<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
(MARK ONE)
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1999
or
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from to
Commission file number 1-14697
------------------------
AUDIOHIGHWAY.COM
(Exact Name of small business issuer as Specified in its Charter)
California 77-0377306
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20600 Mariani Ave. 95014
Cupertino, CA (Zip Code)
(Address of principal executive offices)
(408) 255-5301
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding
at
Class June 30, 1999
- ------------------ -------------
<S> <C>
Shares of Common 5,565,641
Stock, no par
value
</TABLE>
<PAGE>
Part I--Financial Information
Item 1: Financial Statements
AUDIOHIGHWAY.COM
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------- ---------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 19,542 $ 13,007
Accounts receivable................................................................... 248 80
Other assets.......................................................................... 668 47
---------- ------------
Total current assets................................................................ 20,458 13,134
Property and equipment, net............................................................. 583 333
Other assets, net....................................................................... 750 0
---------- ------------
$ 21,791 $ 13,467
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long term debt.................................................. $ 262 $ 952
Accounts payable...................................................................... 508 1,128
Accrued expenses and other current liabilities........................................ 445 204
---------- ------------
Total current liabilities........................................................... 1,215 2,284
Long term debt.......................................................................... 241 376
Stockholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized; none outstanding.......... 0 0
Common Stock, no par value; 50,000,000 shares authorized; 5,565,641 outstanding at
June 30, 1999 and 4,103,643 at December 31, 1998.................................... 32,641 19,130
Additional paid-in capital............................................................ 4,194 4,194
Accumulated deficit................................................................... (16,500) (12,517)
---------- ------------
Total stockholders' equity.......................................................... 20,335 10,807
---------- ------------
$ 21,791 $ 13,467
---------- ------------
---------- ------------
</TABLE>
See Notes to Condensed Financial Statements
2
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AUDIOHIGHWAY.COM
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
------------- --------- ------------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................... $ 414 $ 52 $ 249 $ 10
Costs and expenses:
Operating and development.................................... 1,444 439 746 232
Sales and marketing.......................................... 1,951 604 1,009 266
General and administrative................................... 705 272 344 211
------------- --------- ------------- ---------
Total cost and expenses.................................... 4,100 1,315 2,099 709
Loss from operations........................................... (3,686) (1,263) (1,850) (699)
Other income (expenses):
Interest income (expense).................................... (295) (403) 123 (267)
Other........................................................ (2) 0 0 0
------------- --------- ------------- ---------
Net loss................................................... $ (3,983) $ (1,666) $ (1,727) $ (966)
------------- --------- ------------- ---------
------------- --------- ------------- ---------
Basic and diluted net loss per share........................... $ (0.79) $ (1.67) $ (0.32) $ (0.97)
Shares used in computing basic and diluted net loss per
share........................................................ 5,053 1,001 5,474 999
</TABLE>
See Notes to Condensed Financial Statements
3
<PAGE>
Item 1: Financial Statements (Continued)
AUDIOHIGHWAY.COM
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1999 30, 1998
------------- -------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Net cash used in operating activities............................................... $ (6,310) $ (1,217)
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment............................................. (331) (27)
Acquisition of business........................................................... (200) 0
------------- -------------
Net cash used in investing activities........................................... (531) 27
Cash flows from financing activities:
Proceeds from (repayment of) long term debt....................................... (135) 1,475
Proceeds from issuance of common stock............................................ 13,511 0
------------- -------------
Net cash provided by financing activities....................................... 13,376 1,475
------------- -------------
Net change in cash and cash equivalents....................................... 6,535 231
Cash and cash equivalents at beginning of period.................................... 13,007 5
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 19,542 $ 236
------------- -------------
------------- -------------
</TABLE>
See Notes to Condensed Financial Statements
4
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AUDIOHIGHWAY.COM
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
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 accompanying unaudited condensed financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for a full
year or for any future period. These financial statements should be read in
conjunction with the financial statements and related notes incorporated by
reference in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998. Certain prior period balances have been reclassified to
conform to current period presentation.
NOTE 2 -- ACQUISITION OF MASS MUSIC
Effective January 1, 1999, the Company completed the acquisition of
substantially all the assets of Mass Music, Inc., which markets and sells music
products through its Internet site. The acquisition was accounted for as a
purchase in accordance with APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. Results of operations for Mass Music have been included with those
of the Company for periods subsequent to the date of acquisition. The total
purchase price of the acquisition was $1,000,000, $200,000 in cash and a payable
in the amount of $800,000. In April 1999, the Company converted the payable into
36,478 shares of the Company's Common Stock. The purchase price was allocated to
the assets acquired based on their estimated fair values as follows:
<TABLE>
<S> <C>
Customer lists.................................................. $ 873,516
Software operating systems...................................... 102,000
Other........................................................... 24,484
---------
$1,000,000
---------
---------
</TABLE>
Customer lists and other intangible assets will be amortized on a straight
line basis over a period of two years. Amortization expense for the six and
three months ended June 30, 1999 was $250,000, and $125,000, respectively.
NOTE 3 -- EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average number of common
and equivalent shares outstanding during the period. Basic net earnings (loss)
per share is computed by dividing the net earnings (loss) by the number of
weighted average common shares outstanding. Diluted earnings per share reflects
potential dilution from outstanding stock options and warrants using the
treasury stock method and convertible debt using the if-converted method.
Equivalent shares are excluded from the diluted earnings per share calculation
in loss periods.
NOTE 4 -- EXERCISE OF COMMON STOCK PURCHASE WARRANTS
During the second quarter of 1999, certain of the Common Stock Purchase
Warrants issued in connection with the Company's various rounds of debt
financing prior to its December 1998 IPO were exercised by the holders thereof.
As a result, a total of approximately 178,962 warrants were exercised during the
three month period ended June 30, 1999, which resulted in gross proceeds to the
Company of approximately $670,000. As of June 30, 1999, the Company had cash and
cash equivalents of $19,542,000 and working capital of $19,243,000.
5
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ITEM 2. 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 three and
six month periods ended June 30, 1999 and 1998. The following discussion should
be read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Report on Form 10-QSB and in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998. Some of the
information in this Report contains forward-looking statements which involve
substantial risks and uncertainties. These statements can be identified by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. Investors should read statements
that contain these or similar words carefully because they (i) discuss
management expectations about the Company's future performance; (ii) contain
projections of the Company's future operating results or of the Company's future
financial condition or; (iii) state other "forward-looking" information. The
Company believes it is important to communicate its expectations to its
investors. There may be events in the future, however, that the Company is not
accurately able to predict or over which it has no control. The risk factors
discussed in "Business Risks," later in this Report, as well as any cautionary
language in this Report, provide examples of risks, uncertainties and events
that may cause the Company's actual results to differ materially from the
expectations described in the forward-looking statements. Additional risks will
be described from time to time in the Company's other filings with the SEC.
Investors should be aware that the occurrence of any of the events described in
the risk factors and elsewhere in this Report and in the Company's other
periodic SEC filings could have a material and adverse effect on its business,
results of operations and financial condition.
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 growing library of audio content that ranges from audio books to sports
updates and music.
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 until November
1997, 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 electronic commerce
("e-commerce"), banner advertisements, channel sponsorships and the sale of
audio commercials included in its downloaded or streamed audio programming, 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
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probable. For each hour of downloaded content, the Company can distribute up to
six minutes of audio commercials. The audio selections, which include audio
advertisements, are free of charge to the user. In the first quarter of 1999,
the Company began generating revenues from e-commerce.
Effective as of the first quarter of 1999, the Company acquired
substantially all of the assets of Mass Music, Inc., a company engaged in the
sale of music CD's and videos through the Web site located at massmusic.com.
During the first quarter, the Company also launched "audioshop," the e-commerce
portion of the audiohighway.com Web site. Nearly all of the Company's e-commerce
revenue during the first quarter of 1999 came from Audioshop and sales at
massmusic.com.
In the future, the Company anticipates that it may generate additional
revenue streams through ad-free program charges and charges for premium content
and e-commerce. 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 advertising 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 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 its assets to expand 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, 1999, the Company had an accumulated deficit of approximately $16,500,000
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, expand e-
commerce activity, 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 its December 1998 IPO 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. The Company expects the most significant expense increases
will occur in sales and marketing and research and development.
7
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1998
Net revenues were $414,000 for the six months ended June 30, 1999, as
compared to $52,000 for the same period in 1998. Revenues generated in 1998 were
primarily from advertising sales. Revenues for the first half of 1999 were
attributed to increased revenue sharing opportunities, advertising sales on the
Company's home page and e-commerce sales including revenues generated by the
Audioshop and the Company's Mass Music web site.
Operating and development expenses were $1,444,000 for the six months ended
June 30, 1999, up 228% from $439,000 for the same period in 1998. This increase
was primarily the result of increased payroll expenses associated with increased
staffing, data communications expenses, costs to produce and maintain the
Company's Web site, use of consulting engineers, the cost of products
distributed via e-commerce and amortization of certain of the assets acquired
from Mass Music, Inc. The Company employs outside consulting engineers to
facilitate a portion of its development effort.
Selling and marketing expenses were $1,951,000 for the six months ended June
30, 1999, up 223% from $604,000 for the same period in 1998. This increase is
primarily attributable to the increased payroll expenses associated with
additional sales and marketing staff, as well as increased expenses for public
relations, investor relations, and advertising and marketing expenses associated
with promoting the Company's web sites. The Company expects selling and
marketing expenses to continue to increase substantially in future periods as
the Company promotes its Web site.
General and administrative expenses ("G&A") were $705,000 for the six months
ended June 30, 1999, up 159% compared to G&A expenses of $272,000 for the same
period in 1998. This increase was primarily the result of increased staffing
costs, accounting fees, legal fees and expenses incurred in connection with
transactions and public company compliance.
The operating loss was $3,686,000 for the six months ended June 30, 1999
compared to an operating loss for the same period in 1998 of $1,263,000, an
increase of approximately 191%. As noted above, the increased loss was primarily
the result of increased expenditures in the sales and marketing, and operating
and development areas.
Net interest expense decreased approximately 27% to $295,000 during the six
months ended June 30, 1999 from $403,000 in the same period in 1998. This was
primarily the result of retiring a substantial portion of the outstanding debt
on the Company's books and interest earned on cash balances. The net carrying
value of outstanding debt at June 30, 1999 was $503,000 compared to $1,328,000
on December 31, 1998.
As a result of the factors described above, for the six months ended June
30, 1999, the Company incurred a net loss of $3,983,000 compared to a net loss
of $1,666,000 for the same period in 1998.
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.
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
Net revenues were $249,000 for the three months ended June 30, 1999,
compared to $10,000 for the same period in 1998. Revenues generated in 1998 were
primarily from advertising sales. Revenues in the second quarter of 1999 were
attributed to increased advertising sales and e-commerce, including revenues
generated by the Audioshop and the Company's Mass Music web site.
Operating and development expenses were $746,000 for the three months ended
June 30, 1999, up 221% from $232,000 for the same period in 1998. This increase
was primarily the result of increased payroll expenses associated with increased
staffing, data communications expenses, costs to produce and maintain the
Company's Web site, use of consulting engineers, the cost of products
distributed via e-commerce and amortization of certain of the assets acquired
from Mass Music, Inc. The Company employs outside consulting engineers to
facilitate a portion of its development effort.
Selling and marketing expenses were $1,009,000 for the three months ended
June 30, 1999, up 279% from $266,000 for the same period in 1998. This increase
is primarily attributable to the increased payroll expenses associated with
additional sales and marketing staff, as well as increased expenses for public
relations, investor relations and advertising. The Company expects selling and
marketing expenses to continue to increase substantially in future periods as
the Company promotes its Web site.
General and administrative expenses ("G&A") were $344,000 for the three
months ended June 30, 1999, up 63% compared to G&A expenses of $211,000 for the
same period in 1998. This increase was primarily the result of increased costs
in accounting fees, legal fees and expenses incurred in connection with
transactions and public company compliance.
