) The assignment or sublease shall be on the same terms set forth
in the notice given to Landlord;
(3) No assignment or sublease shall be valid and no assignee or
sublessee shall take possession of the Premises until an executed
counterpart of such assignment or sublease has been delivered to
Landlord.
(4) No assignee or sublessee shall have a further right to assign or
sublet except on the terms herein contained; and
(5) Any sums or other economic consideration received by Tenant as a
result of such assignment or subletting, however denominated under
the assignment or sublease, which exceed, in the aggregate, (i) the
total sums which Tenant is obligated to pay Landlord under this
Lease (prorated to reflect obligations allocable to any portion of
the Premises subleased), plus (ii) any real estate brokerage
commissions or fees payable in connection with such assignment or
subletting, shall be paid to Landlord as additional rent under this
Lease without affecting or reducing any other obligations of Tenant
hereunder.
c. Notwithstanding the provisions of paragraphs a and b above, Tenant
may assign this Lease or sublet the Premises or any portion thereof,
without Landlord's consent and without extending any recapture or
termination option to Landlord, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any
corporation resulting from a merger or consolidation with Tenant, or to
any person or entity which acquires all the assets of Tenant's business
as a going concern, provided that (i) the assignee or sublessee
assumes, in full, the obligations of Tenant under this Lease, (ii)
Tenant remains fully liable under this Lease and (iii) the use of the
Premises under Article 8 remains unchanged.
<PAGE>
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by an assignee or
subtenant of Tenant or any successor of Tenant in the performance of any
of the terms hereof, Landlord may proceed directly against Tenant
without the necessity of exhausting remedies against such assignee,
subtenant or successor. Landlord may consent to subsequent assignments
of the Lease or sublettings or amendments or modifications to the Lease
with assignees of Tenant, without notifying Tenant, or any successor of
Tenant, and without obtaining its or their consent thereto and any such
actions shall not relieve Tenant of liability under this Lease.
e. If Tenant assigns the Lease or sublets the Premises or requests the
consent of Landlord to any assignment or subletting or if Tenant
requests the consent of Landlord for any act that Tenant Proposes to do,
then Tenant shall, upon demand, pay Landlord an administrative fee of
One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys'
fees reasonably incurred by Landlord in connection with such act or
request.
17. HOLDING OVER.
If after expiration of the Term, Tenant remains in possession of the
Premises with Landlord's permission (express or implied), Tenant shall
become a tenant from month to month only, upon all the provisions of
this Lease (except as to term and Base Rent), but the "Monthly
Installments of Base Rent" payable by Tenant shall be increased to one
hundred twenty five percent (125%) of the Monthly Installments of Base
Rent payable by Tenant at the expiration of the Term. Such monthly rent
shall be payable in advance on or before the first day of each month. If
either party desires to terminate such month to month tenancy, it shall
give the other party not less than thirty (30) days advance written
notice of the date of termination.
18. SURRENDER OF PREMISES.
a. Tenant shall peaceably surrender the Premises to Landlord on the
Expiration Date, in broom-clean condition and in as good condition as
when Tenant took possession, except for (i) reasonable wear and tear,
(ii) loss by fire or other casualty, and (iii) loss by condemnation.
Tenant shall, on Landlord's request, remove Tenant's Property on or
before the Expiration Date and promptly repair all damage to the
Premises or Building caused by such removal.
b. If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise, any of Tenant's Property left on the
Premises shall be deemed to be abandoned, and, at Landlord's option,
title shall pass to Landlord under this Lease as by a bill of sale. If
Landlord elects to remove all or any part of such Tenant's Property, the
cost of removal, including repairing any damage to the Premises or
Building caused by such removal, shall be paid by Tenant. On the
Expiration Date Tenant shall surrender all keys to the Premises.
19. DESTRUCTION OR DAMAGE.
a. If the Premises or the portion of the Building necessary for Tenant's
occupancy is damaged by fire, earthquake, act of God, the elements of
other casualty, Landlord shall, subject to the provisions of this
Article, promptly repair the damage, if such repairs can, in Landlord's
opinion, be completed within (90) ninety days. If Landlord determines
that repairs can be completed within ninety (90) days, this Lease shall
remain in full force and effect, except that if such damage is not the
result of the negligence or willful misconduct of Tenant or Tenant's
agents, employees, contractors, licensees or invitees, the Base Rent
shall be abated to the extent Tenant's use of the Premises is impaired,
commencing with the date of damage and continuing until completion of
the repairs required of Landlord under Section 19d.
b. If in Landlord's opinion, such repairs to the Premises or portion of
the Building necessary for Tenant's occupancy cannot be completed within
ninety (90) days, Landlord may elect, upon notice to Tenant given within
thirty (30) days after the date of such fire or other casualty, to
repair such damage, in which event this Lease shall continue in full
force and effect, but the Base Rent shall be partially abated as
provided in Section 19a. If Landlord does not so elect to make such
repairs, this Lease shall terminate as of the date of such fire or other
casualty.
c. If any other portion of the Building or Project is totally destroyed
or damaged to the extent that in Landlord's opinion repair thereof
cannot be completed within ninety (90) days, Landlord may elect upon
notice to Tenant given within thirty (30) days after the date of such
fire or other casualty, to repair such damage, in which event this Lease
shall continue in full force and effect, but the Base Rent shall be
partially abated as provided in Section 19a. If Landlord does not
elect to make such repairs, this Lease shall terminate as of the date of
such fire or other casualty.
d. If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Building and
Building Standard Work in the Premises. Tenant shall be responsible at
its sole cost and expense for the repair, restoration and replacement of
any other Leasehold Improvements and Tenant's Property. Landlord shall
not be liable for any loss of business, inconvenience or annoyance
arising from any repair or restoration, of any portion of the Premises,
Building or Project as a result of any damage from fire or other
casualty.
e. This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Premises, Building or Project by
fire or other casualty, and any present or future law which purports to
govern the rights of Landlord and Tenant in such circumstances in the
absence of express agreement, shall have no application.
20. EMINENT DOMAIN.
a. If the whole of the Building or Premises is lawfully taken by
condemnation or in any other manner for any public or quasi-public
purpose, this Lease shall terminate as of the date of such taking, and
Rent shall be prorated to such date. If less than the whole of the
Building or Premises is so taken, this Lease shall be unaffected by
such taking, provided that (i) Tenant shall have the right to terminate
this Lease by notice to Landlord given within ninety (90) days after the
date of such taking if twenty percent (20%) or more of the Premises is
taken and the remaining area of the Premises is not reasonably
sufficient for Tenant to continue operation of its business, and (ii)
Landlord shall have the right to terminate this Lease by notice to
Tenant given within ninety (90) days after the date of such taking. If
either Landlord or Tenant so elects to terminate this Lease, the Lease
shall terminate on the thirtieth (30th) day after either such notice.
The Rent shall be prorated to the date of termination. If this Lease
continues in force upon such partial taking, the Base Rent and Tenant's
Proportionate Share shall be equitably adjusted according to the
remaining Rentable Area of the Premises and Project.
<PAGE>
b. In the event of any taxing, partial or whole, all of the proceeds of
any award, judgment or settlement payable by the condemning authority
shall be the exclusive property of Landlord, and Tenant hereby assigns
to Landlord all of its right title and interest in any award, judgment
or settlement from the condemning authority. Tenant, however, shall have
the right, to the extent that Landlord's award is not reduced or
prejudiced, to claim from the condemning authority (but not from
Landlord) such compensation as may be recoverable by Tenant in its own
right for relocation expenses and damage to Tenant's personal property.
c. In the event of a partial taking of the Premises which does not
result in a termination of this Lease, Landlord shall restore the
remaining portion of the Premises as nearly as practicable to its
condition prior to the condemnation or taking, but only to the extent of
Building Standard Work. Tenant shall be responsible at its sole cost and
expense for the repair, restoration and replacement of any other
Leasehold improvements and Tenant's Property.
21. INDEMNIFICATION.
a. Tenant shall indemnify and hold Landlord harmless against and from
liability and claims of any kind for loss or damage to property of
Tenant or any other person, or for any injury to or death of any person,
arising out of (1) Tenant's use and occupancy of the Premises, or any
work, activity or other things allowed or suffered by Tenant to be done
in, on or about the Premises; (2) any breach or default by Tenant of any
of Tenant's obligations under this Lease; or (3) any negligent or
otherwise tortious act or omission of Tenant, its agents, employees,
invitees or contractors. Tenant shall at Tenant's expense, and by
counsel satisfactory to Landlord, defend Landlord in any action or
proceeding arising from any such claim and shall indemnify Landlord
against all costs, attorneys' fees, expert witness fees and any other
expenses incurred in such action or proceeding. As a material part of
the consideration for Landlord's execution of this Lease, Tenant hereby
assumes all risk of damage or injury to any person or property in, on or
about the Premises from any cause.
b. Landlord shall not be liable for injury or damage which may be
sustained by the person or property of Tenant, its employees, invitees
or customers, or any other person in or about the Premises, caused by or
resulting from fire, steam, electricity, gas, water or rain which may
leak or flow from or into any part of the Premises, or from the
breakage, leakage, obstruction or other defects of pipes, sprinklers,
wire, appliances, plumbing, air conditioning or lighting fixtures, where
such damage or injury results from conditions arising upon the Premises
or upon other portions of the Building or Project or from other sources.
Landlord shall not be liable for any damages arising from any act or
omission of any other tenant of the Building or Project.
22. TENANT'S INSURANCE.
a. All insurance required to be carried by Tenant hereunder shall be
issued by responsible insurance companies acceptable to Landlord and
Landlord's lender and qualified to do business in the State. Each policy
shall name Landlord, and at Landlord's request any mortgagee of
Landlord, as an additional insured, as their respective interests may
appear. Each policy shall contain (i) a cross-liability endorsement,
(ii) a provision that such policy and the coverage evidenced thereby
shall be primary and non-contributing with respect to any policies
carried by Landlord and that any coverage carried by Landlord shall be
excess insurance, and (iii) a waiver by the insurer of any right of
subrogation against Landlord, its agents, employees and representatives,
which arises or might arise by reason of any payment under such policy
or by reason of any act or omission of Landlord, its agents, employees
or representatives. A copy of each paid up policy (authenticated by the
insurer) or certificate of the insurer evidencing the existence and
amount of each insurance policy required hereunder shall be delivered to
Landlord before the date Tenant is first given the right of possession
of the Premises, and thereafter within thirty (30) days after any demand
by Landlord therefor. Landlord may, at any time and from time to time,
inspect and/or copy any insurance policies required to be maintained by
Tenant hereunder. No such policy shall be cancellable except after
twenty (20) days written notice to Landlord and Landlord's lender.
Tenant shall furnish Landlord with renewals or "binders" of any such
policy at least ten (10) days prior to the expiration thereof. Tenant
agrees that if Tenant does not take out and maintain such insurance.
Landlord may (but shall not be required to) procure said insurance on
Tenant's behalf and charge the Tenant the premiums together with a
twenty-five percent (25%) handling charge, payable upon demand. Tenant
shall have the right to provide such insurance coverage pursuant to
blanket policies obtained by the Tenant, provided such blanket policies
expressly afford coverage to the Premises, Landlord, Landlord's mortgagee
and Tenant as required by this Lease.
b. Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall
procure, pay for and maintain in effect policies of casualty insurance
covering (i) all Leasehold improvements (including any alterations,
additions or improvements as may be made by Tenant pursuant to the
provisions of Article 12 hereof), and (ii) trade fixtures, merchandise
and other personal property from time to time in, on or about the
Premises, in an amount not less than one hundred percent (100%) of their
actual replacement cost from time to time, providing protection against
any peril included within the classification "Fire and Extended Coverage"
together with insurance against sprinkler damage, vandalism and
malicious mischief. The proceeds of such insurance shall be used for the
repair or replacement of the property so insured. Upon termination of
this Lease following a casualty as set forth herein, the proceeds under
(i) shall be paid to Landlord, and the proceeds under (ii) above shall
be paid to Tenant.
c. Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall
procure, pay for and maintain in effect workers' compensation insurance
as required by law and comprehensive public liability and property
damage insurance with respect to the construction of improvements on the
Premises, the use, operation or condition of the Premises and the
operations of Tenant in, on or about the Premises, providing personal
injury and broad form property damage coverage for not less than One
Million Dollars ($1,000,000.00) combined single limit for bodily injury,
death and property damage liability.
d. Not less than every three (3) years during the Term, Landlord and
Tenant shall mutually agree to increases in all of Tenant's insurance
policy limits for all insurance to be carried by Tenant as set forth in
this Article. In the event Landlord and Tenant cannot mutually agree
upon the amounts of said increases, then Tenant agrees that all
insurance policy limits as set forth in this Article shall be adjusted
for increases in the cost of living in the same manner as is set forth
in Section 5.2 hereof for the adjustment of the Base Rent.
<PAGE>
and representatives of the other, on account of loss by or damage to the
waiving party of its property or the property of others under its control, to
the extent that such loss or damage is insured against under any fire and
extended coverage insurance policy which either may have in force at the time
of the loss or damage. Tenant shall, upon obtaining the policies of insurance
required under this Lease give notice to its insurance carrier or carriers
that the foregoing mutual waiver of subrogation is contained in this Lease.
24. SUBORDINATION AND ATTORNMENT.
Upon written request of Landlord, or any first mortgagee or first deed of
trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in
writing, subordinate its rights under this Lease to the lien of any first
mortgage or first deed of trust, or to the interest of any lease in which
Landlord is lessee, and to all advances made or hereafter to be made
thereunder. However, before signing any subordination agreement. Tenant shall
have the right to obtain from any lender or lessor or Landlord requesting
such subordination, an agreement in writing providing that, as long as Tenant
is not in default hereunder, this Lease shall remain in effect for the full
Term. The holder of any security interest may, upon written notice to Tenant
elect to have this Lease prior to its security interest regardless of the
time of the granting or recording of such security interest.
In the event of any foreclosure sale, transfer in lieu of foreclosure or
termination of the lease in which Landlord is lessee. Tenant shall attorn to
the purchaser, transferee or lessor as the case may be, and recognize that
party as Landlord under this Lease, provided such party acquires and accepts
the Premises subject to this Lease.
25. TENANT ESTOPPEL CERTIFICATES.
Within ten (10) days after written request from Landlord, Tenant shall
execute and deliver to Landlord or Landlord's designee, a written statement
certifying (a) that this Lease is unmodified and in full force and effect, or
is in full force and effect as modified and stating the modifications: (b)
the amount of Base Rent and the date to which Base Rent and additional rent
have been paid in advance: (c) the amount of any security deposited with
Landlord; and (d) that Landlord is not in default hereunder or, if Landlord
is claimed to be in default, stating the nature of any claimed default. Any
such statement may be relied upon by a purchaser, assignee or lender.
Tenant's failure to execute and deliver such statement within the time
required shall at Landlord's election be a default under this Lease and shall
also be conclusive upon Tenant that: (1) this Lease is in full force and
effect and has not been modified except as represented by Landlord: (2) there
are no uncured defaults in Landlord's performance and that Tenant has no
right of offset, counter-claim or deduction against Rent: and (3) not more
than one month's Rent has been paid in advance.
26. TRANSFER OF LANDLORD'S INTEREST
In the event of any sale or transfer by Landlord of the Premises, Building or
Project, and assignment of this Lease by Landlord, Landlord shall be and is
hereby entirely freed and relieved of any and all liability and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission relating to the Premises, Building, Project or Lease occurring after
the consummation of such sale or transfer, providing the purchaser shall
expressly assume all of the covenants and obligations of Landlord under this
Lease. If any security deposit or prepaid Rent has been paid by Tenant,
Landlord may transfer the security deposit or prepaid Rent to the Landlord's
successor and upon such transfer, Landlord shall be relieved of any and all
further liability with respect thereto.
27. DEFAULT.
27.1. TENANT'S DEFAULT. The occurrence of any one or more of the following
events shall constitute a default and breach of this Lease by Tenant:
a. If Tenant abandons or vacates the Premises; or
b. If Tenant fails to pay any Rent or any other charges required to be
paid by Tenant under this Lease and such failure continues for five (5)
days after such payment is due and payable; or
c. If Tenant fails to promptly and fully perform any other covenant,
condition or agreement contained in this Lease and such failure continues
for thirty (30) days after written notice thereof from Landlord to
Tenant; or
d. If a writ of attachment or execution is levied on this Lease or on
any of Tenant's Property; or
e. If Tenant makes a general assignment for the benefit of creditors, or
provides for an arrangement, composition, extension or adjustment with
its creditors; or
f. if Tenant files a voluntary petition for relief or if a petition
against Tenant in a proceeding under the federal bankruptcy laws or
other insolvency laws is filed and not withdrawn or dismissed within
forty-five (45) days thereafter, of if under the provisions of any law
providing for reorganization or winding up of corporations, any court of
competent jurisdiction assumes jurisdiction custody or control of Tenant
of any substantial part of its property and such jurisdiction, custody
or control remains in force unrelinquished, unstayed or unterminated for
a period of forty-five (45) days; or
g. If in any proceeding or action in which Tenant is a party, a trustee,
receiver, agent or custodian is appointed to take charge of the Premises
or Tenant's Property (or has the authority to do so) for the purpose of
enforcing a lien against the Premises or Tenant's Property; or
h. If Tenant is a partnership or consists of more than one (1) person
or entity, if any partner of the partnership or other person or entity
is involved in any of the acts or events described in subparagraphs d
through g above.
27.2. REMEDIES. In the event of Tenant's default hereunder, then in addition
to any other rights or remedies Landlord may have under any law, Landlord
shall have the right, at Landlord's option, without further notice or demand
of any kind to do the following
a. Terminate this Lease and Tenant's right to possession of the Premises
and reenter the Premises and take possession thereof, and Tenant shall
have no further claim to the Premises or under this Lease; or
b. Continue this Lease in effect, reenter and occupy the Premises for
the account of Tenant, and collect any unpaid Rent or other charges
which have or thereafter become due and payable; or
c. Reenter the Premises under the provisions of subparagraph b, and
thereafter elect to terminate this Lease and Tenant's right to
possession of the Premises
<PAGE>
If Landlord reenters the Premises under the provisions of subparagraphs b or
c above, Landlord shall not be deemed to have terminated this Lease or the
obligation of Tenant to pay any Rent or other charges thereafter accruing,
unless Landlord notifies Tenant in writing of Landlord's election to
terminate this lease. In the event of any reentry or retaking of possession
by LANDLORD, Landlord shall have the right, but not the obligation, to remove
all or any part of Tenant's Property in the Premises and to place such
property in storage at a public warehouse at the expense and risk of Tenant. If
Landlord elects to relet the Premises for the account of Tenant, the rent
received by Landlord from such reletting shall be applied as follows: first,
to the payment of any indebtedness other than Rent due hereunder from Tenant
to Landlord; second, to the payment of any costs of such reletting: third,
to the payment of the cost of any alterations or repairs to the Premises,
fourth to the payment of Rent due and unpaid hereunder; and the balance, if any,
shall be held by Landlord and applied in payment of future Rent as it becomes
due. If that portion of rent received from the reletting which is applied
against the Rent due hereunder is less than the amount of the Rent due, Tenant
shall pay the deficiency to Landlord promptly upon demand by Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as determined, any costs and expenses incurred by Landlord in
connection with such reletting or in making alterations and repairs to the
Premises, which are not covered by the rent received from the reletting.
Should Landlord elect to terminate this Lease under the provisions of
subparagraph a or c above, Landlord may recover as damages from Tenant the
following:
1. PAST RENT. The worth at the time of the award of any unpaid Rent
which had been earned at the time of termination; plus
2. RENT PRIOR TO AWARD. The worth at the time of the award of the amount
by which the unpaid Rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonable avoided; plus
3. RENT AFTER AWARD. The worth at the time of the award of the amount by
which the unpaid Rent for the balance of the Term after the time of
award exceeds the amount of the rental loss that Tenant proves could be
reasonably avoided; plus
4. PROXIMATELY CAUSED DAMAGES. Any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to
perform its obligations under this Lease or which in the ordinary course
of things would be likely to result therefrom, including, but not
limited to, any costs or expenses (including attorneys' fees), incurred
by Landlord in (a) retaking possession of the Premises, (b) maintaining
the Premises after Tenant's default, (c) preparing the Premises for
reletting to a new tenant, including any repairs or alterations, and (d)
reletting the Premises, including broker's commissions.
"The worth at the time of the award" as used in subparagraphs 1 and 2 above
is to be computed by allowing interest at the rate of ten percent (10%) per
annum. "The worth at the time of the award" as used in subparagraph 3 above,
is to be computed by discounting the amount at the discount rate of the
Federal Reserve Bank situated nearest to the Premises at the time of the
award plus one percent (1%).
The waiver by Landlord of any breach of any term, covenant or condition of
this Lease shall not be deemed a waiver of such term, covenant or condition or
of any subsequent breach of the same or any other term, covenant or
condition. Acceptance of Rent by Landlord subsequent to any breach hereof
shall not be deemed a waiver of any preceding breach other than the failure
to pay the particular Rent so accepted, regardless of Landlord's knowledge of
any breach at the time of such acceptance of Rent. Landlord shall not be
deemed to have waived any term, covenant or condition unless Landlord gives
Tenant written notice of such waiver.
27.3. LANDLORD'S DEFAULT. If Landlord fails to perform any covenant,
condition or agreement contained in this Lease within thirty (30) days after
receipt of written notice from Tenant specifying such default, or if such
default cannot reasonably by cured within thirty (30) days, if Landlord
fails to commence to cure within that thirty (30) day period, then Landlord
shall be liable to Tenant for any damages sustained by Tenant as a result of
Landlord's breach; provided, however, it is expressly understood and agreed
that if Tenant obtains a money judgment against Landlord resulting from any
default or other claim arising under this Lease, that judgment shall be
satisfied only out of the rents, issues, profits, and other income actually
received on account of Landlord's right, title and interest in the Premises,
Building or Project, and no other real, personal or mixed property of
Landlord (or of any of the partners which comprise Landlord, if any) wherever
situated, shall be subject to levy to satisfy such judgment. If, after notice
to Landlord of default, Landlord (or any first mortgagee or first deed of
trust beneficiary of Landlord) fails to cure the default as provided herein,
then Tenant shall have the right to cure that default at Landlord's expense.
Tenant shall not have the right to terminate this Lease or to withhold,
reduce or offset any amount against any payments of Rent or any other charges
due and payable under this Lease except as otherwise specifically provided
herein.
28. BROKERAGE FEES.
Tenant warrants and represents that it has not dealt with any real estate
broker or agent in connection with this Lease or its negotiation except
those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless
from any cost, expense or liability (including costs of suit and reasonable
attorneys' fees) for any compensation, commission or fees claimed by any
other real estate broker or agent in connection with this Lease or its
negotiation by reason of any act of Tenant.
29. NOTICES.
All notices, approvals and demands permitted or required to be given under
this Lease shall be in writing and deemed duly served or given if personally
delivered or sent by certified or registered U.S. mail, postage prepaid, and
addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and
to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address:
provided, however, notices to Tenant shall be deemed duly served or given if
delivered or mailed to Tenant at the Premises Landlord and Tenant may from
time to time by notice to the other designate another place for receipt of
future notices.