The operating loss was $1,850,000 for the three months ended June 30, 1999
compared to an operating loss for the same period in 1998 of $699,000, an
increase of approximately 164%. As noted above, the increased loss was primarily
the result of increased expenditures.
During the three months ended June 30, 1999, the Company had net interest
income of $123,000 compared to an interest expense of $267,000 for the same
period in 1998. This was primarily the result of amortizing the fair value
attributed to warrants issued in connection with outstanding debt over the life
of the related debt, retiring a substantial portion of that debt in the first
half of 1999 and interest earned on cash balances. The net carrying value of
outstanding debt at June 30, 1999 was $503,000 compared to $1,373,000 at June
30, 1998.
As a result of the factors described above, for the three months ended June
30, 1999, the Company incurred a net loss of $1,727,000 compared to a net loss
of $966,000 for the same period in 1998.
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.
In December 1998, it completed its initial public offering of securities, in
which it sold an aggregate of 2,530,000 units consisting of Common Stock and
redeemable Common Stock Purchase Warrants (the "Units"), at an initial public
offering price of $6.50 per Unit. The offering netted the Company approximately
$14,052,000 after deducting expenses related to the offering. In January 1999,
the conditions for redemption set forth in the Common Stock Purchase Warrants
were satisfied and the Company redeemed its outstanding public warrants as of
February 22, 1999. As a result, a total of approximately 1,269,000 warrants were
exercised, which resulted in gross proceeds to the Company of approximately
$12,374,000. The Company paid approximately $315,000 to holders of Warrants who
chose not to redeem during the 30-day redemption period. During the second
quarter of 1999, certain of the Common Stock Purchase Warrants issued in
connection with the Company's various rounds of debt financing prior to its
December 1998 IPO were exercised by the holders thereof. As
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a result, a total of approximately 178,962 warrants were exercised during the
three month period ended June 30, 1999, which resulted in gross proceeds to the
Company of approximately $670,000. As of June 30, 1999, the Company had cash and
cash equivalents of $19,542,000 and working capital of $19,243,000. The Company
currently is financing its daily operations primarily through the application of
the net proceeds from the IPO and its subsequent warrant call.
The Company has issued subordinated convertible promissory notes bearing
interest at 8% to 10% and convertible into Common Stock at rates ranging from
$3.00 to $14.39 per share, as well as other non-convertible debt at rates from
8% to 15%. During 1998, the Company converted $2,466,000 of debt and accrued
interest of $264,000, including debt converted at the close of the Company's
IPO, into 626,384 shares of Common Stock. The remaining debt is all due on or
before the year 2000.
The Company believes that its current financial resources 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. However, there can be
no assurance that presently unforeseen events may result in the Company
determining to raise additional funds.
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, 1998, 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, 1998, the Company had approximately $10,150,000 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 $5,301,000 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 sold in the Company's December 1998
IPO constituted such a change in ownership and utilization of the Company's net
operating loss carryforwards may be limited.
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. Similarly, the Company believes that the products and services it
offers to its customers are not affected by the Year 2000 problem. The Company
has evaluated the potential impact on it of a Year 2000 problem on the part of
its important third party vendors and has found none. The
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Company plans to continue to evaluate its systems and those of its important
vendors in an effort to minimize the effects of a Year 2000 problem. The Company
does not anticipate that the Year 2000 problem will have a material impact on
its business or operations.
The Company is unable to determine at this time whether these or other year
2000 failures will occur and will have a material impact on our business,
results of operations, or financial condition. This inability is particularly
due to the potential scope of the year 2000 problem and the inability to assure
the readiness of external service providers, including utilities, government
entities and other vendors. The Company has not developed, and has no current
plans to develop in the near future, a contingency plan to deal with the effects
of this worst case scenario.
BUSINESS RISKS
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this report on Form 10-QSB and in other public
disclosures of the Company.
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
since its inception. At June 30, 1999 the Company had an accumulated a deficit
of approximately $16,500,000. Accordingly, the Company has a limited operating
history on which to base an evaluation of its business and prospects. The
Company and its prospects must be considered in light of the early stage of
development, particularly companies in new and rapidly evolving markets such as
the market for Internet content, electronic commerce ("e-commerce") and
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 can be 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. Additionally, the limited
operating history of the Company makes the prediction of future operating
results difficult or impossible, and there can be no assurance that the
Company's revenues will increase or even continue at their current level or
generate sufficient cash from operations in future periods. 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.
LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL
FLUCTUATIONS IN QUARTERLY RESULTS. The Company has been out of the development
stage only since the fourth quarter of 1997. Because of the Company's limited
operating history and the emerging nature of the markets in which it competes,
the Company is unable to forecast accurately its revenues. Additionally, the
long-term acceptance of Web-based advertising is as yet uncertain. 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) acquire 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, the Company may be unable to appropriately adjust spending in a timely
manner to compensate for any unexpected revenue shortfall or will have to reduce
its operating expenses, causing it to forego potential
11
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revenue generating activities, either of which could cause a material adverse
effect in 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 electronic 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 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 end users over
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 its subscribers. 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 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 could 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. Such direct competition could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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.
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. 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
12
<PAGE>
demonstrate user and member 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 can be 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 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 could be materially
adversely affected.
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.
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 systems or a formal disaster recovery plan and does not carry
sufficient 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 availability of content or an increase in
response time could result in a loss of potential or existing business services
customers, 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 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,
13
<PAGE>
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 can be 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 sites, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON SHORT-TERM ADVERTISING CONTRACTS. A substantial portion of
the Company's Web advertising revenues are derived from short-term contracts.
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 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.
COMPETITION. The market for e-commerce, information services and
entertainment on the Internet and otherwise is highly competitive, and the
Company expects that competition will continue to intensify. 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 e-commerce enabled Web sites for
on-line customers. There is no assurance that the Company will be able to
compete successfully or that the competitive pressures faced by the Company,
including those described below, will not have a material adverse effect on the
Company's business, results of operations and financial condition.
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 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-
14
<PAGE>
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.
Many of the Company's competitors and potential competitors have greater
financial, sales and other resources than the Company. There is no assurance
that the Company's business strategy will be successful, or that the Company
will gain a market share or customer base that will be sufficient to justify
continued 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 CONTINUED GROWTH IN USE OF THE INTERNET. Rapid growth in use
of and interest in the Internet is a recent phenomenon and there can be 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 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
can be no assurance that the Internet infrastructure will be able to support the
demands placed upon it, specifically the demands of delivering high-quality
video content. Furthermore, user experiences on the Internet are affected by
access speed. There is no assurance that broadband access technologies and cable
modems will become widely adopted. 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.
15
<PAGE>
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.
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.
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.
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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Sales of Unregistered Securities
In April 1999, audiohighway.com issued an aggregate of 36,478 shares of its
unregistered Common Stock to Mass Music, Inc., which were shares issued upon
conversion of a payable in the amount of $800,000 given to the Company in
connection with the acquisition of substantially all of the assets of Mass
Music, Inc. The shares were issued in reliance upon the exemption from
registration provided by Section 4(2) under the Securities Act of 1933.
Between April 1999 and June 1999, audiohighway.com issued an aggregate of
178,962 shares of its unregistered Common Stock to a total of 84 accredited
investors, all of whom exercised previously-issued warrants to purchase Common
Stock. The shares were issued at exercise prices ranging from $1.92 to $9.75, in
accordance with the terms of the warrants, resulting in gross proceeds to the
Company of approximately $670,465. The shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. Such
exemption was predicated on the fact that the sale was made to sophisticated,
accredited investors who were purchasing for their own account and not with a
view towards distribution of the securities acquired.
(b) Use of Proceeds
In December 1998, the Company completed its initial public offering of
securities, in which it sold an aggregate of 2,530,000 units consisting of
Common Stock and redeemable Common Stock Purchase Warrants (the "Units"), at an
initial public offering price of $6.50 per Unit. The offering netted the Company
approximately $14,052,000 after deducting expenses related to the offering. In
January 1999, the conditions for redemption set forth in the Common Stock
Purchase Warrants were satisfied and the Company redeemed its outstanding public
warrants as of February 22, 1999. As a result, a total of approximately
1,269,000 warrants were exercised, which resulted in additional gross proceeds
to the Company of approximately $12,374,000. The Company paid approximately
$315,000 to holders of Warrants who chose not to redeem during the 30-day
redemption period. Through June 30, 1999, approximately $3,983,000 of the
proceeds had been used in financing the Company's operating activities,
including approximately $1,951,000 used in sales and marketing and approximately
$1,444,000 used in operating and development. The Company has also used
approximately $1,858,000 to purchase assets (including approximately $250,000 to
acquire capital assets and $200,000 to acquire Mass Music, Inc.) and reduce
liabilities, including approximately $1,500,000 used to repay various debt
instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.8 Asset Purchase Agreement between the Registrant and Mass
Music, Inc. dated as of
January 1, 1999
27.1 Financial Data Schedule
b. Reports on Form 8-K during the quarter ended June 30, 1999
During the period covered by this report, the Company did not file
any reports on Form 8-K.
18
<PAGE>
AUDIOHIGHWAY.COM
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
AUDIOHIGHWAY.COM
By: /s/ NATHAN M. SCHULHOF
-----------------------------------------
Nathan M. Schulhof
DATE: AUGUST 13, 1999 CHIEF EXECUTIVE OFFICER
By: /s/ GREG SUTYAK
-----------------------------------------
Greg Sutyak
CHIEF FINANCIAL OFFICER
</TABLE>
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------------------
<S> <C>
10.8 Asset Purchase Agreement between the Registrant and Mass Music, Inc., dated as of January 1,
1999
27.1 Financial Data Schedule
</TABLE>
20
<PAGE>
EXHIBIT 10.8
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is entered into as of
January 1, 1999, by and among audiohighway.com, a California corporation with
its principal office located at 20600 Mariani Ave., Cupertino, California 95104
("PURCHASER"), and Mass Music, Inc., a California corporation with its principal
office located at 3410 Bowman Court, Santa Cruz, California 95065 ("COMPANY").
RECITALS
A. Company is engaged in the business of marketing and selling music
products through its internet site, "massmusic.com" (the "BUSINESS").
B. The parties hereto desire that Company sell to Purchaser and
Purchaser purchase from Company certain assets (including website, customer
lists, technology, software, intellectual property and contracts) of Company
pursuant to the terms of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS.
1.1 PURCHASED ASSETS. For purposes of this Agreement, "PURCHASED ASSETS"
means, collectively, all of the assets, documents, rights and properties of
Company, which the Company had on January 1, 1999 (the "EFFECTIVE DATE"), and
such additional assets, rights and property of Company as Company acquired
during the period commencing with the Effective Date and ending with the closing
of the transaction provided for in this Agreement (the "CLOSING") (which period
is referred to herein as the "INTERIM PERIOD"), free and clear of any liens or
encumbrances, which assets, documents, rights and properties include the
following:
(a) WEBSITE. All websites or other sites accessed via the
internet or any other electronic network, including any cable-based network
or private network, that are, in whole, or in part owned or operated by
Company, either as of the Effective Date, the date of Closing (the "CLOSING
DATE") or anytime in the past, including the domain name registration, URLs,
HTML, SHTML, links, and all code or software developed by Company related to
the operation and maintenance of that certain website currently accessible at
the URL address "http://www.massmusic.com" (collectively, the "COMPANY
WEBSITE") PROVIDED, HOWEVER, that with respect to any such website or site
that is not owned by Company but on which Company content is displayed, the
term "Company Website" shall mean and refer only to that portion of such
website or site that contains the content directly or indirectly provided by
Company.