30. GOVERNMENT ENERGY OR UTILITY CONTROLS.
In the event of imposition of federal, state or local government controls,
rules, regulations, or restrictions on the use or consumption of energy or
other utilities during the Term, both Landlord and Tenant shall be bound
thereby. In the event of a difference in interpretation by Landlord and
Tenant of any such controls, the interpretation of Landlord shall prevail,
and Landlord shall have the right to enforce compliance therewith, including
the right of entry into the Premises to effect compliance.
<PAGE>
described in this Lease, and if the relocation occurs after the
Commencement Date, shall be placed in that condition by Landlord at its
cost.
b. Landlord shall give Tenant at least thirty (30) days written notice of
Landlord's intention to relocate the Premises.
c. As nearly as practicable, the physical relocation of the Premises
shall take place on a weekend and shall be completed before the
following Monday. If the physical relocation has not been completed in
that time, Base Rent shall abate in full from the time the physical
relocation commences to the time it is completed. Upon completion of
such relocation, the new premises shall become the "Premises" under this
Lease.
d. All reasonable costs incurred by Tenant as a result of the relocation
shall be paid by Landlord.
e. If the new premises are smaller than the Premises as it existed
before the relocation, Base Rent shall be reduced proportionately.
f. The parties hereto shall immediately execute an amendment to this
Lease setting forth the relocation of the Premises and the reduction of
Base Rent, if any.
32. QUIET ENJOYMENT.
Tenant, upon paying the Rent and performing all of its obligations under this
Lease, shall peaceably and quietly enjoy the Premises, subject to the terms
of this Lease and to any mortgage, lease, or other agreement to which this
Lease may be subordinate.
33. OBSERVANCE OF LAW.
Tenant shall not use the Premises or permit anything to be done in or about
the Premises which will in any way conflict with any law, statute, ordinance
or governmental rule or regulation now in force or which may hereafter be
enacted or promulgated. Tenant shall, at its sole cost and expense, promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements now in force or which may hereafter be in force,
and with the requirements of any board of fire insurance underwriters or
other similar bodies now or hereafter constituted, relating to, or affecting
the condition, use or occupancy of the Premises, excluding structural changes
not related to or affected by Tenant's improvements or acts. The judgment of
any court of competent jurisdiction or the admission of Tenant in any action
against Tenant, whether Landlord is a party thereto or not, that Tenant has
violated any law, ordinance or governmental rule, regulation or requirement,
shall be conclusive of that fact as between Landlord and Tenant.
34. FORCE MAJEURE.
Any prevention, delay or stoppage of work to be performed by Landlord or
Tenant which is due to strikes, labor disputes, inability to obtain labor,
materials, equipment or reasonable substitutes therefor, acts of God,
governmental restrictions or regulations or controls, judicial orders, enemy
or hostile government actions, civil commotion, fire or other casualty, or
other causes beyond the reasonable control of the party obligated to perform
hereunder, shall excuse performance of the work by that party for a period
equal to the duration of that prevention, delay or stoppage. Nothing in this
Article 34 shall excuse or delay Tenant's obligation to pay Rent or other
charges under this Lease.
35. CURING TENANT'S DEFAULTS.
If Tenant defaults in the performance of any of its obligations under this
Lease, Landlord may (but shall not be obligated to) without waiving such
default, perform the same for the account at the expense of Tenant. Tenant
shall pay Landlord all costs of such performance promptly upon receipt of a
bill therefor.
36. SIGN CONTROL.
Tenant shall not affix, paint, erect or inscribe any sign, projection,
awning, signal or advertisement of any kind to any part of the Premises,
Building or Project, including without limitation, the inside or outside of
windows or doors, without the written consent of Landlord. Landlord shall
have the right to remove any signs or other matter, installed without
Landlord's permission, without being liable to Tenant by reason of such
removal, and to charge the cost of removal to Tenant as additional rent
hereunder, payable within ten (10) days of written demand by Landlord.
37. MISCELLANEOUS.
a. ACCORD AND SATISFACTION: ALLOCATION OF PAYMENTS. No payment by Tenant or
receipt by Landlord of a lesser amount than the Rent provided for in this
Lease shall be deemed to be other than on account of the earliest due Rent,
nor shall any endorsement or statement on any check or letter accompanying
any check or payment as Rent be deemed an accord and satisfaction, and
Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of the Rent or pursue any other remedy provided
for in this Lease. In connection with the foregoing. Landlord shall have the
absolute right in its sole discretion to apply any payment received from
Tenant to any account or other payment of Tenant then not current and due or
delinquent.
b. ADDENDA. If any provision contained in an addendum to this Lease is
inconsistent with any other provision herein, the provision contained in the
addendum shall control, unless otherwise provided in the addendum.
c. ATTORNEYS' FEES. If any action or proceeding is brought by either party
against the other pertaining to or arising out of this Lease, the finally
prevailing party shall be entitled to recover all costs and expenses,
including reasonable attorneys' fees, incurred on account of such action or
proceeding.
d. CAPTIONS, ARTICLES AND SECTION NUMBERS. The captions appearing within the
body of this Lease have been inserted as a matter of convenience and for
reference only and in no way define, limit or enlarge the scope or meaning
of this Lease. All references to Article and Section numbers refer to
Articles and Sections in this Lease.
e. CHANGES REQUESTED BY LENDER. Neither Landlord or Tenant shall unreasonably
withhold its consent to changes or amendments to this Lease requested by the
lender on Landlord's interest, so long as these changes do not alter the
basic business terms of this Lease or otherwise materially diminish any
rights or materially increase any obligations of the party from whom consent
to such charge or amendment is requested.
f. CHOICE OF LAW. This Lease shall be construed and enforced in accordance
with the laws of the State.
g. CONSENT. Notwithstanding anything contained in this Lease to the contrary.
Tenant shall have no claim, and hereby waives the right to any claim against
Landlord for money damages by reason of any refusal, withholding or delaying
by Landlord of any consent, approval or statement of satisfaction, and in
such event. Tenant's only remedies therefor shall be an action for
<PAGE>
h. CORPORATE AUTHORITY. If Tenant is a corporation, each individual signing
this Lease on behalf of Tenant represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation,
and that this Lease is binding on Tenant in accordance with its terms. Tenant
shall, at Landlord's request, deliver a certified copy of a resolution of its
board of directors authorizing such execution.
i. COUNTERPARTS. This Lease may be executed in multiple counterparts, all of
which shall constitute one and the same Lease.
j. EXECUTION OF LEASE, NO OPTION. The submission of this Lease to Tenant
shall be for examination purposes only, and does not and shall not constitute
a reservation of or option for Tenant to lease, or otherwise create any
interest of Tenant in the Premises or any other premises within the Building
or Project. Execution of this Lease by Tenant and its return to Landlord
shall not be binding on Landlord notwithstanding any time interval, until
Landlord has in fact signed and delivered this Lease to Tenant.
k. FURNISHING OF FINANCIAL STATEMENTS: TENANT'S REPRESENTATIONS. In order to
induce Landlord to enter into this Lease Tenant agrees that it shall promptly
furnish Landlord, from time to time, upon Landlord's written request,
with financial statements reflecting Tenant's current financial condition.
Tenant represents and warrants that all financial statements, records and
information furnished by Tenant to Landlord in connection with this Lease are
true, correct and complete in all respects.
l. FURTHER ASSURNACES. The parties agree to promptly sign all documents
reasonably requested to give effect to the provisions of this Lease.
m. MORTGAGEE PROTECTION. Tenant agrees to send by certified or registered
mail to any first mortgagee or first deed of trust beneficiary of Landlord
whose address has been furnished to Tenant, a copy of any notice of default
served by Tenant on Landlord. If Landlord fails to cure such default within
the time provided for in this Lease, such mortgagee or beneficiary shall have
an additional thirty (30) days to cure such default; provided that if such
default cannot reasonably be cured within that thirty (30) day period, then
such mortgagee or beneficiary shall have such additional time to cure the
default as is reasonably necessary under the circumstances.
n. PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all of the agreements of
the parties with respect to any matter covered or mentioned in this Lease,
and no prior agreement or understanding pertaining to any such matter shall
be effective for any purpose. No provisions of this Lease may be amended or
added to except by an agreement in writing signed by the parties or their
respective successors in interest.
0. RECORDING. Tenant shall not record this Lease without the prior written
consent of Landlord. Tenant, upon the request of Landlord, shall execute and
acknowledge a "short form" memorandum of this Lease for recording purposes.
p. SEVERABILITY. A final determination by a court of competent jurisdiction
that any provision of this Lease is invalid shall not affect the validity of
any other provision, and any provision so determined to be invalid shall, to
the extent possible, be construed to accomplish its intended effect.
q. SUCCESSORS AND ASSIGNS. This Lease shall apply to and bind the heirs,
personal representatives, and permitted successors and assigns of the parties.
r. TIME OF THE ESSENCE. Time is of the essence of this Lease.
s. WAIVER. No delay or omission in the exercise of any right or remedy of
Landlord upon any default by Tenant shall impair such right to remedy or be
construed as a waiver of such default.
t. COMPLIANCE. The parties hereto agree to comply with all applicable
federal, state and local laws, regulations, codes ordinances and
administrative orders having jurisdiction over the parties, property or the
subject matter of this Agreement, including, but not limited to, the 1964
Civil Rights Act and all amendments thereto, the Foreign Investment in Real
Property Tax Act, the Comprehensive Environmental Response Compensation and
Liability Act, and The Americans With Disabilities Act.
The receipt and acceptance by Landlord of delinquent Rent shall not
constitute a waiver of any other default; it shall constitute only a waiver
of timely payment of the particular Rent payment involved.
No act or conduct of Landlord, including, without limitation, the acceptance
of keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the Term. Only a written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish a termination of the Lease.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of the
Lease.
The parties hereto have executed this Lease as of the dates set forth below.
Date: June 15, 1994 Date: 6/21/94
------------------------- ---------------------------------------
Landlord: Eldon (Bud) Hoffman Tenant: Information Highway Media Corporation
--------------------- -------------------------------------
By: /s/ Eldon Bud Hoffman By: N. M. Schulhof
--------------------------- -----------------------------------------
Eldon (Bud) Hoffman
Title: Owner Title: President
------------------------ --------------------------------------
By: By:
--------------------------- -----------------------------------------
Title: Title:
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - THIS DOCUMENT HAS BEEN PREPARED FOR APPROVAL BY YOUR
ATTORNEY. NO REPRESENTATION OR RECOMMENDATION IS MADE BY CB COMMERCIAL AS TO
THE LEGAL SUFFICIENCY OR TAX CONSEQUENCES OF THIS DOCUMENT OR THE TRANSACTION
TO WHICH IT RELATES. THESE ARE QUESTIONS FOR YOUR ATTORNEY.
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL [ILLEGIBLE]
<PAGE>
ADDENDA TO REAL ESTATE LEASE
This is an Addenda to the Real Estate Lease dated June 15, 1994 between Eldon
(Bud) Hoffman, an individual as Landlord and Information Highway Corporation
(A California corporation), concerning the property known as 20600 Mariani
Avenue, California, as more specifically described in the Lease.
The following is made a part:
5.3 OPERATING EXPENSES:
(c) Operating Expenses - The base rent includes a $0.14 per square
foot/month expense stop for the first year. Said expense stop
covers taxes, property insurance, common area maintenance, and once
a week janitorial. During months 13-24 these shall be an expense
adjustment to reconcile actual expenses that exceed the $0.14 per
square foot/month expense stop. Said adjustment shall not exceed 5%
per year (Note: in the event Option to Expand/Extend is exercised
the adjustment cap shall be cumulative).
(d) Utilities - Current utilities are $0.20 per square foot month and
are included in the base rent. It is understood and agreed that
there shall be an adjustment (up & down) to reflect actual
utilities shared on a pro-rata basis, documented by actual utility
bills. Said adjustment shall be on a quarterly basis. In the event
Tenant other than Any Mountain occupies the downstairs during
this tenancy, the cost of said utilities shall not exceed those of
the typical office.