<PAGE>
(b) CUSTOMER LISTS, MARKETING INFORMATION. All of Company's
customer lists (whether current or prior) and customer account histories for
customers or prospective customers of the Business or any of its products,
including all data regarding such customers, and all other marketing,
promotional and sales information, whether stored in written form, magnetic
or electronic media or in any other form, that have been or now are related
to the Business or any of its products or that have been or now are used,
developed or purchased in connection with the Business or any of its
products. Upon the Closing, Purchaser shall acquire and have sole and
exclusive ownership of, access to and use of all assets, customer lists and
other information described in this Section 1.2(b) (collectively, the
"CUSTOMER LIST ASSETS").
(c) SOFTWARE. All of the software of Company, including the
software listed on SCHEDULE 1.1(A) and any other software used to operate and
maintain the Company Website or the Business including any and all source and
object codes, binaries, supplements, modifications, updates, corrections and
enhancements to past and current versions of such software and versions of
such software currently under development, and any and all English and
foreign language versions and back-up and archival tapes from Company's
storage facilities of past and current versions of such software and versions
of such software currently under development (collectively, the "SOFTWARE").
(d) DOCUMENTATION. Copies of all design and use documentation
for the Software.
(e) RIGHTS TO INTELLECTUAL PROPERTY. All right, title and
interest in and to all intellectual property owned by Company, including (i)
those patents and patent applications, and registered copyrights and
applications therefor, listed in SCHEDULE 1.1(B) hereto, and (ii) those
trademarks, trade names and service marks listed on SCHEDULE 1.1(C) hereto
(and any registrations and applications for such marks), and all other
patents, patent applications, copyrights, trademarks and trade names,
together with the goodwill of the business connected with the use of and
symbolized by said marks and (iii) all of the know-how and trade secrets
relating to the Business or the Purchased Assets (collectively, "COMPANY
INTELLECTUAL PROPERTY").
(f) CONTRACTS. All of the contracts, agreements, engagements,
licenses and accounts receivable relating to the Business that are listed on
SCHEDULE 1.1(D) hereto (collectively, the "CONTRACTS"), together with all
claims, causes of action and rights of Company now existing or hereafter
arising out of such Contracts or the performance thereof, all warranties and
representations made to Company by third parties under such Contracts, and
all rights, remedies, setoffs, allowances, rebates, discounts and credits
granted to Company by third parties in relation to such Contracts.
(g) FINANCIAL RECORDS. All logs, books, records, files,
supplier lists and files, product component lists, engineering and design
drawings, diagrams and other documentation depicting or specifying the
designs and components of all the Company's products, and all sales
literature and sales aids, pictures, negatives, camera ready proofs, product
catalogs, product sheets and documentation, product displays, advertising
materials, manuals, computer and electronic data processing materials and
correspondence relating to Company's Business, all copies of all sales and
customer records relating to the Business or any of its
<PAGE>
products, and copies of all the Financial Records (as defined below); PROVIDED
that Company shall retain title to and ownership of the Financial Records and
may retain copies of the Financial Records for Company's use in compliance with
this Agreement. As used herein, the term "FINANCIAL RECORDS" means all Company's
business, accounting and financial records and analyses pertaining to the
operation of the Business that are not otherwise described in this Section
1.1(h).
(h) OTHER TANGIBLE ASSETS. All of the tangible assets and
tangible embodiments of intangible assets (including but not limited to
personal computers, furniture and equipment) not described in the preceding
subparagraphs of this Section 1.1 that, on the Effective Date (or on any date
thereafter through and including the Closing Date), are located either at
3410 Bowman Ct., Santa Cruz, California 95065 (the "FACILITY") or 4010
Moorpark Avenue, Suite 219, San Jose, California 95117 (the "BARGAIN AMERICA
FACILITY"), including, but not limited to, all such assets used in support of
both Company's businesses, exclusive of inventory, training documentation and
other materials not related to Company's Business (the "TANGIBLE ASSETS"). A
list of the Tangible Assets as of the Effective Date plus any other Tangible
Assets as of the date hereof is listed on SCHEDULE 1.1(E) hereto.
(i) CASH. All cash and cash equivalents of Company at the
Effective Date.
1.2 EXCLUDED LIABILITIES. Notwithstanding any other provision of this
Agreement, the Purchased Assets shall not include, Purchaser is not assuming and
shall not be liable for, and Company shall retain and, as between Purchaser and
Company, remain solely liable for and be obligated to discharge, all of the
debts, contracts, agreements, commitments, obligations and other liabilities of
any nature of Company, whether known or unknown, accrued or not accrued, fixed
or contingent, due or to become due, and arising out of or resulting from the
operations of Company at any time before [OR AFTER] the date hereof and
including any liabilities resulting from the sale of the Purchased Assets
constituting a "bulk sale" under any state commercial code (collectively, the
"EXCLUDED LIABILITIES"). Such Excluded Liabilities shall not include those
debts, contracts, agreements, commitments and other liabilities to be assumed by
Purchaser listed in SCHEDULE 1.2 (the "ASSUMED LIABILITIES").
1.3 ACQUISITION OF COMPANY OPERATIONS AS OF THE EFFECTIVE DATE.
Although the Purchased Assets will not be transferred by Company to Purchaser
until the Closing, the parties intend the benefits and burdens of Company
operations commencing on the Effective Date will, as of the Closing, be
transferred to Purchaser. To the extent that Company operations during the
Interim Period result in net income, Purchaser will have the benefit of that
income (in increased cash or other assets, or reduced Assumed Liabilities, at
the Closing). To the extent that Company operations during the Interim period
result in a net loss, Purchaser will have the burden of that loss (in diminished
cash or assets or increased Assumed Liabilities at the Closing). Purchaser will
assume all other operating responsibilities as of the Effective Date including
returns, exchanges and credit card challenges.
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1.4 AGREEMENT TO SELL AND PURCHASE THE PURCHASED ASSETS. Company hereby
agrees to sell, assign, transfer and convey to Purchaser at the Closing (as
defined in Section 2.4 below), and Purchaser agrees to purchase and acquire from
Company at the Closing, all right, title and interest in and to all of the
Purchased Assets.
1.5 TRANSFER OF PURCHASED ASSETS; PASSAGE OF TITLE; DELIVERY.
(a) TITLE PASSAGE. Except as otherwise provided in this Section 1.5,
upon the Closing, title to all of the Purchased Assets will pass to
Purchaser; Company will deliver to Purchaser possession of all of the
Purchased Assets as provided in Section 1.5(b) below; and Company will
further execute and/or deliver to Purchaser:
(i) the Assignment, Bill of Sale and Assumption Agreement
attached as EXHIBIT A hereto;
(ii) the consents and assignments of contracts and Company
Intellectual Property; and
(iii) such other instruments of conveyance as Purchaser may
reasonably request (both at and after the Closing) to effect or evidence the
transfers contemplated by this Agreement.
(b) DELIVERY OF PURCHASED ASSETS FREE AND CLEAR OF RESTRICTIONS.
Company represents to Purchaser that it owns, and will convey to Purchaser at
the Closing, the Purchased Assets free and clear of any and all Liens (as
defined in Section 3.4 below). To the extent practicable, Company shall
deliver the Software included in the Purchased Assets electronically.
1.6 BULK SALES. At the request of Company, Purchaser hereby waives any
requirement for compliance with the provisions of Article 6 of the Uniform
Commercial Code concerning bulk sales or any similar law. Company agrees to
indemnify Purchaser and hold Purchaser harmless from any claim, loss, liability,
expense or obligation (including attorneys' fees and costs) arising out of or
relating to any non-compliance (or alleged non-compliance) with such laws, and
shall, without limitation, reimburse Purchaser for all costs (including
attorneys' fees and costs), as incurred, of investigation, prosecution, defense
or settlement of any claim or action arising out of relating to any of the
foregoing.
1.7 TRANSFER OBLIGATIONS. Purchaser and Scott Cole agree to enter into
a consulting agreement dated April 14, 1999, substantially in the form attached
hereto as EXHIBIT C (the "CONSULTING AGREEMENT"). The Company will use all
diligent efforts to facilitate and cooperate with Scott Cole in providing
consulting services to Purchaser as contemplated in the Consulting Agreement and
to cause Scott Cole to furnish such services on a timely basis.
2. PURCHASE PRICE.
2.1 PURCHASE PRICE. Purchaser and Company hereby agree that the full
purchase price (the "PURCHASE PRICE") to be paid by Purchaser to Company for the
sale, transfer, conveyance and assignment of all the Purchased Assets to
Purchaser shall consist of:
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(a) $150,000 in cash (the "CASH PAYMENT");
(b) $50,000 in the form of forgiveness of the Secured Promissory
Note by and between Purchaser and Company dated April 2, 1999
(the "LOAN PAYMENT"); and
(c) a number of shares of Purchaser's Common Stock (collectively,
the "SHARES") equal to $800,000 divided by an amount equal to
the average per share price of the "last trade" quoted on
Nasdaq for the ten trading days immediately preceding
April 14, 1999 (the "SHARE PAYMENT").
Purchaser shall issue the cash and Shares to Company, subject to Section 2.2 and
the Escrow Agreement entered into among Company, Purchaser and such escrow
holder substantially in the form attached as EXHIBIT D (the "ESCROW AGREEMENT"),
at the Closing by delivery to Company a certificate representing the shares
registered in the name of Mass Music, Inc.
2.2 BALANCE OF PURCHASE PRICE; ESCROW. At the Closing, Purchaser will
deposit all of the Shares and $150,000 in cash (the "ESCROW FUNDS") into an
escrow account with the escrow holder named pursuant to the Escrow Agreement.
Such shares will be to secure the performance of the Company's Closing
obligations pursuant to Section 7.1, (the "INITIAL ESCROW SHARES AND CASH") the
Company's transfer obligations under Section 1.7 and Scott Cole's obligations
under the Consulting Agreement (the "TRANSITION ESCROW SHARES") and the
indemnification obligations of Company as set forth in Sections 2.2, 5.5, and 8
(the "INDEMNIFICATION ESCROW SHARES").
(a) INITIAL ESCROW SHARES AND CASH. $150,000 in cash and a number
of Shares of equal to $300,000 divided by an amount equal to
the average per share price of the "last trade" quoted on
Nasdaq for the ten trading days immediately preceding April
14, 1999, will be held in escrow, and will be transferred to
Company upon completion of the Company's closing obligations
under Section 7.1 in accordance with Section 2(c) of the
Escrow Agreement.
(b) TRANSITION ESCROW SHARES. A number of Shares equal to $250,000
divided by an amount equal to the average per share price of
the "last trade" quoted on Nasdaq for the ten trading days
immediately preceding April 14, 1999, will be held in escrow
(remaining after payment of any claims by Purchaser against
the escrow and not subject to any unresolved claims by
Purchaser against the escrow), and will be transferred to
Company upon completion of Scott Cole's obligations under the
Consulting Agreement and the Company's transfer obligations
under Section 1.7, which is anticipated to occur within 90
days after the Closing Date, in accordance with Section 2(d)
of the Escrow Agreement.
(c) INDEMNIFICATION ESCROW SHARES. A number of Shares equal to
$250,000 divided by an amount equal to the average per share
price of the "last trade" quoted on Nasdaq for the ten trading
days immediately preceding April 14, 1999 and will be held in
escrow (remaining after payment of any claims by Purchaser
against the escrow and not subject to any unresolved claims by
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Purchaser against the escrow), will be transferred to Company
on the twelve month anniversary of the Closing Date, PROVIDED
Company has fulfilled its indemnification obligations under
Sections 2.2, 5.5, and 8 of this Agreement in accordance with
Section 2(e) of the Escrow Agreement.
2.3 VALUE OF PURCHASED ASSETS. The value of the Purchased Assets
described in each of the subsections of Section 1.1 hereof will be set forth on
SCHEDULE 2.3, which will be completed by Purchaser and reviewed and agreed to by
Company (which agreement will not be unreasonably withheld or delayed) before
the Closing. When final and agreed to between Company and Purchaser, by their
execution thereof, SCHEDULE 2.3 will be attached to this Agreement and will form
a part hereof. No party will take any position that varies from or is
inconsistent with such allocation in any tax return or other filing made by such
party with any governmental, tax or regulatory authority. Nothing herein
contained will impose on any party the duty or obligation to contest any action
which any taxing authority may take or any adjustment or change in such
allocation which any taxing authority may make or propose.