38. OPTION TO EXPAND/EXTEND:
(a) Premises - It is understood and agreed that Landlord does hereby
grant to Tenant a one time option to expand into the 4,814 sq. ft.
on the ground floor of the Premises upon the terms and conditions
herein set forth. (Note: Parking to increase by 19 spaces, 4/1000
Ratio.)
(b) Trigger Date - Tenant must exercise the option to expand, no later
than January 15, 1995 hereinafter referred to as the "Option
Trigger Date".
(c) Compliance - It is hereby understood and agreed that this option to
expand is conditioned upon Tenants compliance with terms and
conditions of the lease agreement. Any default must be cured in
advance of the exercise of subject option to expand.
(d) Commencement - If Tenant shall exercise the option to expand on or
before the "Option Trigger Date", commencement of a new 24 month
term shall begin on May 15, 1995 or later contingent only on Any
Mountain's ability to vacate, no to exceed June 30th 1995.
(e) Rental Adjustment - Upon execution in writing of the Option to
Expand, if Tenant exercises its option to expand there shall be a
one time rental adjustment equivalent to $7,200.00. Said adjustment
shall come in the form of rental abatement. Months 2-24 of option
term shall be @ $1.64 per sq. ft. per month as base rent.
(f) Extension - It is understood and agreed that a material part of
this option to expand is a Tenant commitment to extend the lease
term of 24 months from occupancy but in no event later. The new
termination date would be 24 months from occupancy date.
(g) Real Estate Fees - All real estate fees associated with the option
to expand shall be paid by Landlord. Subject fees are in accordance
with the listing schedule and shall be due upon exercising option
to expand.
(h) Remaining Term - All other terms and conditions contained in the
lease date June 15, 1994 shall remain in full force and effect.
39. BASE RENT:
Tenant agrees to pay to Landlord basic rent commencing Aug 1.
according to the following schedule:
ORIGINAL LEASE SCHEDULE: SCHEDULE IF EXPANSION/EXTENSION
OPTION IS EXERCISED:
<TABLE>
<CAPTION>
Months Monthly Payments Months Months Payments
------ ---------------- ------ ---------------
<S> <C> <C> <C>
1-24 $7,027.88 1-10 $7,027.88
Option Term (8,633 S.F.)
1 ($14,158.12 - $7,200.00) $6,958.12
2-24 $14,158.11
</TABLE>
<PAGE>
40. "AS IS" CONDITION:
Tenant hereby agrees to accept possession of the demised premises in its
existing condition, and, at Tenant's sole expense, to make all
improvements, and installations that Tenant may deem necessary for the
proper conduct of Tenant's business. Prior to the commencement of any
such work, Tenant shall submit to and obtain Landlords written approval
of plans and specifications which approval shall not be unreasonably
withheld by Landlord.
41. COMPLIANCE WITH LAW:
Both Landlord and Tenant shall comply with all state and federal laws,
rules, regulations, or statutes requiring the submission, reporting, or
filing of information regarding the storage, use, or discharge of
chemical or other substances a the Premises or in the Building. Each
shall provide the other a full copy of any such report or filing within
fifteen (15) days of submission. Tenant shall provide Landlord with a
copy of any such report or filing made by any sub-tenant in the Building
within thirty (30) days of the date Landlord files or receives a copy of
such submission.
42. HAZARDOUS SUBSTANCES:
The Tenant shall not use in any way, or permit or suffer the use of the
leased Premises or any part thereof, to either directly or indirectly
prepare, produce, generate, manufacture, refine, treat, transport,
store, maintain, handle, dispose of, transfer, or process any hazardous
Substances as defined herein, unless it has received the prior written
consent of the Landlord, which may be unreasonably withheld.
Any substance which the Landlord permits the tenant to treat, store,
transfer, or dispose of must be done in strict compliance with any and
all federal, state, county, or municipal statutes or laws now or at any
time hereafter in effect, including but not limited to, the
Comprehensive Environmental Response, Compensation, and Liability Act
(42 U.S.C. Paragraph 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Paragraph 1801 et. seq.) the Resource
Conservation and Recovery Act (42 U.S.C. Paragraph 6901 et seq.), The
Federal Walter Pollution Control Act (33 U.S.C. Paragraph 1251 et seq.),
the Clean Air Act (42 U.S.C. Paragraph 7401 et seq.), the Toxic
Substances Control Act, as amended (15 U.S.C. Paragraph 2601 et seq.),
and the Occupational Safety and Health Act (29 U.S.C. Paragraph 651 et
seq.), as these laws have been amended or supplemented.
As used herein hazardous substances shall mean any pollutant,
contaminant, toxic or hazardous waste, dangerous substance, potentially
dangerous substance, noxious substance, toxic substance, flammable,
explosive, radioactive Material, urea formaldehyde foam insulation,
asbestos, PCBs, or any other substances the removal of which is require,
or the manufacture, preparation, production, generation, use,
maintenance, treatment, storage, transfer, handling or ownership of
which is restricted, prohibited, regulated or penalized by any and all
federal, state, county, or municipal statutes or laws now or at any
time hereafter in effect, including but not limited to, the
comprehensive Environmental Response, Compensation, and Liability Act
(42 U.S.C. Paragraph 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Paragraph 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Paragraph 6901 et seq.), the
Federal Water Pollutions Control Act (33 U.S.C. Paragraph 7401 et seq.),
the Toxic Substances Control Act, as amended (15 U.S.C. Paragraph 2601
et seq.), and the Occupational Safety and Health Act (29 U.S.C. Paragraph
651 et seq.), as these laws have been amended or supplemented.
Landlord and Tenant agree to protect, indemnify and hold harmless each
other and its respective directors, officers, contractors, employees,
agents, successors and assigns from any and all loss, damage (except for
consequential damages), cost, expense, or liability (including
reasonable attorneys' fees and costs) directly or indirectly arise out
of or attributable to the acts of the other
<PAGE>
party or its respective agents, contractors, servants, or employees
relating to the use, generation, manufacture, production, storage,
release, threatened release, discharge, disposal of a hazardous
substance on, under or about the Premises or the Building, any
environmental pollution, damage, condition or problem in or about the
Premises or the Building that are caused by the acts or negligence of
the other party, its respective agents, servants or contractors. In the
event of any governmental or court order concerning hazardous substances
on the Premises (not caused by Tenant) that precludes Tenant from
reasonable operation of its business on the Premises, Tenant may
terminate this Lease in its sole discretion.
In the event of any conflict between the terms of this Addendum and the
Lease, the terms of this Addendum shall prevail.
Lessee: Lessor: /s/ Eldon B. Hoffman
-------------------------- --------------------------
By: /s/ Nathan M. Schulhof By: Owner
------------------------------ ------------------------------
Title: President Title:
--------------------------- ---------------------------
Address: Address:
------------------------- -------------------------
Date: [illegible] Date:
---------------------------- ----------------------------
<PAGE>
Broker has conducted no investigation regarding the subject matter hereof,
except as may be contained in separate written document signed by Broker.
Broker makes no representations concerning the existence or nonexistence of
hazardous wastes or substances, or underground storage tanks, in, on, or
about the Property. Purchaser/Lessee should contact a professional, such as
a civil engineer, industrial hygienist or other person with experience in
these matters, to advise on these matters.
The term "hazardous wastes or substances" is used herein in its very broadest
sense and includes, but is not limited to, petroleum based products, paints
and solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCBs and other chemical products. Hazardous wastes or
substances in underground storage tanks may be present on all types of real
property. This Notice is intended to apply to any transaction involving any
type of real property, whether improved or unimproved.
BROKER REPRESENTATION
____ CHECK IF APPLICABLE. Seller/Lessor and Purchaser/Tenant hereby
acknowledge that Broker represents both parties hereto; and both parties
consent thereto.
BROKER DISCLOSURE
The parties hereby expressly acknowledge that Broker has made no independent
determination or investigation regarding the following: present or future use
or zoning of the Property; environmental matters affecting the Property; the
condition of the Property, including, but not limited to structural,
mechanical and soils conditions as well as issues surrounding hazardous
wastes or substances as set out above; violations of the Occupational Safety
and Health Act or any other federal, state, county or municipal laws,
ordinances, or statute measurements of land and/or buildings.
Purchaser/Lessee agrees to make its own investigation determination regarding
such items.
COMPLIANCE WITH LAWS
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of the
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Fore Investment in Realty Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.
RECEIPT OF A COPY OF THIS NOTICE AND AGREEMENT IS HEREBY ACKNOWLEDGED.
Dated __________________, 199_ _________________________________________
Seller/Lessor
Dated __________________, 199_ _________________________________________
Purchaser/Lessee
--------------------------------------------------------------------
CONSULT YOUR ADVISORS NO REPRESENTATION OR RECOMMENDATION IS MADE BY
CB COMMERCIAL REAL ESTATE GROUP, INC. OR ITS AGENTS OR EMPLOYEES AS
TO THE LEGAL EFFECT, INTERPRETATION, OR ECONOMIC CONSEQUENCES OF THE
NATIONAL FLOOD INSURANCE PROGRAM AND RELATED LEGISLATION, NOR OF
OTHER LEGISLATION REFERRED TO HEREIN. THESE ARE QUESTIONS THAT YOU
SHOULD ADDRESS WITH YOUR CONSULTANTS AND ADVISORS.
--------------------------------------------------------------------
<PAGE>
Date: June 15, 1994
Lessor/
Seller: Eldon (Bud) Hoffman
Lessee/
Purchaser: Information Highway Corporation
Property: 20600 Mariani Avenue, Cupertino, CA 95014
Brokers: CB Commercial Real Estate Group, Inc., representing
Eldon (Bud) Hoffman
ALQUIST-PRIOLO NOTIFICATION; ALQUIST-PRIOLO SPECIAL EARTHQUAKE STUDIES ZONE ACT
The Property described above is or may be situated in a Special Studies Zone
as designated under the Alquist-Priolo Special Studies Zone Act,
Sections 2621-2630, inclusive, of the California Public Resources Code; and,
as such, the construction or development on the Property of any structure for
human occupancy may be subject to the findings of a geologic report prepared
by a geologist registered in the State of California, unless such report is
waived by the city or county under the terms of that Act. No representations
on the subject are made by Seller/Lessor or by CB COMMERCIAL REAL ESTATE
GROUP, INC., or its agents or employees, and the Purchaser/Tenant should make
his/her/its own inquiry or investigation.
SPECIAL STUDIES ZONE ____ YES ____ NO SOURCE _______________________________
NOTIFICATION RE: NATIONAL FLOOD INSURANCE PROGRAM
The Property is or may be located in a Special Flood Hazard Area on United
States Department of Housing and Urban Development (HUD) "Special Flood Zone
Area Maps." Federal law requires that as a condition of obtaining federally
related financing on most properties located in "flood zones," banks, savings
and loan associations, and some insurance lenders require flood insurance to
be carried where the property, real or personal, is security for a loan.
This requirement is mandated by the National Flood Insurance Act of 1968 and
the Flood Disaster Protection Act of 1973. The purpose of the program is to
provide flood insurance to property owners at a reasonable cost. Cities or
counties participating in the National Flood Insurance Program may have
adopted building or zoning restrictions, or other measures, as part of their
participation in the program. You should contact the city or county in which
the property is located to determine any such restrictions. The extent of
coverage available in your area and the cost of this coverage may vary, and
for further information, you should consult your lender or insurance carrier.