2.4 CLOSING. The Closing will take place at the offices of Fenwick &
West, located at Two Palo Alto Square, Palo Alto, California when conditions for
Closing set forth in Sections 7.1 and 7.2 have been fulfilled or waived. The
Closing is expected to occur on April 24, 1999, or at such other time or date,
and at such place, or by such other means of exchanging documents, as may be
agreed to by the parties hereto.
3. REPRESENTATIONS AND WARRANTIES OF COMPANY.
Company hereby represents and warrants to Purchaser that, except as set
forth in SCHEDULE 3 attached hereto (the "SCHEDULE OF EXCEPTIONS"), each of the
following statements set forth in Sections 3.1 through 3.18 is true and complete
as of the date hereof and will be true and complete as of the Closing:
3.1 DUE ORGANIZATION AND CORPORATE POWERS. Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of California and has full corporate power and authority and the legal
right to own and use the Purchased Assets. Company has full corporate power and
authority to enter into this Agreement and to enter into all assignments or
other documents that Company is required to execute and deliver hereunder (the
"COMPANY ANCILLARY DOCUMENTS") and to consummate the transactions contemplated
hereby and thereby. Company holds all permits, licenses, orders and approvals of
all federal, state and local governmental or regulatory bodies necessary and
required therefor.
3.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. The execution, delivery
and performance by Company of this Agreement and the Company Ancillary
Documents, and the consummation of all the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate
action, including actions by the Company's Board of Directors and shareholders.
This Agreement and the Company Ancillary Documents, when executed and delivered
by Company, will be duly and validly executed and delivered and will be the
respective valid and binding obligations of Company, enforceable against Company
in accordance with their respective terms except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors'
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rights generally or by general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.3 NO VIOLATION. Neither the execution and delivery of this Agreement
by Company, nor the execution and delivery by Company of the Company Ancillary
Documents, nor the performance by Company of its respective obligations under
this Agreement or the Company Ancillary Documents will:
(i) conflict with, violate or result in any breach of the terms,
conditions or provisions of the articles, bylaws or other organizational
documents or agreements of Company;
(ii) result in a violation or breach of, or permit any third
party to rescind any term or provision of, or constitute a default under, any
loan, notice, bend, note, indenture, mortgage, deed of trust, security
agreement, lease or material contract, contract, license, lease or other
agreement or obligation to which Company is a party or by which Company or
any of the Purchased Assets is bound; or
(iii) violate any law, statute, rule or regulation or order,
writ, judgment, injunction or decree of any Governmental Entity (as defined
in Section 3.5) below.
3.4 TITLE. Company has good and marketable title to all of the
Purchased Assets, free and clear of all mortgages, pledges, liens, licenses,
rights of possession, security interests, restrictions, encumbrances, charges,
title retention, conditional sale or other security arrangements and all claims
or agreements of any nature whatsoever, other than statutory liens in favor of
federal, state and local taxing authorities arising in the ordinary course of
business securing the payment of taxes that are not yet due and payable
(collectively, "LIENS"). Company has the complete and unrestricted power and the
unqualified right to sell, assign and deliver the Purchased Assets to Purchaser
without obtaining the consent or approval of any person or party. Upon
consummation of the transactions contemplated by this Agreement, Purchaser will
acquire valid title to the Purchased Assets free and clear of any Liens. No
person other than Company has any right or interest in the Purchased Assets,
including the right to grant interests in the Purchased Assets to third parties.
3.5 CONSENTS AND APPROVALS OF GOVERNMENTAL ENTITIES. There is no
requirement applicable to Company to make any filing, declaration or
registration with, or to obtain any permit, authorization, consent or approval
of, any Governmental Entity as a condition to the lawful consummation by Company
of the transactions contemplated by this Agreement and the Company Ancillary
Documents. "GOVERNMENTAL ENTITY" shall mean any court, or any Federal, state
municipal or other governmental authority, department, commission, board, agency
or other instrumentality (domestic or foreign).
3.6 DISTRIBUTION AGREEMENTS, ETC. All distribution agreements, license
agreements, sales representative agreements, or other agreements or
understandings relating to the Purchased Assets, either in the United States or
outside of the United States, are specifically identified in SCHEDULE 3.6.
Except as set forth in SCHEDULE 3.6, the transactions contemplated by this
Agreement do not require the consent of any third party to such other agreement
or understanding. Except as set forth in SCHEDULE 3.6, all such agreements or
understandings are
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terminable by Purchaser, without payment or penalty and upon no more than
sixty (60) days prior notice.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth in this
Agreement or the Schedules hereto, there are no other debts, liabilities or
obligations of any nature (whether absolute, contingent, accrued, known, due or
to become due) of Company.
3.8 LITIGATION. There is no claim, action, suit inquiry, proceeding or
investigations relating to Company or the Purchased Assets which are currently
pending or, to the best of Company's knowledge, threatened against Company at
law, in equity, by way of arbitration or before or by any Governmental Entity.
There are no judgments, decrees, injunctions or orders of any Governmental
Entity against Company affecting the Purchased Assets. There are no claims
relating to any of the Purchased Assets containing allegations that the
Purchased Assets are defective or in breach of any warranty, or were improperly
designed or manufactured or improperly labeled.
3.9 INTELLECTUAL PROPERTY.
(a) OWNERSHIP; NO NOTICE OF INFRINGEMENT. Company owns all
Company Intellectual Property, including the Software free and clear of any
Liens. To the best of Company's knowledge, the Purchased Assets and their
expected use do not infringe or violate any of the patents, trademarks, service
marks, trade names, copyrights, trade secrets, proprietary rights or other
intellectual property of any other person or entity. Company has taken
reasonable measures to protect all Company Intellectual Property and Company is
not aware of any infringement of any Company Intellectual Property by any third
party. Company has not received any written or oral claim or notice of
infringement or potential infringement of the intellectual property of any other
person or entity. In addition, there is no pending or threatened claim by
Company against any person or entity for infringement, misuse or
misappropriation of any Purchased Assets nor is Company aware of any such
infringement, misuse or misappropriation.
(b) RIGHTS ASSIGNMENT AND NONDISCLOSURE AGREEMENTS. A copy of
Company's standard form of nondisclosure or confidentiality agreement utilized
to protect the Company Intellectual Property has been provided to Purchaser. All
Employees and any other third parties who have been involved in development of
the Purchased Assets for Company have executed confidentiality and invention
assignment agreements, wherein they have assigned all of their rights in any
Company Intellectual Property developed, created, invented or reduced to
practice by them to Company. All Employees who have or have had access to
confidential or trade secret information concerning technology or products
related to the Purchased Assets have executed nondisclosure agreements in favor
of Company requiring such Employees to maintain the confidentiality of such
information.
3.10 COMPLIANCE WITH LAWS. Company has, to the best knowledge of
Company, duly complied with all applicable laws, rules, regulations and orders
of all Governmental Entities (including but not limited to all export control
laws and regulations of the United States of America or any governmental
authority or agency of the United States government), except where the failure
to comply would not have a material adverse effect on the Purchased Assets,
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and Company is not in default with respect to any order, judgment, writ,
injunction, decree, award, rule or regulation of any court, or any Governmental
Entity relating to or that could affect any of the Purchased Assets.
3.11 TAXES. All sales and use taxes, real and personal property taxes,
gross receipts taxes, documentary transfer taxes, withholding taxes,
unemployment insurance contributions and other taxes or governmental charges of
any kind, however denominated, including any interest, penalties and additions
to tax in respect thereto, for which Purchaser could be come liable as a result
of acquiring the Purchased Assets or which could result in a Lien on or charge
against the Purchased Assets (collectively, "TAXES") have been or will be paid
for all periods (or portions thereof) prior to the due dates thereof. Company
and any other person required to file returns or reports of Taxes have been duly
and timely filed (or will file prior to the release of the Initial Escrow Shares
and Cash pursuant to Section 2.2(a)) all returns and reports of Taxes required
to be filed prior to such date, and all such returns and reports are true and
complete. There are no Liens for Taxes on any of the Purchased Assets. There are
no pending or, to the best knowledge of Company, threatened proceedings with
respect to Taxes, and there are no outstanding waivers or extensions of statutes
of limitations with respect to assessments of Taxes. Company is not a "foreign
person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of
1986, as amended.
3.12 FAIR CONSIDERATION; NO FRAUDULENT CONVEYANCE. The sale of the
Purchased Assets pursuant to this Agreement is made in exchange for fair and
equivalent consideration, and Company is not now insolvent and will not be
rendered insolvent by the sale, transfer and assignment of the Purchased Assets
pursuant to the terms of this Agreement. The Company is not entering into this
Agreement or the Company Ancillary Documents with the intent to defraud, delay
or hinder its creditors and the consummation of the transactions contemplated by
this Agreement and the Company Ancillary Documents referenced in this Agreement
will not have any such effect. The transactions contemplated in this Agreement
or any Company Ancillary Document will not constitute a fraudulent conveyance,
or otherwise give rise to any right of any creditor of Company whatsoever to any
of the Purchased Assets in the hands of Purchaser after the Closing.
3.13 CREDITORS. Attached hereto as SCHEDULE 3.13 is a complete and
accurate list of all existing creditors and persons holding claims to payment by
Company, including all amounts payable by Company to each such persons.
3.14 NO INSIDER TRANSACTIONS. Except as set forth in SCHEDULE 3.14
attached hereto, there is no agreement between Company and any shareholder of
Company or any affiliates of either Company or the shareholders of Company or
parties related to either Company or the shareholders of the Company.
3.15 FULL DISCLOSURE. No representation or warranty by Company in this
Agreement, the Company Ancillary Documents, or in any document, statement,
certificate or schedule furnished or to be furnished to Purchaser by (or on
behalf of) Company pursuant thereto, contains, or will when furnished contain,
any untrue statement of a material fact, or omits, or will then omit to state, a
material fact necessary to make any statement of facts contained herein or
therein not materially misleading. There have been no events or transactions, or
information
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which has come to the attention of Company which, as related directly to
Company or the Purchased Assets, could reasonably be expected to have a
material adverse effect on the Purchased Assets.
3.16 SECURITIES REPRESENTATIONS. Company further represents and warrants to
Purchaser that the following are true and correct as of the Closing:
(a) The shareholders who hold at least 75% of the outstanding
shares of Company's capital stock entitled to vote on this Agreement and the
transactions contemplated hereby, have voted in favor of the Purchase
Agreement and the transactions contemplated hereby;
(b) Not more than 10% of the holders of outstanding shares of
Company's capital stock entitled to vote on this Agreement and the
transactions contemplated hereby voted against the Agreement and such
transactions; and
(c) All holders of outstanding shares of Company's capital stock
entitled to vote on this Agreement and the transactions contemplated hereby
have, and have been properly informed of, their dissenters' rights under
Chapter 13 of the California General Corporation Law or any other applicable
federal or state law ("DISSENTERS' RIGHTS").
3.17 COMPANY INVESTOR REPRESENTATIONS. Company understands and covenants to
Purchaser as follows:
(a) PURCHASE FOR OWN ACCOUNT. The Shares to be received by
Company hereunder will be acquired for investment for Company's own account, not
as a nominee or agent, and not with a view to the public resale or distribution
thereof within the meaning of the Securities Act of 1933, as amended, (the "1933
ACT"), and Company has no present intention of selling, granting any
participation in, or otherwise distributing the same, except for the
distribution of the Shares to no more than 25 current shareholders each of whom
is an "accredited investor" as defined in Rule 501(a) under Regulation D of the
1933 Act and each of whom has executed a Shareholder Consent and Representation
substantially in the form of EXHIBIT B hereto. Company also represents that it
has not been formed for the specific purpose of acquiring the Shares.
(b) ACCESS TO INFORMATION. Company has received or has had
full access to all the information it or the shareholders of the Company
considers necessary or appropriate to make an informed investment decision with
respect to the Shares to be received under this Agreement and has delivered such
information to the shareholders of the Company. Company further has had an
opportunity to ask questions and receive answers from Purchaser regarding
Purchaser's business and to obtain additional information (to the extent
Purchaser possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify any information furnished to Company or
to which Company had access. The foregoing, however, does not in any way limit
or modify the representations and warranties made by Purchaser in Section 4.
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(c) UNDERSTANDING OF RISKS. Company is fully aware of: (i) the
highly speculative nature of the investment in the Shares; (ii) the financial
hazards involved; (iii) the lack of liquidity of the Shares and the restrictions
on transferability of the Shares (e.g., that Company may not be able to sell or
dispose of the Shares or use them as collateral for loans); (iv) the
qualifications and backgrounds of the management of the Purchaser; and (v) the
tax consequences of investment in the Shares.
(d) COMPANY QUALIFICATIONS. Company has a preexisting personal
or business relationship with Purchaser and/or certain of its officers and/or
directors of a nature and duration sufficient to make Company aware of the
character, business acumen and general business and financial circumstances of
Purchaser and/or such officers and directors. By reason of Company's business or
financial experience, Company is capable of evaluating the merits and risks of
this investment, has the ability to protect Company's own interests in this
transaction and is financially capable of bearing a total loss on this
investment.
(e) QUALIFICATIONS. Each of the Company's shareholders have an
preexisting personal or business relationship with Purchaser and/or certain of
its officers and/or directors of a nature and duration sufficient to make each
of the Company's shareholders aware of the character, business acumen and
general business and financial circumstances of Purchaser and/or such officers
and directors. By reason of each of the Company's shareholders business or
financial experience, each of the Company's shareholders are capable of
evaluating the merits and risks of this investment, has the ability to protect
the shareholder's own interests in this transaction and is financially capable
of bearing a total loss on this investment.
(f) NO GENERAL SOLICITATION. Company represents that at no
time was Company presented with or solicited by any general mailing, leaflet,
public promotional meeting, newspaper or magazine article, radio or television
advertisement, or any other form of general advertising or general solicitation
in connection with the sale, offer or purchase of the Shares.
(g) RESTRICTED SECURITIES; REGISTRATION RIGHTS. Company
understands that the Shares are characterized as "restricted securities" under
the 1933 Act inasmuch as they are being acquired from Purchaser in a transaction
not involving a public offering and that under the 1933 Act and applicable
regulations thereunder such securities may be resold without registration under
the 1933 Act only in certain limited circumstances. In this connection, Company
represents that it is familiar with Rule 144 of the U.S. Securities and Exchange
Commission (the "SEC"), as presently in effect, and understands the resale
limitations imposed thereby and by the 1933 Act. Company acknowledges that it
has certain rights to register such Restricted Securities as set forth in the
Registration Rights Agreement being entered into pursuant to this Agreement, a
form of which is attached as EXHIBIT E, and that they may not be sold or
transferred except in accordance with such provisions and Rule 144. The Company
further Acknowledges and understands that Purchaser is obligated to register the
Shares to be issued to Company only as provided in the Registration Rights
Agreement. Company understands that no public market now exists for any of the
Shares and that it is uncertain whether a public market will ever exist for the
Shares.
(h) RULE 144. Company acknowledges that, absent such
registration of the Shares, Company will not be able to publicly sell the Shares
until one year after the Effective
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Time. After that date, Company may sell the Shares under Rule 144. Company is
familiar with the provisions of Rule 144 promulgated under the Securities Act
which permit limited public resale of "restricted securities," subject to the
satisfaction of certain conditions. Company understands that in the event all of
the applicable requirements of Rule 144 are not satisfied, registration under
the Securities Act or some other exemption from the registration requirements of
the Securities Act will be required in order to dispose of the Shares, and that
such stockholder may be required to hold his/its/her shares for a significant
period to time prior to reselling them. Company acknowledges that if it is or
becomes an "affiliate" of Purchaser, then certain restrictions, including volume
limits, imposed by Rule 144 will continue to apply to Company beyond the first
anniversary of the date on which such Company acquires the Shares.
(i) FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, Company further agrees not to make
any disposition of all or any portion of the Shares unless and until:
(i) there is then in effect a registration statement
under the 1933 Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
(ii) Company shall have notified Purchaser of the
proposed disposition and shall have furnished Purchaser with a
statement of the circumstances surrounding the proposed disposition,
and, at the expense of Company or its transferee, with an opinion of
counsel, reasonably satisfactory to Purchaser, that such disposition
will not require registration of such securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (i) and (ii) above, no such
registration statement or opinion of counsel shall be required: (x) for any
transfer of any Shares in compliance with SEC Rule 144 or Rule 144A, or (y) for
any transfer of Shares by (1) any of its shareholders or (2) the estate of any
such shareholder; PROVIDED that in each of the foregoing cases the transferee
agrees in writing to be subject to the terms of this Section 3.19 to the same
extent as if the transferee were an original investor hereunder.
(i) STOP TRANSFER INSTRUCTIONS; NO REQUIREMENT TO TRANSFER.
Company agrees that, in order to ensure compliance with the restrictions
referred to herein, Purchaser may issue appropriate "stop transfer" instructions
to its transfer agent. Purchaser shall not be required (i) to transfer or have
transferred on its books any common stock of Purchaser that has been sold or
otherwise transferred in violation of any of the provisions of this Agreement or
the Registration Rights Agreement or (ii) to treat as owner of such common stock
of Purchaser or to accord the right to vote or pay dividends to any purchaser or
other transferee to whom such common stock of Purchaser shall have been so
transferred in violation of any provision of this Agreement or the Registration
Rights Agreement. Purchaser agrees that such stop transfer instructions and
legends will be promptly removed if the provisions of the Registration Rights
Agreement and the Securities Act are complied with.
3.18 LEGENDS. Company agrees with Purchaser that the certificates
evidencing the Shares will bear the legends set forth below (or such other
legend as Purchaser deems appropriate):
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
The legend set forth above shall be removed by Purchaser from any certificate
evidencing Shares upon delivery to Purchaser of an opinion by counsel,
reasonably satisfactory to Purchaser, that a registration statement under the
1933 Act is at that time in effect with respect to the legended security or that
such security can be freely transferred in a public sale without such a
registration statement being in effect and that such transfer will not
jeopardize the exemption or exemptions from registration pursuant to which
Purchaser issued the Shares.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Company as follows:
4.1 DUE ORGANIZATION. Purchaser (i) is duly organized, validly existing
and in good standing under the laws of the State of California and (ii) has the
corporate power and authority and the legal right to own and operate its
property, to lease the property it operates as lessee and to conduct its
business as now being conducted and as proposed to be conducted, except to the
extent the failure to have such power, authority or legal right would not, in
the aggregate with all such other failures, have a material adverse effect on
Purchaser.
4.2 CORPORATE POWER. Purchaser has all requisite corporate power and
authority to enter into and deliver this Agreement and each related agreement
and to perform its obligations hereunder and thereunder. Purchaser is not in
default in the performance, observance or fulfillment of any provision of its
charter documents.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. The execution, delivery
and performance by Purchaser of this Agreement and each related agreement and
the consummation by Purchaser of the transactions contemplated hereby and
thereby have been duly authorized by all requisite corporate action. Except as
otherwise contemplated by this Agreement, no other corporate action on the part
of Purchaser is necessary for the execution, delivery and performance by
Purchaser, as applicable, of this Agreement and each related agreement and the
consummation by Purchaser, as applicable, of the transactions contemplated
hereby and thereby. This Agreement and each related agreement has been duly
executed and delivered by Purchaser, and this Agreement and the related
agreements constitute the legally valid and binding obligations of Purchaser,
enforceable against it in accordance with their respective terms, except
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as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally or by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.4 CAPITALIZATION. As of the Closing Date, the authorized capital
stock of Purchaser consists of (i) 50 million shares of Common Stock of which
4,835,191 shares are issued and outstanding, and (ii) 50 million shares of
Series A Preferred Stock, none of which are issued and outstanding. All of the
issued and outstanding shares of Common Stock are, and all shares reserved for
issuance will be upon issuance in accordance with the terms specified in the
instruments or agreements pursuant to which they are issuable (including
pursuant to this Agreement), duly authorized, validly issued, fully paid and
nonassessable.
4.5 NO CONFLICT, REQUIRED FILINGS AND CONSENTS.
(a) The execution, delivery and performance of this Agreement
by Purchaser do not and will not (i) conflict with or violate Purchaser's
Articles of Incorporation or Bylaws, (ii) materially conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Purchaser, or
(iii) result in any material breach of or constitute a material default under,
or impair Purchaser's rights, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a Lien
on any of the properties or assets of Purchaser pursuant to any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation.
(b) The execution, delivery and performance of this Agreement
by Purchaser does not and will not require any consent, approval, authorization
or permit of, or filing with or notification to, any Governmental Entity, except
for applicable requirements, if any, of the 1933 Act, and any applicable state
blue sky laws which shall be completed either before or promptly after the
Closing.
5. COVENANTS OF COMPANY.
Company covenants and agrees with Purchaser as follows:
5.1 CARRY ON BUSINESS IN NORMAL MANNER. From this date to the Closing
Date, Purchaser has carried on and will carry on the Business in the ordinary
course consistent with Company's past practices. Company agrees to use
reasonable efforts to retain its employees, to protect and preserve the
Purchased Assets, to enforce all contract rights and other rights, to preserve
the value of the Business and to preserve the goodwill of its customers,
suppliers and others having business relations with the Business. Without
limiting the generality of the foregoing, without Purchaser's prior written
consent, Company shall not:
(a) engage in any transaction that would be inconsistent with
any representation or warranty of Company set forth herein or which would cause
a breach of any such representation or warranty;
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(b) sell, transfer, convey, assign, lease, license or
otherwise dispose of any of the Purchased Assets, or cancel, rescind, waive,
release, fail to renew or forgive any Contracts or claims of Company except, in
each case, in the ordinary course of the Business consistent with Company's past
practices;
(c) mortgage, pledge, subject to a lien, or grant a security
interest in, or otherwise encumber, any of the Purchased Assets;
(d) make any loan or otherwise extend credit to any other
person, firm or corporation except in the ordinary course of the Business
consistent with past practices of Company;
(e) increase or alter the compensation for any employee of
the Business;
5.2 ACCESS TO INFORMATION. From the date hereof to the Closing Date,
Company will afford to the representatives of Purchaser, including its counsel
and auditors, during normal business hours, access to any and all of the
Purchased Assets and information with respect to the Business to the end that
Purchaser may have a reasonable opportunity to make such a full investigation of
the Purchased Assets and of the Business in advance of the Closing Date as it
shall reasonably desire, and the officers of Company will confer with
representatives of Purchaser and will furnish to Purchaser, either orally or by
means of such records, documents, and memoranda as are available or reasonably
capable of preparation, such information as Purchaser may reasonably request,
and Company will furnish to Purchaser's auditors all consents and authority that
they may reasonably request in connection with any examination of Purchaser. In
addition, from the Closing Date until Purchaser takes possession of the
Purchased Assets, Company will afford the Purchaser's representatives, including
its counsel and auditors, full access to the Purchased Assets at all times.
5.3 CONSENT OF THIRD PARTIES. Prior to the Closing Date, Company shall
obtain the consent in writing of all persons necessary to permit Company to
assign and transfer all of the Purchased Assets (including but not limited to
the Contracts) to Purchaser, free and clear of all liens, security interests,
restrictions, claims and encumbrances (other than the Assumed Liabilities) and
to perform its obligations under, and to conclude the transactions contemplated
by, this Agreement in order that the performance hereof will not result in the
termination of, or any violation, breach or default under, any Contracts or any
material contracts, loans, notes, Contracts, agreements, obligations, leases,
permits or licenses to which Company is a party or by which any of Company's
property is bound.