FLOOD ZONE DESIGNATION: HUD ZONE A ____ SOURCE _____________________________
HAZARDOUS WASTES OR SUBSTANCES AND UNDERGROUND STORAGE TANKS
Comprehensive federal and state laws and regulations have been enacted in the
past several years in an effort to control the use, storage, handling,
clean-up, removal and disposal of hazardous wastes or substances. Some of
these laws and regulations (such as, for example, the Comprehensive
Environmental Response Compensation and Liability Act [CERCLA]) provide for
broad liability on the part of owners, Tenants, or other users of property
for clean-up costs and damages, regardless of fault. Other laws and
regulations set standards for the handling of asbestos, and establish
requirements for the use, modification, abandonment, and closure of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, Sellers/Lessors and Buyers/Lessees are urged to consult
legal counsel to determine their respective rights and liabilities with
respect to the issues described in this Notice, as well as all other aspects
of the proposed transaction. If hazardous wastes or substances have been, or
are going to be used, stored, handled or disposed of on the Property, or if
the Property has or may have underground storage tanks, it is essential that
legal and technical advice be obtained to determine, among other things, the
nature of permits and approvals which have been obtained or may be required;
the estimated costs and expenses associated with the use, storage, handling,
clean-up, disposal or removal of hazardous wastes or substances; and the
nature and extent of contractual provisions necessary or desirable in this
transaction. Broker recommends expert assistance and site investigation to
determine past uses of the property, which may provide valuable information
as to the likelihood of hazardous wastes or substances, or underground
storage tanks, being on the Property.
Seller/Lessor agrees to disclose to Broker and to Purchaser/Lessee any and
all information which he/she/it has regarding present and future zoning and
environmental matters affecting the Property and regarding the condition of
the Property, including, but not limited to structural, mechanical and soils
conditions, the presence and location of asbestos, PCB transformers, other
toxic, hazardous or contaminated substances, and underground storage tanks,
in, on, or about the Property.
<PAGE>
STANDARD SUBLEASE
American Industrial Real Estate Association
[LOGO]
1. PARTIES. This Sublease, dated, for reference purposes only, September 16,
1997, is made by and between Packeteer, Inc. a Delaware Corporation (herein
called "Sublessor") and Audio Highway, Inc. (herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Santa Clara, State of California, commonly known as 10495 De Anza Boulevard,
Cupertino and described as a portion of a larger building being approximately
5775 square feet as indicated on the attached Exhibit 2.
Said real property, including the land and all improvements thereon, is
hereinafter called the "Premises".
3. TERM
3.1 TERM. The term of this Sublease shall be for 24 months commencing on
December 1, 1997 or upon completion of Tenant Improvements, which ever is
later, and ending on November 30, 1999 unless sooner terminated pursuant to
any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee on
said date, Sublessor shall not be subject to any liability therefore, nor shall
such failure affect the validity of this Lease of the obligations of Sublessee
hereunder or extend the term hereof, but in such case Sublessee shall not be
obligated to pay rent until possession of the Premises is tendered to Sublessee;
provided, however, that if Sublessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date. Sublessee may, at
Sublessee's option, by notice in writing to Sublessor within ten (10) days
thereafter, cancel this Sublease, in which event the parties shall be discharged
from all obligations thereunder. If Sublessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the termination date and Sublessee
shall pay rent for such period at the initial monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $17,325.00, in advance, on the 1st day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $17,325.00
as rent for December 1997.
Rent for any period during the term hereof which is for less than one month
shall be a prorata portion of the monthly installment. Rent shall be payable in
lawful money of the United States to Sublessor at the address stated herein or
to such other persons or at such other places as Sublessor may designate in
writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $17,902.50 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount hereinabove stated and Sublessee's failure to do
so shall be a material breach of this Sublease. Sublessor shall not be required
to keep said deposit separate from its general accounts. If Sublessee performs
all of Sublessee's obligations hereunder, said deposit, or so much thereof as
has not theretofore been applied by Sublessor, shall be returned, without
payment of interest or other increment for its use to Sublessee (or at
Sublessor's option, to the last assignee, if any, of Sublessee's interest
hereunder) at the expiration of the term hereof, and after Sublessee has vacated
the Premises. No trust relationship is created herein between Sublessor and
Sublessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for general office
and related legal uses and for no other purpose.
6.2 COMPLIANCE WITH LAW.
Sublessee shall, at Sublessee's expense, comply promptly with all
applicable statutes, ordinances, rules, regulations, orders, restrictions of
record, and requirements in effect during the term or any part of the term
hereof regulating the use by Sublessee of the Premises. Sublessee shall not use
or permit the use of the Premises in any manner that will tend to create waste
or a nuisance or, if there shall be more than one tenant of the building
containing the Premises, which shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their condition existing as of the date
of the execution hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances, and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Sublessee acknowledges that
neither Sublessor nor Sublessor's agents have made any representation or
warranty as to the suitability of the Premises for the conduct of Sublessee's
business.
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated August 25, 1997 wherein Eldon R. Hoffman is the
lessor, hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions
of the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease or excluded below in which event the
terms of this Sublease document shall control over the Master Lease.
Notwithstanding anything to the contrary contained in or incorporated into
this Sublease, Sublandlord shall not be obligated to perform Master Lessor's
obligations under the Master lease. Sublandlord hereby covenants to perform
its obligations as Tenant under the Master Lease and to use commercially
reasonable efforts to cause Master Lessor to perform its obligations under
the Master Lease. Therefore, for the purposes of this Sublease, wherever in
the Master Lease the word "Lessor" is used it shall be deemed to mean the
Sublessor herein and wherever in the Master Lease the word "Lessee" is used
it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with,
for the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease EXCEPT for the following paragraphs which
are excluded therefrom: 1.1 through 1.7, 1.9 through 1.12, and Addendum
paragraphs 49, 50, 51, 53, 64, 68, 71 through 77.
<PAGE>
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term
of this Sublease, subject, however, to any earlier termination of the Master
Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and
from all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that to the best of its knowledge no default exists on the
part of any party to the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease,
to pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from
Sublessor to the contrary and Sublessor shall have no right or claim against
Sublessee for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within 10 days of the date hereof, Master Lessor
sign this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease, nor the Master
Lessor's consent, shall not be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving guarantors consent to
this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the rent and perform and
comply with all of the obligations of Sublessor to be performed under the
Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any
one else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(f) In the event that Sublessor shall default in its obligations under
the Master Lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event Master
Lessor shall undertake the obligations of Sublessor under this Sublease from the
time of the exercise of said option to termination of this Sublease but Master
Lessor shall not be liable for any prepaid rents nor any security deposit paid
by Sublessee, nor shall Master Lessor be liable for any other defaults of the
Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to CPS, a
licensed real estate broker, (herein called "Broker"), a fee as set forth in a
separate agreement between Sublessor and Broker.
11. ATTORNEY'S FEES. If any party named herein brings an action to enforce the
terms hereof or to declare rights hereunder, the prevailing party in any such
action, on trial and appeal, shall be entitled to his reasonable attorney's
fees to be paid by the losing party as fixed by the Court.
<PAGE>
12. ADDITIONAL PROVISIONS. (If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there
are additional provisions place the same here.)
See Addendum paragraphs 13 through 21.
IF THIS SUBLEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION RELATING THERETO.
Executed at Packeteer, Inc.
-------------------------- -------------------------------------
on By /s/ Craig Elliot
----------------------------------- -----------------------------------
address By /s/ Jeff Harmon
------------------------------ -----------------------------------
- ------------------------------------- "Sublessor" (Corporate Seal)
Executed at Audio Highway, Inc.
-------------------------- -------------------------------------
on By /s/ N.M. Schulhof
----------------------------------- -----------------------------------
address By
------------------------------ -----------------------------------
- ------------------------------------- "Sublessee" (Corporate Seal)
Executed at Eldon R. Hoffman
-------------------------- -------------------------------------
on By /s/ Eldon R. Hoffman
----------------------------------- -----------------------------------
address By 10-10-97
------------------------------ -----------------------------------
- ------------------------------------- "Master Lessor" (Corporate Seal)
Executed at
-------------------------- -------------------------------------
on
----------------------------------- -------------------------------------
address
------------------------------ -------------------------------------
- ------------------------------------- "Guarantors"
Form 401 778
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777.
XXXXXX American Industrial Real Estate Association. All Rights Reserved. No
part of these works may be reproduced in any form without permission in
writing.
<PAGE>
ADDENDUM TO SUBLEASE
This Addendum is attached to and made a part of the Sublease dated September 16,
1997 by and between Packeteer, Inc. ("Sublessor") and Audio Highway, Inc.
("Sublessee") for the Premises at 10495 De Anza Boulevard, Cupertino,
California.
13. RENT: The full service monthly Base Rent shall be:
<TABLE>
<CAPTION>
MONTHS RENT/MO./FULL SERVICE
------ ---------------------
<S> <C>
01-12 $17,325.00
13-24 $17,902.50
</TABLE>
14. OPERATING EXPENSE INCREASE: Sublessee shall pay to Sublessor during the
term hereof, in addition to the Base Rent, Sublessee's Share, as
hereinafter defined, of the amount by which all Operating Expenses, as
hereinafter defined, for each Comparison Year exceeds the amount of all
Operating Expenses for the Base Year, such excess being hereinafter
referred to as the "Operating Expense Increase," in accordance with the
following provisions:
(a) "Sublessee's Share" is defined, for purposes of this Lease, as 21.4%
determined by dividing the approximate square footage of the Premises
by the total approximate square footage of the rentable space
contained in the Office Building. It is understood and agreed that
the square footage figures set forth in the Basic Lease provisions are
approximations which Sublessor and Sublessee agree are reasonable and
shall not be subject to revision except in connection with an actual
change in the size of the Premises.
(b) "Base Year" is defined as the first twelve (12) months of the lease
term.
(c) "Comparison Year" is defined as each twelve (12) month period during
the term of this Lease subsequent to the Base Year; provided, however,
Sublessee shall have no obligation to pay a share of the Operating
Expense Increase applicable to the first twelve (12) months of the
Lease Term (other than such as are mandated by a governmental
authority, as to which government mandated expenses Sublessee shall
pay Sublessee's Share, notwithstanding they occur during the first
twelve (12) months).
(d) "Operating Expenses" is defined, for the purposes of this Sublease to
include all costs incurred by Sublandlord in connection with the
operation, repair, replacement, and maintenance of the Premises and
any other expense reasonably characterized as an operating expense and
payable by Sublandlord as Tenant under the Master Lease;
(e) Sublessee's Share of Operating Expense Increase shall be payable by
Sublessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Sublessee by Sublessor.
15. SUBLESSOR'S OBLIGATIONS. Sublessor agrees to furnish the Premises during
reasonable hours of generally recognized business days, to be determined by
Sublessor, water, gas and electricity suitable for the intended use of the
Premises, heat and air conditioning required in Sublessor's judgment for
the comfortable use and occupancy of the Premises, scavenger, 5 day per
week janitorial service, maintain and keep lighted the common stairs,
entries and toilet rooms in the Building.
Sublessor shall not be liable for, and Sublessee shall not be entitled to,
any abatement or reduction of rent by reason of Sublessor's failure to
furnish any of the foregoing when such failure is caused by accidents,
breakage, repairs, strikes, lockouts or other labor disturbances or labor
disputes of any character, or by any other cause similar or dissimilar,
beyond the reasonable control of Sublessor, except to the extent Sublessor
realizes abatement or reduction of its rent. Sublessor shall not be liable
under any circumstances for loss of or injury to property, however
occurring, throughout in connection with or incidental to failure to
furnish any of the foregoing.
Page 1 of 3
<PAGE>
(a) Sublessee will not, without the prior written consent of Sublessor,
use any apparatus or device in the Premises, which would substantially
increase the amount of electricity or water usually furnished or
supplied for use of the premises as general office space; nor connect
with electric current, except through existing electrical outlets in
the Premises, or water pipes, any apparatus or device, for the
purposes of using electric current or water.