5.4 FURTHER ASSURANCES. From and after the Closing Date, Company shall
promptly execute and deliver to Purchaser any and all such further assignments,
endorsements and other documents as Purchaser may reasonably request for the
purpose of effecting the transfer of Company's title to the Purchased Assets to
Purchaser and/or carrying out the provisions of the Agreements. Company hereby
appoints Purchaser as its attorney-in-fact for the limited purpose of executing
such assignments, endorsements and other documents should Company be unable or
unwilling to do so.
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5.5 INDEMNITY FOR EXCLUDED LIABILITIES. Company shall fully defend and
indemnify Purchaser, at Company's own expense, from and against all the Excluded
Liabilities and any claim, suit, action, loss, judgment, award, damages, debt,
liability, costs and expenses (including but not limited to reasonable
attorneys' fee) incurred or suffered by Purchaser in connection with any
Excluded Liabilities (collectively, "CLAIMS"). Company, however, shall have the
right to contest in good faith such Claims, and Purchaser shall cooperate fully
with Company, at Company's expense, in connection with any such contest. In the
event that Company contests any Claim, Company will bear any and all costs,
expenses and liabilities incurred by Purchaser in connection therewith,
including but not limited to reasonable attorneys' fees. Purchaser shall have
the right, at Purchaser's sole option, in addition to exercising any other
rights or remedies Purchaser may have under this Agreement, at law or in equity,
to offset or withhold all or part of any amounts payable by Purchaser to Company
(including but not limited to any amounts payable pursuant to Sections 2.1 and
2.2 hereof) that Purchaser considers necessary to satisfy any Claim of which
Purchaser becomes aware prior to the date such payments are made. If Company
disputes Purchaser's right to exercise such right of offset, then within 10 days
after receiving Purchaser's notice of exercise of such offset right, Company may
submit such dispute to the American Arbitration Association, and such dispute
shall be resolved through mandatory binding arbitration before a single
arbitrator (who shall be a lawyer knowledgeable regarding the personal computer
software industry) in San Diego, California under the Commercial Arbitration
Rules of the American Arbitration Association then in effect.
5.6 COVENANTS NOT TO COMPETE.
(a) COVENANTS. Subject to the following provisions of this
Section 5.6, as a material inducement and consideration for Purchaser to enter
into this Agreement, for a period of five (5) years from and after the Closing
Date (the "RESTRICTED PERIOD"), Company shall not, within any state of the
United States, directly or indirectly, carry on any business, or own (in whole
or in part), operate, advise, assist or lend funds to or invest funds in, any
person, firm, partnership, business, corporation or other entity which competes,
in whole or in part, with the Business. This Section shall not prohibit the
ownership by Company, as a passive investor only, of an aggregate of not more
than one percent (1%) of the total stock or other equity interests of any
company or partnership whose stock or equity interests are publicly traded on a
national stock exchange or in the over-the-counter market. During the Restricted
Period, Company further agrees not to interfere with, disrupt or attempt to
disrupt the relationship between Purchaser and any third party, including
without limitation any customer, supplier or employee of Purchaser, and not to
endorse or otherwise promote or support any online retailer or software product.
In the event of a breach of any of the covenants set forth in this Section,
Purchaser shall be entitled to an injunction against the breaching party
restraining such breach in addition to any other remedies provided by law or
equity. In the event that any covenant in this Section is held to be invalid,
illegal or unenforceable by any court of competent jurisdiction or any other
governmental authority, it is agreed and understood that such covenant shall not
be voided but rather shall be construed to impose limitations upon Company's
activities no greater than allowable under then applicable law.
(b) EXCEPTIONS. Notwithstanding anything to the contrary in
the provisions of Section 5.6(a), nothing in this Section 5.6 shall prohibit
Company from creating, developing,
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publishing, marketing, distributing or sublicensing any Excluded Asset (as
defined in Section 1.2(b) hereof). Further, nothing in this Section 5.6 is
intended to prevent Company from performing its material obligations under any
of the contracts or agreements listed in SCHEDULE 5.6 hereto to the extent
necessary for Company to avoid incurring liability under such contracts or
agreements.
5.7 USE OF NAMES "MASS MUSIC," "HTTP://WWW.MASSMUSIC.COM" AND "MAYHEM".
Following the Closing, from and after the Closing Date, Company shall cease to
use the trademarks and trade names "Mass Music", "http://www.massmusic.com",
"Mayhem" or any similar name, without the prior written consent of Purchaser.
5.8 NO OTHER NEGOTIATIONS. From the date hereof until the termination of
this Agreement in accordance with its terms or the consummation of the sale of
the Purchased Assets at the Closing, whichever comes first, Company will not,
directly or indirectly, solicit, facilitate or encourage any offer, inquiry or
proposal received from any party other than Purchaser, or enter into any
negotiations or discussions or provide any information to any third party
(including information with respect to this Agreement or transactions provided
for herein), concerning the possible disposition of all or any substantial
portion of the Purchased Assets by merger, sale or any other means, will
otherwise solicit, facilitate or encourage any such disposition or will
authorize or permit any officer, director, employee, affiliate, agent or
representative of Company, or any other person, on its behalf, directly or
indirectly, to take any of the foregoing actions.
5.9 CONFIDENTIAL INFORMATION. All copies of financial information,
marketing and sales information, pricing, marketing plans, business plans,
financial and business projections, manufacturing processes and procedures,
formulae, methodologies, inventions, product designs, product specifications and
drawings, and other confidential and/or proprietary information of Purchaser
disclosed to Company in the course of negotiating the transaction contemplated
by this Agreement ("PURCHASER CONFIDENTIAL INFORMATION") will be held in
confidence and not used or disclosed by Company or any of its employees,
affiliates or stockholders for a period of two (2) years from the Closing Date
and will be promptly destroyed by Company or returned to Purchaser, upon
Purchaser's written request to Company. Company's employees, affiliates and
stockholders will not be given access to Purchaser Confidential Information
except on a "need to know" basis. It is agreed that Purchaser Confidential
Information will NOT include information that: (a) is proven to have been known
to Company prior to receipt of such information from the Purchaser; (b) is
disclosed by a third party having the legal right to disclose such information
and who owes no obligation of confidence to the Purchaser; (c) is now, or later
becomes part of the general public knowledge or literature in the art, other
than as a result of a breach of this Agreement by Company; or (d) is
independently developed by Company without the use of any Purchaser Confidential
Information.
5.10 EMPLOYEES. At Purchaser's request, Company shall cooperate with
Purchaser in identifying those of Company's employees that are currently
employed in connection with the Business that Purchaser may wish to hire and in
facilitating the employment by Purchaser, after the Closing Date, of those
employees of Company, employed in connection with the Business (including any
employees who become such after the Effective Date), which Purchaser elects to
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employ, including permitting Purchaser to interview and offer employment to such
employees. The parties hereby acknowledge that Purchaser is under no obligation
whatsoever to employ any current or future employees of Company or any of its
affiliates and that Company and its affiliates alone remain responsible for all
obligations and liabilities, whether arising under statute, regulation or
contract, to present and future employees of Company and its affiliates arising
out of their employment (or the termination of their employment) with Company or
any of Company's affiliates, including but not limited to any obligations and
liabilities arising under or from any existing or future Employee Plans or other
employee benefit plans of Company or any of its affiliates, any present or
future obligations or liabilities of Company or any of its affiliates to
existing or future employees of Company under COBRA or WARN or any severance pay
obligations of Company or any of its affiliates.
5.11 TAXES. Company agrees to promptly pay all sales, use or other
taxes imposed on the sale of the Purchased Assets to Purchaser under this
Agreement and to defend, indemnify and hold Company harmless from and against
any such taxes or claims for payment thereof by any tax authority. Company
acknowledges that the transactions provided for herein will be a taxable
transaction under federal and state tax laws.
5.12 DISTRIBUTION OF SHARES. Company agrees to distribute the Shares
only to "accredited investors" as defined in Rule 501(a) under Regulation D of
the 1933 Act, and only in accordance with Sections 3.17 and 3.19 herein. Company
agrees that prior to effecting any such transfer, each transferee will execute
and deliver to Purchaser a Shareholder Consent and Representation, in the form
attached as EXHIBIT B hereto. Company shall not make any such distributions of
the Shares without compliance with Section 5.14 of this Agreement.
5.13 COMPLIANCE WITH STATE BLUE SKY LAWS. Company agrees to promptly
comply with all applicable state blue sky laws.
5.14 DISTRIBUTION LIMITATION. The Company shall not make a distribution
to the shareholders of the Company if the Company is, or as a result thereof
would be likely to be unable to meet its liabilities (except those whose payment
is otherwise adequately provided for) as they mature. The Company will fully
comply with the limitations on distributions to shareholders set forth in
Sections 500, 501 and 502 of the CCC.
5.15 DISSENTING SHARES.
(a) Notwithstanding any provisions of this Agreement to the
contrary, a holder of any shares of Company Common Stock who has exercised such
holder's dissenters' rights in accordance with the California Corporations Code
("CCC") and who, as of the Effective Time, has not effectively withdrawn or lost
such dissenters' rights ("DISSENTING SHARES"), shall only be entitled to such
rights as are granted by the CCC. Company will properly notify its shareholders
of their dissenter's rights in accordance with the CCC.
(b) Company shall give Purchaser (i) prompt written notice of
any written demands for payment with respect to any shares of Company Common
Stock pursuant to dissenters' rights, and any withdrawals of such demands or
losses of such rights, and any other instruments served pursuant to the CGCL,
and (ii) the opportunity to participate in all
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negotiations and proceedings with respect to demands for dissenters' rights.
Company shall not, except with the prior written consent of Purchaser,
voluntarily make any payment with respect to demands for dissenters' rights or
offer to settle or settle any such demands.
5.16 CLOSING CONDITIONS. The Company covenants to use all reasonable
efforts to cause the Closing conditions provided for herein to be satisfied and
to cause the representations and warranties made by them herein to be true and
complete as of the Closing.
6. COVENANTS OF PURCHASER.
6.1 CONFIDENTIAL INFORMATION. All copies of financial information,
marketing and sales information, pricing, marketing plans, business plans,
financial and business projections, manufacturing processes and procedures,
formulae, methodologies, inventions, product designs, product specifications and
drawings, and other confidential and/or proprietary information of Company
disclosed to Purchaser in the course of negotiating the transaction contemplated
by this Agreement ("COMPANY CONFIDENTIAL INFORMATION") will be held in
confidence and not used or disclosed by Purchaser or any of its employees,
affiliates or stockholders for a period of two (2) years from the Effective Date
and will be promptly destroyed by Purchaser or returned to Company, upon
Company's written request to Purchaser; PROVIDED, HOWEVER that from and after
the Closing, the foregoing covenant shall not be applicable to any Company
Confidential Information included in the Purchased Assets. Purchaser's
employees, affiliates and stockholders will not be given access to Company
Confidential Information except on a "need to know" basis. It is agreed that
Company Confidential Information will NOT include information that: (a) is
proven to have been known to Purchaser prior to receipt of such information from
Company; (b) is disclosed by a third party having the legal right to disclose
such information and who owes no obligation of confidence to Company; (c) is
now, or later becomes part of the general public knowledge or literature in the
art, other than as a result of a breach of this Agreement by Purchaser; or (d)
is independently developed by Purchaser without the use of any Company
Confidential Information.
6.2 CLOSING CONDITIONS. Purchaser covenants to use all reasonable efforts
to cause the Closing conditions provided for herein to be satisfied and to cause
the representations and warranties made by them herein to be true and complete
as of the Closing.
7. CONDITIONS TO CLOSING.
7.1 CONDITIONS TO PURCHASER'S OBLIGATIONS. The obligations of Purchaser
to purchase the Purchased Assets at the Closing as provided hereunder will be
subject to the satisfaction and fulfillment of each of the following conditions,
except as Purchaser may expressly waive the same in writing:
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(a) NO MATERIAL ADVERSE CHANGE. From April 14, 1999 to the
Closing Date, there shall have been no material adverse change in the financial
condition, Purchased Assets or Business of Company.
(b) CONDUCT OF BUSINESS IN ORDINARY COURSE. To the Closing
Date, Company shall have conducted the Business only in the ordinary course,
consistent with Company's past practices, except for actions expressly permitted
by this Agreement, matters incident to carrying out this Agreement, or such
further matters as may be consented to by Purchaser in writing.
(c) ACCURACY OF REPRESENTATIONS AND WARRANTIES ON CLOSING
DATE. The representations and warranties made herein by Company (as qualified by
Company's SCHEDULE 3 attached hereto, which shall be updated as of the Closing
Date) shall be true and complete in all material respects, and not misleading in
any material respect, on and as of the date given, and on and as of the Closing
Date with the same force and effect as though such representations and
warranties were made on and as of the Closing Date.
(d) COMPLIANCE. As of the Closing Date, Company shall have
complied in all material respects with, and shall have fully performed, in all
material respects, all conditions, covenants and obligations of this Agreement
imposed on Company and required to be performed or complied with by Company at,
or prior to, the Closing Date. Purchaser will have received a certificate
executed by Company's Chief Financial Officer to such effect and to the effect
that (a), (b) and (c) of this Section have been fulfilled on Company's behalf.
(e) DELIVERY OF PURCHASED ASSETS. Company will have delivered
and Purchaser will have received the Purchased Assets.
(f) ASSIGNMENT, BILL OF SALE AND ASSUMPTION AGREEMENT. Company
will have executed and delivered the Assignment, Bill of Sale and Assumption
Agreement to the effect and in the form attached as EXHIBIT A hereto, signed by
an authorized officer of Company on behalf of Company.
(g) DELIVERY OF OTHER CLOSING DOCUMENTS. Company will have
delivered, and Purchaser will have received, such other documents relating
hereto as Purchaser may reasonably request, including the fully executed
Agreement and related agreements and copies of consents of the Board of
Directors and shareholders approving this Agreement and the transactions
contemplated hereby.
(h) THIRD PARTY CONSENTS OBTAINED. All executed copies by
Company of the consents and assignments required to be obtained or executed by
Company as set forth in SCHEDULE 1.1(D), if any, necessary to assign or transfer
all of the Purchased Assets (including, but not limited to, Company Intellectual
Property) to Purchaser, free and clear of all Liens, will have been delivered.
(i) ESCROW AGREEMENT. Company shall have executed and
delivered the Escrow Agreement substantially in the form as attached as EXHIBIT
D hereto.
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7.2 CONDITIONS TO COMPANY'S OBLIGATIONS. The obligations of Company to
sell the Purchased Assets at the Closing as provided hereunder shall be subject
to the satisfaction and fulfillment of each of the following conditions, except
as Company may expressly waive the same in writing:
(a) COMPLIANCE. As of the Closing Date, Purchaser shall have
complied in all material respects with, and shall have fully performed, in all
material respects, all conditions, covenants and obligations of this Agreement
imposed on Purchaser and required to be performed or complied with by Purchaser
at, or prior to, the Closing Date. Company will have received a certificate to
such effect executed by Purchaser's Chief Operating Officer.
(b) REQUISITE APPROVAL. Purchaser will have delivered a
certified copy of the resolutions of the Board of Directors of Purchaser
authorizing the execution and delivery by Purchaser of this Agreement, and all
Ancillary Agreements, and the consummation of the transactions contemplated
hereby and thereby.
(c) PURCHASE PRICE. Purchaser shall have delivered the
Purchase Price as set forth in Section 2.2.
(d) ASSIGNMENT, BILL OF SALE AND ASSUMPTION AGREEMENT.
Purchaser will have executed and delivered the Assignment, Bill of Sale and
Assumption Agreement to the effect and in the form attached as EXHIBIT A hereto,
signed by an authorized officer of Purchaser on behalf of Purchaser.
(e) ESCROW AGREEMENT. Purchaser shall have executed and
delivered the Escrow Agreement substantially in the form as attached as EXHIBIT
D hereto.
(f) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have
executed and delivered the Registration Rights Agreement substantially in the
for as attached as EXHIBIT E hereto.
8. SURVIVAL OF WARRANTIES; INDEMNIFICATION; LIQUIDATED DAMAGES.
8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants made by Company and Purchaser herein
will survive the Closing.
8.2 INDEMNIFICATION BY COMPANY. Company will defend, indemnify and hold
harmless Purchaser, any parent, subsidiary or affiliate of Purchaser and any
director, officer, manager, employee, shareholder, member, interest holder,
partner, agent or attorney of Purchaser or of any parent, subsidiary or
affiliate of Purchaser from and against and in respect of any and all claims,
causes of action, liability, loss, damages, fines, fees, penalties, obligations,
injuries including those resulting from any and all actions, suits, proceedings,
demands, assessments, judgments, awards or arbitrations, together with costs and
expenses including the fees of attorneys and other legal costs and expenses
relating thereto (including costs of investigation, negotiation, prosecution,
defense or settlement) ("LOSS") which arise out of or relate to the following:
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(a) the failure of Company to satisfy any liability or perform
any obligation or covenant required to be performed by it hereunder or under the
Shareholder Consent and representation Letter; or
(b) any breach by Company of any of the representations and
warranties (i) of the Company in this Agreement or (ii) of any of the
shareholders of the Company in the Shareholder Consent and Representation
Letter.
8.4 INDEMNIFICATION LIMITATION.
In the absence of fraud or willful misconduct,
(a) no Indemnified Party will be liable under this Agreement
other than for the Indemnification provided for in this Section 8;
(b) the liability for Loss for monetary amounts for which the
Indemnified Parties are liable under this Section 8is capped at the amount of
the Escrow Shares deposited in the Escrow pursuant to the Escrow Agreement; and
(c) all claims for indemnification for Loss for monetary
amounts will brought under and in accordance with the Escrow Agreement.
8.5 INDEMNIFICATION PROCEDURE. Any claim of indemnity made by an
Indemnified Person under this Section 8 must be raised in writing delivered to
the Company and the Escrow Agent by no later than the Indemnification Escrow
Release Date. Additionally, promptly after the receipt by Purchaser of notice or
discovery of any claim, damage or legal action or proceeding giving rise to
indemnification rights under this Agreement, Purchaser will give Company and the
Escrow Agent written notice of such claim, damage legal action, or other Claims
in accordance with Section 3 of the Escrow Agreement attached as EXHIBIT D
hereto. Such claims will be resolved in accordance with Section 4 of the Escrow
Agreement.
8.6 LIQUIDATED DAMAGES. Both parties agree that the damages resulting
from the failure of Company to complete its obligations under Section 1.7 or
Scott Cole to complete his obligations under the Consulting Agreement are not
readily ascertainable and that it would impossible to determine the amount
thereof. Therefore, both parties agree that the amount of liquidated damages for
such failure is $250,000 and that this is a reasonable estimate as to what the
actual amount of such damages would be. The release of the Transition Escrow
Shares shall not occur until completion of the Company's obligations under
Section 1.7 and Scott Cole's obligations under the Consulting Agreement.
9. TERMINATION, AMENDMENT AND WAIVER.
9.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by the mutual written consent of Company and Purchaser;
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(b) by either Purchaser or Company at any time prior to
Closing, if the other commits a material breach of this Agreement that is not
cured within 30 days after notice thereof; or
(c) by either Company or Purchaser if there shall have been
instituted (and not withdrawn) any action or proceeding by any governmental
authority or administrative agency before any governmental authority,
administrative agency or court of competent jurisdiction, or there shall be in
effect any judgment, decree or order of any governmental authority,
administrative agency or court of competent jurisdiction, in either case,
seeking to prevent consummation of any of the transactions contemplated by this
Agreement or the Ancillary Agreements, or seeking to prohibit or limit Purchaser
or any of its subsidiaries from exercising all material rights and privileges
pertaining to ownership of the Purchased Assets or the ownership or operation by
Purchaser or any of its subsidiaries of all or a material portion of the
Purchased Assets, or seeking to compel Purchaser or any of its subsidiaries to
dispose of or hold separate all or any material portion of the Purchased Assets.
9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto; provided that
nothing herein shall relieve either party from liability for any willful breach
hereof.
9.3 WAIVER. At any time prior to the Closing, any party hereto may (a)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or (c)
waive compliance with any of the agreements or conditions contained herein. Any
such extension or waiver shall be valid if set forth in an instrument in writing
signed by the party to be bound thereby.
10. MISCELLANEOUS.
10.1 EXPENSES. Each of the parties hereto will bear its own costs and
expenses (including attorneys' fees) in connection with the negotiation and
consummation of this Agreement, the Company Ancillary Documents, and all
transactions contemplated hereby and thereby.
10.2 NOTICES. Any notice required or permitted to be given under this
Agreement will be in writing and will be effective upon: (i) receipt if hand
delivered; (ii) the next business day after dispatch by fax transmission or
nationally recognized overnight express courier and addressed as set forth
herein; or (iii) three days after dispatch by certified or registered United
States mail, postage prepaid, addressed as set forth herein.
(a) IF TO COMPANY:
Mass Music, Inc.
3410 Bowman Ct.
Santa Cruz, CA 95065
Attn: Thomas Tansy
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Fax No.: (831) 479-4610
WITH A COPY TO:
Bryan Duckworth, Esq.
101 Park Center Plaza
Suite 1007
San Jose, CA 95113
Fax No.: (408) 292-1257
(b) IF TO PURCHASER:
audiohighway.com
20600 Mariani Ave
Cupertino CA 95014
Attn: Grant Jasmin
Fax No.: (408) 255-5591
WITH A COPY TO:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attn: R. Gregory Roussel, Esq.
Fax No.: (650) 494-1417
10.3 ENTIRE AGREEMENT; CAPTIONS; CERTAIN TERMS. This Agreement, the
Schedules and Exhibits hereto (which are incorporated herein by reference) and
the Company Ancillary Documents together constitute the entire agreement and
understanding between the parties and there are no other agreements or
commitments with respect to the transactions contemplated herein or therein.
This Agreement and the Company Ancillary Documents supersede any prior offer,
agreement or understanding between the parties with respect to the transactions
contemplated hereby and thereby. The captions in this Agreement are for
convenience only and will not be considered a part of or affect the construction
or interpretation of any provision of this Agreement. The terms "including,"
includes" or similar terms shall be deemed to mean that certain items are being
referred to without limitation or exclusion of other items. The term "costs"
shall be deemed to include "expenses," and vice versa.
10.4 AMENDMENT; WAIVER. Any term or provision of this Agreement may be
amended only by a writing signed by Company and Purchaser. The observance of any
term or provision of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a writing
signed by the party to be bound by such waiver. No waiver by a party of any
breach of this Agreement will be deemed to constitute a waiver of any other
breach or any succeeding breach.
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10.5 NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in this
Agreement is intended, or will be construed, to confer upon or to give any
person, firm or corporation, other than the parties hereto, any rights or
remedies under or by reason of this Agreement.
10.6 EXECUTION IN COUNTERPARTS. For the convenience of the parties,
this Agreement may be executed in one or more counterparts, each of which will
be deemed an original but all of which together will constitute one and the same
instrument.
10.7 ASSIGNMENT. Notwithstanding any other term or provision of this
Agreement to the contrary, this Agreement may not be assigned by any party
hereto without the prior written consent of the other party, except that any
party may assign this Agreement (and the Company Ancillary Documents) by
operation of law or in connection with any merger, consolidation or sale of all
or substantially all of its assets or in connection with any similar transaction
without such consent.
10.8 BENEFIT AND BURDEN. This Agreement will be binding upon, will
inure to the benefit of, and be enforceable by and against, the parties hereto
and their respective successors and permitted assigns.