(b) If Sublessee shall require water or electric current in excess of that
usually furnished or supplied for use of the Premises as general
office space, Sublessee shall first procure the consent of Sublessor
for the use thereof, which consent Sublessor may refuse and Sublessor
may cause a water meter or electric current meter to be installed in
the Premises, so as to measure the amount of water and electric
current consumed for any such other use. The cost of such meters and
of installation, maintenance and repair thereof shall be paid for by
Sublessee and Sublessee agrees to pay Sublessor promptly upon demand
by Sublessor for all such water and electric current consumed as shown
by said meters, at the rates charged for such services by the City in
which the Building is located or the local public utility, as the case
may be, furnishing the same, plus any additional expense incurred in
keeping account of the water and electric current so consumed.
Sublessor acknowledges Sublessee will operate two (2) servers on a
24-hour basis, and that such operation is not in excess of general
office use.
(c) Wherever heat generating machines or equipment are used in the
Premises which affect the temperature otherwise maintained by the air
conditioning system, with the prior written consent of Sublessee,
which consent will not be unreasonably withheld, Sublessor reserves
the right to install supplementary air conditioning units in the
Premises and the cost thereof, including the cost of installation,
operation and maintenance thereof, shall be paid by Sublessee to
Sublessor upon demand by Sublessor. Sublessee shall be responsible
for the installation and cost of Sublessee's operating equipment and
ancillary equipment required to support it.
17. PARKING. Sublessee shall have the right to 18 unassigned parking spaces at
no charge to Sublessee.
18. IMPROVEMENTS. Sublessor shall, at Sublessor's sole expense, complete
improvements indicated per Exhibit 2 and in keeping with building
standards. Ceilings shall be open and premises shall be carpeted with new
gray carpet to complement existing first floor carpet.
19. SIGNAGE. Sublessee shall have the right, subject to Sublessor's approval,
to place the company name or names on its entry door in accordance with
building standards and, subject to Sublessor's approval, a sign at walkway
entrance to Premises from driveway/parking area.
20. OPTION TO EXTEND TERM. Subject to availability of Sublease Premises at the
sole discretion of Sublessor, and provided Sublessee is not in material
default of its obligations under this sublease, Sublessor grants to
Sublessee the option to extend the initial term of the sublease for one (1)
year ending November 30, 2000. The option to extend shall be exercised
within thirty (30) working days of Sublessor's notification to Sublessee in
writing not later than six months prior to the end of the then existing
term, that Sublease premises are available for Sublease for the extended
term.
The base monthly rent payable during such extended term shall be $18,480.00
per month.
21. HOLDING OVER. Any holding over by Sublessee after expiration or other
termination of the term of this Sublease shall not constitute a renewal or
extension of the Sublease or give Sublessee any rights in or to the
Subleased Premises except as expressly provided in this Sublease. Any
holding over after the expiration or other termination of the term of this
Sublease shall be construed to be a tenancy from month to month, on the
same terms and conditions herein specified insofar as applicable except
that the monthly Basic Rent shall be increased to an amount equal to two
hundred percent (200%) of the monthly Basic Rent required during the last
month of the Sublease term.
Page 2 of 3
<PAGE>
22. ALTERATIONS. In addition to compliance with all the terms of the Master
Lease, any alterations made by Sublessee must be approved in writing in
advance by Sublessor, and Sublessee may, at Sublessor's option, be required
to remove any such alterations at the end of the Sublease term.
Sublessor: Sublessee:
Packeteer, Inc. Audio Highway, Inc.
a Delaware Corporation
By: /s/ Craig Elliot /s/ Jeff Harmon By: /s/ N.M. Schulhof
--------------------------------- --------------------------------
Its: CEO COO/CFO Its: President
--------------------------------- --------------------------------
Date: 10/5/97 10-5-97 Date: 10/2/97
------------------------------- -------------------------------
Master Lessor:
Eldon R. Hoffman
By: /s/ Eldon R. Hoffman
--------------------------------
Its:
-------------------------------
Date: 10-10-97
------------------------------
Page 3 of 3
<PAGE>
audio 2t
Issue Date: 4/2/98
Expiration Date: 4/30/98
CO: Audio Highway
ATTN: Ted Richards
TEL: 408.255.5301
FAX: 408.255.5591
SITE: 408255
UUNET TECHNOLOGIES, INC.
QUOTATION FOR DOUBLE T SERVICE
ONE-TIME SERVICE FEES
UUNET Double T Start Up Fee N/C
ESTIMATED T1 Leased Line Install Charges (for both circuits) $1,267.00
---------
TOTAL: ONE-TIME SERVICE FEES $1,267.00
MONTHLY RECURRING FEES
UUNET Double T Monthly Service Fee $4,200.00
ESTIMATED Monthly Leased Line Charges (for both circuits) $913.75
---------
TOTAL: MONTHLY RECURRING FEES $5,113.75
QTY. EQUIPMENT OPTIONS
1 V.35 CABLE $100.00
1 T1 CSU/DSU KENTROX $995.00
---------
EQUIPMENT TOTAL: $1095.00
UUNET recommends maintaining "cold spare" equipment for mission-critical
applications.
Purchase Orders: must include Total One Time Service Fees, 1st Month Total
Recurring Fees, and corresponding Equipment cost. Subsequent monthly invoices
equal Total Mo. Recurring Fees. Please note that P.O. must indicate acceptance
of subsequent Monthly Recurring Fees.
All line charges are estimates, actual line charges will be used for invoicing.
Extended wiring may be additional. Payment is due 30 days after invoice date
with approved credit. A 15% monthly interest charge will be added for late
payments. Monthly UUNET service fees will be billed in advance. Delivery is 4-8
weeks ARO(1). All Cisco Equipment comes standard with CD ROM Manual. Hard Copy
available for an additional $75.00 (please specify).
Term Commitment discounts do not apply.
(1)Lead times may vary according to regional telco issues.
Please call me with any questions regarding the quotation and I look forward to
working with you.
Accepted By /s/ N. M. Schulhof
---------------------------
(Authorized Signature)
Sincerely,
/s/ Brian Norman
Brian Norman
v 408.490.4611
f 408.490.4646 Updated 8/1/97
<PAGE>
Please list the equipment you plan to use for this connection:
Router: 2501, CISCO Purchased from UUNET? /X/ Yes / / No
CSU/DSU KENTROX Purchased from UUNET? /X/ Yes / / No
If there are any other special circuit installation or termination needs for
your site, please explain NONE V.35 CABLE TO BE INCLUDED
If you are upgrading an existing UUNET account, what is the site name you have
been assigned?
(Examples: 001234, site-ip, site.com) YES, U07910
Would you like UUNET to provide you with weekly usage reports? /X/ Yes / / No
ISDN INFORMATION FOR ISDN DIAL BACKUP
If you are using ISDN, we need some additional information to configure your
router before shipping. Because lead times on ISDN service can be
significant, we recommend that: a) you have your ISDN line scheduled for
installation before ordering your Internet 9-5 Basic service, or b) you have
the UUNET-authorized agent start the ISDN ordering process for you.
/ /ISDN line already installed / / ISDN line scheduled for installation
on _______________________ (Date)
B-channel phone number(s):__________________________________________________
SPID numbers:_______________________________________________________________
Please choose one of the following types of ISDN service:
/ / National (N)-1)
/ / Custom: please indicate service type: / / Northern Telecom (NT)
/ / AT&T point to point / / AT&T multi-point
Line speed: / / 56K / / 64K
ADDITIONAL INFORMATION: (OPTIONAL)
If you currently have an Internet service provider other then UUNET, please
indicate the name here _____________________________________________________
Are there any other companies which you feel would benefit from UUNET's
services? If so, UUNET will give you a one-time 5% credit on your monthly
service fee when your referral obtains service from us.
Contact:___________________________ Phone:__________________________________
Company:___________________________ Fax:____________________________________
Address:___________________________ E-mail:_________________________________
___________________________
___________________________
CUSTOMER APPROVAL:
Name Nathan M. Schulhof Signature /s/ Nathan M. Schulhof Date 4/3/98
-------------------- --------------------- -------
"THE INTERNET AT WORK"
<PAGE>
EDGE INFORMATION SYSTEMS
MISSION CRITICAL
TRICORD MAINTENANCE AGREEMENT
Agreement Number 706101
------
This agreement is made and entered into by and between Edge Information
Systems, Inc. a California corporation ("Edge IS"), located at 150 Baypointe
Parkway, San Jose, CA 95134, and Audio Highway, located at 20600 Mariani
Avenue, Cupertino, CA 95014. In consideration of the mutual covenants and
promises contained herein, the parties hereby agree as follows:
TERM
This agreement shall be effective for a period of twelve months, June 1, 1997
to May 31, 1998. Pricing options are outlined in the section Pricing and
Payment Terms.
TERMINATION
Either party may terminate this agreement by providing a 30 (thirty) day
written notification. In the event that Edge IS terminates the agreement, a
credit will be issued equal to the number of months remaining in the contract
multiplied by 1/12 of the original contract amount. In the event that client
terminates the agreement, a credit will be issued equal to the number of
months remaining in the contract multiplied by 1/24 of the original contract
amount.
SERVICES PROVIDED
The following services will be provided:
CRITICAL COMPONENTS
MAINTENANCE: Parts and labor to replace or repair defective Tricord
ES/100 and Tricord ES/166 components covered under
the contract and within 50 miles of the Edge IS
offices. Best efforts response to be provided within
four (4) business hours of initial call. The
following items are considered critical components:
Power Supply Modules, Bridge Subsystem, Intelligent
Management Subsystem, Power Entry Module,
Power/Cooling System, Intelligent SCSI Subsystem,
CPU 100MHZ and CPU 166MHZ cards with cache.
Non-critical components which are not covered in a 4
hour turnaround time include memory, hard drives,
and additional CPU processing boards. These items
are covered under Tricord's standard 2-3 business
day warranty and will be installed by EdgeIS when we
receive the necessary part.
<PAGE>
PREVENTIVE
MAINTENANCE AND
DIAGNOSTIC SUPPORT
VISITS:
Edge IS Engineers will conduct 3 (three) preventative maintenance visits per
year. Edge IS Engineers will run diagnostics on covered equipment, update the
documentation on the original equipment and provide a written summary of
findings and recommendations.
UNLIMITED TELEPHONE
SUPPORT: An Edge IS telephone support contract provides
unlimited telephone support for up to two client
contacts during normal business hours (24 hours a
day for Mission Critical contracts). This service is
not an applications help desk or an end-user support
line. It is intended to provide trained LAN
Administrators access to technical resources. Calls
will be returned by a technical support engineer no
more than one hour after initial contact (calls will
be returned within 20 minutes for Mission Critical
contracts).
EXTENDED NOS/NLM
MAINTENANCE: Edge IS Engineers will troubleshoot network
operating system anomalies, determine corrective
action and obtain new drivers/operating system
patches available in the public domain. Edge IS will
also provide installation of such patches as deemed
appropriate by Edge IS Engineers, the software
developer, and the original equipment manufacturer
to maintain the functionality of the system as
installed. NOS/NLM (Network Operating System/Netware
Loadable Modules) maintenance covers all operating
system products provided and installed by Edge IS
during the term of the contract. In addition, Edge
IS will provide, but not install, any non-essential
patches requested by the customer. Edge IS reserves
the right to bill for all products and services
utilized to correct issues that cannot be addressed
through the application of standard maintenance
patches.
EXTENDED HOURS
SUPPORT: Edge IS offers telephone and on-site services 24
hours per day, 7 days per week. When enrolling in
this program, you are provided an emergency pager
number, as well as a list of numbers for escalation.
You may place a call at any time on any day and you
will receive a call back by one of our engineers
within twenty minutes. If required, an engineer will
be dispatched on-site within four hours.
<PAGE>
SERVICES EXCLUDED
The following services are specifically excluded from this maintenance
agreement:
1. On-going network administration such as moves, adds, changes, routine
backup and restore, training, etc.
2. Installation, maintenance, configuration and support of applications
software with the exception of re-installation of applications when the
disaster recovery option for services is selected.
3. Service issues due to the introduction of a computer virus.
4. Service issues created by the installation of additional hardware or
software, or modification of the original installation, unless
performed by Edge IS.
Any work performed to address the above issues will be billed at standard
Edge IS engineering rates.
TERMS AND CONDITIONS
Edge IS will not, under any circumstances, be liable for any lost profit,
lost savings, or other incidental or consequential damages including, but not
limited to, property damage, lost time, loss of use of any equipment or any
other damages resulting from the breakdown or failure of any equipment or
from delays in servicing or the inability to render service on any equipment.
Edge IS liability for damages resulting from any cause whatsoever, including
but not limited to Edge IS's negligence or installation of defective parts or
components shall not exceed the actual price paid to Edge IS by client for
the products or services.
Neither party shall be liable for an failure, inability or delay to perform
hereunder, if such failure, inability or delay is due to circumstances beyond
its control, including but not limited to, war, strike, lockout, labor
disturbance, social conflict, fire, explosion, or natural disasters.
Edge Is will not be liable for any damage to computer equipment caused by
power surges, outages, brownouts, improper electrical wiring, etc. It is the
client's responsibility to ensure that adequate power protection is being
utilized.
Edge IS will, in no way, be responsible for the integrity for any data stored
on computers, drives, tape backup systems, or any other product that contains
data. Client understands the need to maintain current backups of stored data
prior to initiating any work.
Edge IS reserves the right to use subcontractors to fulfill our obligations
under this agreement.
Failure to make timely payments for products or services delivered under this
proposal will result in suspension of all services upon a thirty (30) day
written notice by Edge Information Systems.
In the event that any Edge IS employee or subcontractor is hired by client
within six months subsequent to the performance of services, client agrees to
pay a fee of 40% of the individual's current annual salary.
<PAGE>
Client warrants and represents that it has a valid software license for each
application that client directs Edge IS employees to install either on
individual workstations or on a server for specified workstations. Further,
Client agrees to indemnify Edge Information Systems against any action a
software manufacturer may take for unauthorized duplication of software that
"Company" directed Edge IS to install on our systems.
Client will identify an employee who will serve as primary point of contact
with Edge IS personnel in authorizing and scheduling work.
Client represents that the individual signing this agreement is duly
authorized to enter into this agreement.
Client will be responsible for license fees and taxes or assessments charged
or levied by reason of anything performed under this agreement.
This contract is not transferable or assignable by client without prior
written consent of Edge IS.
PRICING AND PAYMENT TERMS
<TABLE>
<S> <C>
OPTION 1:
Annual Contract Price for the Tricord Servers shown in Exhibit A: $34,250
5% Discount for full year Prepaid (due and payable on or before May 31) $32,537
OPTION 2:
Annual Contract Price for the Tricord Servers shown in Exhibit A: $34,250
Payable in the following 4 months installments:
50% due on May 31, 1997 $17,125
25% due on September 30, 1997 $8,563
25% due on January 31, 1998 $8,562
OPTION 3:
Annual Contract Price for the Tricord Servers shown in Exhibit A: $34,250
Payable in the following 3 month installments
First payment due on May 31, 1997 $10,000
2nd payment due on August 31, 1997 $8,084
3rd payment due on November 30, 1997 $8,083
4th payment due February 28, 1997 $8,083
</TABLE>
It is the understanding of EdgeIS and the client that the payment plan
described in Option 2 is the preferred option of payment. Should the client
decide to return the Tricord equipment to Tricord and purchase new servers by
May 31st, these committed payments can be applied to a contract for new
servers and services provided by EdgeIS.
<PAGE>
ENTIRE AGREEMENT
This agreement sets forth the entire agreement and understanding between the
parties with respect to the subject matter hereof. The attached agreements
are made a part of this agreement. This agreement shall not be supplemented,
modified or amended except by a written instrument signed by duly authorized
representatives of client and Edge I.S., respectively, and no other person
has or shall have the authority to supplement, modify or amend this agreement
in another manner. This agreement shall be interpreted and governed by the
laws of the State of California.
In witness whereof, the parties have signed this agreement by their duly
authorized representatives.
EDGE INFORMATION SYSTEMS AUDIO HIGHWAY
By: /s/ [ILLEGIBLE] By: /s/ N.M. Schulhof
-------------------- --------------------
Title: V.P. Title: President
-------------------- --------------------
Date: 3/28/97 Date: 3/28/97
-------------------- --------------------
<PAGE>
EXHIBIT A
Tricord Servers covered by this agreement:
Tricord ES/166 (Quantity: 1)
*8 Processor 166MHZ CPU
*768MB RAM
*Four 2GB Drives
Tricord ES/100P (Quantity: 1)
*2 Processor 100MHZ CPU
*512MB RAM
*Two 2GB Drives
*Five 9.1GB Drives
Tricord ES/100P (Quantity: 1)
*2 Processor 100MHZ CPU
*256MB RAM
*Two 2GB Drives
*Six 9.1GB Drives
<PAGE>
Exh 10.5
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release is entered into by and
between Tricord Systems, Inc. ("Tricord") and Audio Highway, Inc. ("Audio
Highway") this 24th day of April, 1998.
WHEREAS, Audio Highway contends that Tricord made misrepresentations
which permit Audio Highway to withhold payment for the computer parts and
permit Audio Highway to rescind the purchase; and
WHEREAS, Audio Highway initiated a lawsuit against Tricord in Federal
District Court for the Northern District of California (the "Lawsuit") and
Tricord asserted Counterclaims against Audio Highway; and
WHEREAS, Tricord and Audio Highway are desirous of resolving their
disputes.
NOW, THEREFORE, the parties hereto agree as follows:
1. Audio Highway agrees to pay Tricord $147,857 upon the signing of this
Settlement Agreement and Mutual Release. Payments to be wire transferred
to Tricord according to the following schedule: An initial $47,857 payment
not later than 31 May 1998. Four equal payments of $25,000 due 30, 60, 90
and 120 days respectively after the initial payment (30 June 1998, 31 July
1998, 31 August 1998, and 30 September 1998).
2. Tricord agrees to release and dismiss with prejudice its claims, including
interest, against Audio Highway.
3. Audio Highway agrees to release and dismiss with prejudice its claims
against Tricord.
4. Audio Highway and Tricord agree to pay their own attorneys' fees and costs.
5. As additional consideration for the payments defined in paragraph 1,
Tricord will provide the following upgrades and services to Audio Highway.
The upgrades will be provided after Tricord receives the third Audio
Highway payment (31 July 1998) as set forth in paragraph 1.
a. Upgrade the 8 CPU 166MHz computer system to an 8 CPU 200MHz
configuration.
Page 1 of 4
<PAGE>
b. Upgrade each of the two 2-CPU 100MHz computer systems to 4-CPU 100MHz
configuration.
c. Provide two days of on-site installation and consulting service to
upgrade the systems. Provide a senior field engineer experienced in
computers and networks.
d. Provide one seat in the course for Certified Tricord Engineer (CTE)
training. Schedule to be mutually agreed.
6. Audio Highway and Tricord will mutually agree on the schedule for the
upgrades and training as set forth in paragraph 5.
7. By execution of this Settlement Agreement and Mutual Release, Tricord does
hereby forever and fully discharge and release Audio Highway, including
where applicable, its shareholders, employees, representatives, agents,
attorneys, successors and assigns, from any and all liability, claims
demands, actions, causes of action, suits, grievances, arbitrations, costs,
disbursements, attorneys' fees and all other claims of every kind and
nature whatsoever, whether in law or in equity, and however arising out of
or related to the subject matters of the Lawsuit, which against Audio
Highway it ever had, now has, or in the future may have, up to the date of
this Settlement Agreement and Mutual Release concerning or arising out of
all matters that were asserted, or could have been asserted, by Tricord in
the Lawsuit.
8. By execution of this Settlement Agreement and Mutual Release, Audio Highway
hereby forever and fully discharges and releases Tricord, its shareholders,
employees, representatives, agents, attorneys, successors and assigns, from
any and all liability, claims, demands, actions, causes of action, suits,
grievances, arbitrations, costs, disbursements, attorneys' fees and all
other claims of every kind and nature whatsoever, whether in law or in
equity, and however arising out of or related to the subject matters of the
Lawsuit, which against Tricord it ever had, now have, or in the future may
have, up to the date of this Settlement Agreement and Mutual Release
concerning or arising out of all matters that were asserted, or could have
been asserted, by Audio Highway in the Lawsuit.
9. It is a further condition of the consideration hereof, and is the intention
of the parties in executing this instrument that the same shall be
effective as a bar as to each and every claim, demand and cause of action
hereinabove specified and, in furtherance of this intention, the parties
hereby expressly waive any and all rights or benefits conferred by the
provisions of Section 1542 of the California Civil Code and expressly
consent that this Agreement shall be given full force and effect according
to each and all of its express terms and conditions, including those
relating to unknown and
Page 2 of 4
<PAGE>
unsuspected claims, demands and causes of actions, if any, or specifically
relating to any claims, demands and causes of actions hereinabove
specified. Section 1542 provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR"
The parties acknowledge that they may hereafter discover claims or facts in
addition to or different from those which they now know or believe to exist
with respect to the subject matter of this Agreement and which, if known or
suspected at the time of executing this Agreement, may have materially
affected this settlement. Nevertheless, the parties hereby waive any
right, claim or cause of action that might arise as a result of such
different or additional claims or facts. The parties acknowledge that they
understand the significance and consequence of such release and such
specific waiver of Section 1542.
10. Audio Highway and Tricord represent that they have not assigned or in any
way conveyed or encumbered to any person or entity any claim or part of any
claim they may have had against the other.
11. It is understood and agreed that the parties are settling disputed claims
and that nothing set forth in this Settlement Agreement and Mutual Release
is intended as or may be construed as an admission of fault, liability or
wrongdoing of Audio Highway or Tricord.
12. This Settlement Agreement and Mutual Release sets forth the entire
agreement and understanding of the parties with respect to the Lawsuit and
supersedes all prior agreements, arrangements and understandings between
the parties with respect to the settlement of the Lawsuit.
13. This Settlement Agreement and Mutual Release shall not be amended or
modified except in writing signed by the parties.
14. The parties agree that they have fully consulted with their counsel
regarding the effect of this Settlement Agreement and Mutual Release.
Page 3 of 4
<PAGE>
15. The undersigned signatories on behalf of the respective parties are duly
authorized to execute this Settlement Agreement and Mutual Release as a
document fully binding upon the company on behalf of which it is signed.
Dated: April 24, 1998 Tricord Systems, Inc.
By: /s/ C. E. Pearsall
Its Vice President for Engineering
Dated: April 24, 1998 AUDIO HIGHWAY
By: /s/ N. M. Schulhof
Its President
Page 4 of 4
<PAGE>
MOBILE AUDIO DELIVERY AGREEMENT
THIS AGREEMENT IS MADE THE 13TH DAY OF JULY 1998
BETWEEN
(1) Sycom Technologies, Inc., a company incorporated in the State of New
Jersey, USA situated at 1239 Parkway Avenue, Ewing, New Jersey (hereinafter
referred to as "SYCOM");
and
(2) Audio Highway, Inc., a company incorporated in the State of California
situated at 20600 Mariani Avenue, Cupertino, California (hereinafter
referred to as "AUDIO HIGHWAY").
WHEREAS, AUDIO HIGHWAY desires to generate revenues through the delivery of
audio and other content through their Web Server; and
WHEREAS SYCOM has certain technologies regarding the storage and management of
digital data; and
WHEREAS, AUDIO HIGHWAY desires to utilize SYCOM's technology to enable portable
devices to be capable of receiving, storing and playing content; and
WHEREAS, SYCOM desires to provide to AUDIO HIGHWAY portable devices and chip
sets capable of storing and playing back said content,
THEREFORE, the parties agree as follows:
DEFINITIONS
The following terms shall have the associated meanings as used herein:
"Gross Profits"
Shall mean the gross revenue generated from the delivery of
audio content through the Web Server directly related to a
Product or chipset, it shall not include revenue from banner
ads located on the web site or bounce-back sales. It is
understood that currently AUDIO HIGHWAY's revenue model is
generated by an economic model where advertisers pay $3.00
for every sixty minutes of content delivered to a Product.
If AUDIO HIGWAY changes its revenue model the parties agree
to renegotiate, in good faith, a definition of "Gross
Profit" that does not leave either party worse off than if
the revenue model had remained the same.
"Product"
Shall mean a hand held product capable of downloading
digital audio from a PC, storing the audio in digital format
and playing it back manufactured by Sycom or using a Sycom
Chip Set.
"Chip Set"
<PAGE>
An embedded silicon based microelectronic circuit capable of
storing, managing and interpreting digital audio data and
playing it back
"PC Agent"
A software component which resides on a user's personal
computer and interfaces into the Web Server.
"Web Server"
A server package that interfaces with the world wide web or
any other network and serves up digital content onto that
network
TERMS
AUDIO HIGHWAY agrees to pay SYCOM a royalty in the amount of 8% of the ongoing
Gross Profits resulting from the use of Products either manufactured or enabled
by SYCOM's chip sets so long as SYCOM does not supply any competitors of AUDIO
HIGHWAY. Once SYCOM begins to receive revenues from a competitor to AUDIO
HIGHWAY, AUDIO HIGHWAY shall then only be responsible to pay SYCOM a royalty in
the amount of 6% of the ongoing Gross Profits resulting from the use of Products
either manufactured or enabled by SYCOM's chip sets.
AUDIO HIGHWAY agrees to make best efforts to ensure that their Web Server and PC
Agent are capable of interfacing to SYCOM's chip set. SYCOM agrees to make best
efforts to ensure that their chip sets are capable of interfacing to AUDIO
HIGHWAY's Web Server and PC Agent.
SYCOM shall offer to AUDIO HIGHWAY most favorable pricing for Product which,
AUDIO HIGHWAY purchases directly from SYCOM. In addition SYCOM shall not supply
Product to any other internet backend audio providers who would be deemed a
competitor to AUDIO HIGHWAY for a period of one year from the date of this
agreement.
Both parties agree to cooperate fully with the other in matters of joint
development and pursuit of mutually beneficial business opportunities.
DURATION
This agreement shall remain in effect for a period of three (3) years and two
(2) successive two (2) year terms. If this agreement is not cancelled by either
party 30 days prior to the expiration of any term it shall automatically renew
for the next term.
PAYMENTS
In consideration of this agreement as well as other good and valuable
consideration received, AUDIO HIGHWAY agrees to pay SYCOM the $30,775.42
currently due and outstanding on the books of SYCOM within 10 days of signing
this agreement. In addition AUDIO HIGHWAY agrees to pay SYCOM the additional
$15,000 still remaining on the development of the "Listen-Up" Product 45 days
after the product is delivered. There are currently 250 packaged Listen-Up
Players with docking stations, cables and power supplies owed to Audio Highway.
Payments to SYCOM under this agreement will be made quarterly, based upon
revenues collected by AUDIO HIGHWAY or any of its subsidiaries or partners,
during the previous calendar quarter related to devices enabled by SYCOM.
Payment shall be made no more than 15 days beyond the end of each quarter. Late
fees shall be assessed at 1.5% per month. Said penalties shall begin to accrue
on the 15th day of each quarter for overdue payments.
<PAGE>
QUARTERLY REPORTS.
Within fifteen (15) days after the end of each calendar quarter, together with
payment, during the Term, commencing with the end of the first calendar quarter,
AUDIO HIGHWAY shall prepare and deliver to SYCOM a quarterly report of actual
Gross Profits in respect of such quarter for all Products and/or customers
subject to this agreement. Each quarterly report shall specify (a) the number
of Products sold by AUDIO HIGHWAY or on behalf of AUDIO HIGHWAY, to said
customers and the number of units in service during such quarter, and (b) the
calculations of the actual Gross Profits in respect to said customers, for such
period and the calculation of the cumulative Gross Revenue from the ending date
of the last such report through the end of such calendar quarter; PROVIDED that
the first quarterly report shall commence on the date of the first firm order
and shall end on the last day of the calendar quarter immediately following such
date. AUDIO HIGHWAY will make a good faith effort to make additional
information available to SYCOM to assist them in their marketing efforts.
AUDIO HIGHWAY BOOKS OF ACCOUNT.
AUDIO HIGHWAY shall keep complete and accurate books of account for
the purpose of showing the amount of each Payment payable to SYCOM.
These books of account shall be kept at AUDIO HIGHWAY's principal
place of business and shall be open at reasonable times during normal
business hours for three (3) years following the end of the calendar
year to which they pertain for inspection or audit by SYCOM at its
expense.
SYCOM'S AUDIT RIGHTS.
SYCOM shall be entitled annually to audit AUDIO HIGHWAY's books of
account solely as they relate to the obligations of AUDIO HIGHWAY
under this Agreement, at SYCOM's expense, with at least two weeks
prior notice to AUDIO HIGHWAY. Any error discovered by SYCOM in the
course of such audit shall be remedied within thirty (30) days by
AUDIO HIGHWAY, if it has underpaid SYCOM and by SYCOM, to the extent
it has been overpaid. In addition if such errors exceed five percent
(5%) then AUDIO HIGHWAY shall bear the cost of the audit and shall pay
a penalty of five percent (5%) of the error. All information received
by SYCOM in the course of any such audit shall be held confidential by
SYCOM and shall not be disclosed to any third party (other than
SYCOM's attorneys and accountants) or used for any purpose whatsoever
other than to determine the accuracy of the payments made hereunder.
TERMINATION
This Agreement may be terminated by either party if an Event of Default occurs
or with 30 days written notice. In the event of Termination, AUDIO HIGHWAY
shall remain liable to SYCOM for payment of monies due in relation to this
Agreement as well as any future Profits from devices enabled by SYCOM. The party
that does not default shall have the right to retain both the obligations as
well as the benefit of this agreement. The Payments clause as well as all
clauses subsequent shall survive the termination of this agreement.
NOTICES
A notice, approval consent or other communication in connection with this
Agreement:
(a) must be given by an authorized representation of the relevant party;
<PAGE>
(b) must be in writing; and
(c) must be left at the address of the addressee or sent by prepaid
ordinary or via internationally recognized courier service to the
address of the addressee or sent by facsimile to the facsimile number
of the addressee which is specified in Schedule 1 or if the addressee
notifies another address or facsimile number then to that address or
facsimile number.
A letter or facsimile is taken to be received:
(a) in the case of a posted letter, on the third Business Day after
posting; and
(b) in the case of a facsimile, on the next Business Day following the
transmission of a facsimile; and
(c) in the case of an internationally recognized courier service, on the
second Business Day after the date sent.
ENTIRE AGREEMENT
This Agreement, together with its Annexes, constitutes the entire Agreement
among the parties. It hereby replaces and supersedes all prior agreements
between the party including the "Strategic Alliance Agreement" dated June 1,
1996 and the "Amendment to the Strategic Alliance Agreement" signed on January
6, 1997, specifically SYCOM hereby waives any claims to stock in AUDIO HIGHWAY
as mentioned in said agreement.
This Agreement may only be amended in writing, signed by an authorized
representative of each party. This Agreement supersedes all previous
representations, proposals, and other understanding between the parties relating
hereto.
NO AGENCY
This Agreement shall not be construed as creating an agency, partnership, joint
venture, or other relationship between the parties other than one of independent
contractors.
PROCEDURES IN THE EVENT OF A DISPUTE
(a) In the event of a dispute between or among the parties regarding the
performance of one or more parties under this Agreement, the parties
shall use their good faith efforts to resolve such dispute. If, after
twenty (20) days, the parties are unable to reach agreement despite
their good faith efforts to do so, any party may refer the dispute to
the Senior Executives (as hereinafter defined) for resolution in
accordance with sub-clause (b) below.
(b) Each party shall designate a senior executive officer (a "Senior
Executive") of its company who will be available in the event of any
dispute. The initial Senior Executives shall be Nathan Schulhof, on
behalf of AUDIO HIGHWAY, and Ronald J. Wilkins, on behalf of SYCOM.
The Senior Executives shall attempt in good faith to resolve any issue
presented to them by either party in accordance with sub-clause (a)
above. If the Senior Executives are unable to resolve a disputed
matter within fifteen (15) business days after the referral to them of
a dispute (or such longer period of time as to which the Senior
Executives mutually agree in writing), any party may submit the
dispute to mediation in accordance with sub-clause (c) below.
(c) The dispute shall be submitted to a reputable and experienced
mediation service, located in Denver, Colorado, or such other place as
the parties may agree, that is
<PAGE>
mutually acceptable to the Senior Executives, for non-binding
mediation in an attempt to reach a resolution.
(d) With the exception of interim equitable relief, neither party will
institute legal proceedings regarding a bona fide dispute until it has
exercised reasonable good faith efforts to achieve resolution through
the foregoing procedures.
WAIVER
No waiver of any breach of any provision of this Agreement shall constitute
a waiver of any prior, concurrent or subsequent breach of the same or any
other provisions hereof and no waiver shall be effective unless made in
writing and signed by authorized representative of the waving party.
INTERPRETATION
Whenever possible, each provision of this Agreement shall be interpreted so
as to be effective and valid under applicable law, but if any portion of
any provision should be deemed invalid or prohibited by applicable law,
such portion shall not invalidate the remaining provisions of this
Agreement.
GOVERNING LAW, JURISDICTION AND SERVICE OF PROCESS
This Agreement is governed by and construed in accordance with the internal
laws of the State of New Jersey and the United States, without regard to
principles of conflicts of law and without regard to the United Nations
Convention on Contracts for the International Sale of Goods.
EACH PARTY HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE STATE OF NEW JERSEY AND COUNTY OF MERCER IN
ANY ACTION, SUIT OR PROCEEDING HEREUNDER, HEREBY WAIVING TRIAL BY JURY AND
ANY AND ALL OBJECTION TO VENUE IN ANY AUDIO HIGHWAYION INSTITUTED
HEREUNDER.
Without preventing any other mode of service, any document in an action
(including without limitation, any writ or summons or other originating
process or any third or other party notice) may be served on any party by
being delivered to or left for the party at its Address for service of
notices herein.
<PAGE>
IN WITNESS THEREOF, the parties execute this Agreement by their duly authorized
representatives, effective as of the date first above written.
Signed by Mr. Nathan Schulhof as duly
authorized representative for Audio
Highway, Inc. in the presence of:
- ----------------------------------
Signature of witness
- ----------------------------------
Printed name of witness
Signed by Ron Wilkins as duly authorized
representative for Sycom Technologies, Inc.,
in the presence of:
- ----------------------------------
Signature of witness
- ----------------------------------
Printed name of witness
Nathan Schulhof, CEO
/s/ Nathan Schulhof
- -----------------------------------------
By executing this Agreement the signatory
warrants that the signatory is duly
authorized to execute this Agreement on
behalf of Audio Highway Inc.
Ron Wilkins, CEO
/s/ Ron Wilkins
- ----------------------------------
By executing this Agreement the signatory
warrants that the signatory is duly
authorized to execute this Agreement on
behalf of Sycom Technologies, Inc.
<PAGE>
Schedule 1
- --------------------------------------------------------------------------------
SYCOM
Sycom Technologies, Inc.
1239 Parkway Avenue
Ewing, NJ 08628
Attn: LEGAL DEPARTMENT
Contract Maintenance
Fax: 609-530-0217
AUDIO HIGHWAY
Audio Highway
20600 Mariani Avenue
Cupertino, California
Attn: LEGAL DEPARTMENT
Contract Maintenance
Fax: 408-255-5591
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