10.9 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
California (excluding application of any conflict of law doctrines that would
make applicable the law of any other state or jurisdiction) and, where
appropriate, applicable federal law. Subject to Section 8.11 the parties hereto
submit to the exclusive jurisdiction and venue of any state or federal court
located in Santa Clara County, California, for purposes of any action arising
out of or relating to this Agreement and agree that service of process in any
such action may be made in the manner provided herein for delivery of notices.
10.10 SEVERABILITY. If any provision of this Agreement is for any
reason and to any extent deemed to be invalid or unenforceable, then such
provision will not be voided but rather will be enforced to the maximum extent
then permissible under then applicable law and so as to reasonably effect the
intent of the parties hereto, and the remainder of this Agreement will remain in
full force and effect.
10.11 ARBITRATION. Any contested claim for indemnification and any
other dispute under this Agreement or any Company Ancillary Document shall be
settled by mandatory and binding arbitration pursuant to the arbitration
provisions set forth below:
(a) Any dispute between the parties shall be settled by
arbitration in Santa Clara County, California and, except as herein specifically
stated, in accordance with the commercial arbitration rules of the American
Arbitration Association ("AAA RULES") then in effect. However, in all events,
the provisions of this Agreement shall govern over any conflicting rules which
may now or hereafter be contained in the AAA Rules. Any judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction over
the subject matter thereof. The arbitrator shall have the authority to grant any
equitable and legal remedies that would be available in any judicial proceeding
instituted to resolve a dispute between the parties.
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(b) The parties to the dispute will each pay fifty percent
(50%) of the initial compensation to be paid to the arbitrator in any such
arbitration and fifty percent (50%) of the costs of transcripts and other normal
and regular expenses of the arbitration proceedings; provided, however, that the
prevailing party in any arbitration will be entitled to an award of attorneys'
fees and costs, and all costs of arbitration, including those provided for
above, will be paid by the losing party, and the arbitrator will be authorized
to make such determinations.
(c) Upon the conclusion of any arbitration proceedings
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to the parties to the dispute, along
with a signed copy of the award. The arbitrator chosen in accordance with these
provisions will not have the power to alter, amend or otherwise affect the terms
of the arbitration provisions set forth herein or any other provision of this
Agreement or any Company Ancillary Document. Except as specifically otherwise
provided in this Agreement, arbitration will be the sole and exclusive remedy of
the parties for any dispute concerning the provisions or performance of the
Agreement or Company Ancillary Document. The final decision of the arbitrator
will be furnished to the parties in writing and will constitute a conclusive
determination of the issue in question, binding upon such parties.
10.12 ATTORNEYS' FEES. If arbitration is brought to enforce or
interpret any provision of this Agreement, the prevailing party will be entitled
to recover reasonable fees and costs of attorneys, including costs, expenses and
fees on any appeal, to be fixed in amount by the court or the arbitrator(s).
10.13 POST-CLOSING COOPERATION. Company agrees that, if requested by
Purchaser, it will cooperate with Purchaser in enforcing the terms of any
agreements between Company and any third party involving the Purchased Assets,
including any terms relating to confidentiality and the protection of
intellectual property rights.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Asset Purchase Agreement by their duly authorized representatives as of the
Closing Date.
"PURCHASER" "COMPANY"
AUDIOHIGHWAY.COM MASS MUSIC, INC.
By: /s/ Nathan M Schulhof By: /s/ Scott Cole
---------------------------------- --------------------------
Nathan M. Schulhof, President Scott Cole, Chief Financial
and Chief Executive Officer Officer
By: /s/ Grant Jasmin By: /s/ Thomas F. Tansy
---------------------------------- --------------------------
Grant Jasmin, Chief Operating Thomas F. Tansy,
Officer Chief Executive Officer
and President
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SCHEDULES AND EXHIBITS
Exhibit A Assignment, Bill of Sale and Assumption Agreement
Exhibit B Shareholder Consent and Representations
Exhibit C Consulting Agreement by and between Scott Cole and
audiohighway.com
Exhibit D Escrow Agreement
Exhibit E Registration Rights Agreement
Schedule 1.1(A) Software
Schedule 1.1(B) Patents, Copyrights and Applications Therefor
Schedule 1.1(C) Trademarks, Trade Names and Service Marks
Schedule 1.1(D) Contracts
Schedule 1.1(E) Other Tangible Assets
Schedule 1.2 Assumed Liabilities
Schedule 2.2 Valuation of Purchased Assets
Schedule 3 Schedule of Exceptions
Schedule 3.6 Distribution Agreements
Schedule 3.13 List of Creditors
Schedule 3.14 Insider Transactions
<PAGE>
EXHIBIT A
ASSIGNMENT, BILL OF SALE AND ASSUMPTION AGREEMENT
29
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ASSIGNMENT, BILL OF SALE AND ASSUMPTION AGREEMENT
This Assignment, Bill of Sale and Assumption Agreement (this
"AGREEMENT") is made between audiohighway.com, a California corporation
("PURCHASER"), and Mass Music, Inc., a California corporation ("COMPANY") and
dated as of April 14, 1999. Company and Purchaser are parties to a certain Asset
Purchase Agreement by and between Purchaser and Company, dated as of January 1,
1999 (the "PURCHASE AGREEMENT"). Capitalized terms used without definitions
herein will have the meanings ascribed to such terms in the Purchase Agreement.
1. SALE AND ASSIGNMENT OF PURCHASED ASSETS. Pursuant to the Purchase
Agreement, Purchaser has on the date hereof purchased the Purchased Assets from
Company. Company does hereby sell, assign, bargain, transfer, convey and deliver
unto Purchaser all of the right, title and interest in and to the Purchased
Assets, free and clear of any and all Liens (as defined in Section 3.4 of the
Purchase Agreement).
2. ASSUMPTION OF ASSUMED LIABILITIES. Purchaser does not agree to
assume or pay any debts, obligations or liabilities of Company not expressly
assumed by Purchaser in the Purchase Agreement.
3. COOPERATION. Purchaser and Company agree to cooperate with each
other to execute and deliver such other documents and instruments and to do such
further acts and things as may be reasonably requested by the other to evidence,
document or carry out the sale of the Purchased Assets.
4. EFFECT OF AGREEMENT. Nothing in this Agreement will, or will be
deemed to, modify or otherwise affect any provisions of the Purchase Agreement
or affect the rights of the parties under the Purchase Agreement. In the event
of any conflict between the provisions hereof and the provisions of the Purchase
Agreement, the provisions of the Purchase Agreement will govern and control.
IN WITNESS WHEREOF, Company and Purchaser have caused this Assignment,
Bill of Sale and Assumption Agreement to be executed on the date first written
above.
"PURCHASER" "COMPANY"
AUDIOHIGHWAY.COM MASS MUSIC, INC.
By By:
--------------------------------------- ---------------------------------
Grant Jasmin, Chief Operating Officer Scott Cole, Chief Financial
Officer
By: By:
--------------------------------------- ---------------------------------
30
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Nathan M. Schulhof, President and Thomas F. Tansy, Chief Executive
Chief Executive Officer Officer and President
31
<PAGE>
EXHIBIT B
SHAREHOLDER CONSENT AND REPRESENTATIONS
32
<PAGE>
WRITTEN CONSENT AND REPRESENTATIONS OF THE SHAREHOLDERS
OF
MASS MUSIC, INC.
APRIL 14, 1999
The undersigned, being the shareholders of Mass Music, Inc., a
California Corporation (the "COMPANY"), do hereby consent to and approve the
adoption of the following resolutions, without a meeting, pursuant to Section
603(a) of the California Corporations Code and the Bylaws of the Corporation,
effective as of the date first set forth above (unless otherwise noted in the
resolution):
APPROVAL OF SALE OF ASSETS AND RELATED AGREEMENTS
WHEREAS, it is in the best interests of the Company to proceed with the
proposed sale of substantially all of the Company's assets (the
"ASSETS") to audiohighway.com, a California corporation (the
"PURCHASER"), pursuant to the Asset Purchase Agreement by and between
the Company and the Purchaser in substantially the form of that
attached hereto as EXHIBIT A with such changes as the Company's
President may approve (the "PURCHASE AGREEMENT"):
RESOLVED, that the sale by the Company of substantially all of its
assets to the Purchaser pursuant to the Purchase Agreement is hereby
adopted and approved.
RESOLVED FURTHER, that the Purchase Agreement, each agreement and
document to be entered pursuant to the terms of the Purchase Agreement,
including, without limitation, the Assignment and Bill of Sale, Escrow
Agreement and Registration Rights Agreement, each substantially in the
form attached to the Purchase Agreement with such changes as the
President of the Company may approve (the "RELATED AGREEMENTS"), and
each other transaction contemplated by the Purchase Agreement are
hereby adopted and approved and that the officers of the Company, and
any of them acting without, the others, are authorized and directed to
execute delivery on behalf of the Company the Purchase Agreement and
the Related Agreements and to cause the Company to perform its
obligations thereunder.
REPRESENTATIONS AND WARRANTIES
In order to induce the Purchaser to enter the Purchase Agreement and
the agreements, documents and transactions contemplated by the Purchase
Agreement each of the undersigned shareholders (referred to individually as
"SHAREHOLDER") individually represents and warrants the following for the
benefit and reliance of the Purchaser:
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OWNERSHIP OF SHARES. Shareholder owns the shares of Company
common stock set forth on the signature page hereof free and clear of all
pledges, liens, licenses, security interests, restrictions, encumbrances,
charges title retention, conditional sale or other security arrangements.
PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Should Shareholder
acquire any shares of Purchaser (the "RESTRICTED SHARES"), shareholder will be
acquiring the Restricted Securities for Shareholder's own account for investment
purposes only and not with a view to, or for sale in connection with, a
distribution of the Restricted Securities within the meaning of the Securities
Act of 1933, as amended (the "1933 ACT"). Shareholder has no present intention
of selling or otherwise disposing of all or any portion of the Restricted
Securities and no one other than Shareholder has any beneficial ownership of any
of the Restricted Securities.
ACCESS TO INFORMATION. Shareholder has had access to all
information regarding the Purchaser and its present and prospective business,
assets, liabilities and financial condition that Shareholder considers pertinent
in making the decision to execute and deliver this consent, and Shareholder has
had ample opportunity to ask questions of the Purchaser's representatives
concerning such matters.
UNDERSTANDING OF RISKS. Shareholder is fully aware of: (i) the
highly speculative nature of the shares of the Purchaser's common stock to be
issued by the Purchaser in connection with the Purchase Agreement (the
"RESTRICTED SECURITIES"); (ii) the financial hazards involved; (iii) the lack of
liquidity of the Restricted Securities and the restrictions on transferability
of the Restricted Securities (E.G., that Shareholder may not be able to sell or
dispose of the Restricted Securities or use them as collateral for loans); (iv)
the qualifications and backgrounds of the management of the Purchaser; and (v)
the tax consequences of investment in the Restricted Securities.
PURCHASER'S QUALIFICATIONS. Shareholder has a preexisting
personal or business relationship with the Purchaser and/or certain of its
officers and/or directors of a nature and duration sufficient to make
Shareholder aware of the character, business acumen and general business
financial circumstances of the Purchaser and/or such officers and directors. By
reason of Shareholder's business or financial experience, Shareholder is capable
of evaluating the merits and risks of this investment, has the ability to
protect Shareholder's own interest in this transaction and is financially
capable of bearing a total loss of this investment.
NO GENERAL SOLICITATION. At no time was Shareholder presented
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale purchase or the Restricted Securities.
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<PAGE>
COMPLIANCE WITH SECURITIES LAWS. Shareholder understands and
acknowledges that, in reliance upon the representations and warranties made by
Shareholder herein, the Restricted Securities are not being registered with the
Securities and Exchange Commission ("SEC") under the 1933 Act or being qualified
under the California Corporate Securities Law of 1968, as amended (the "LAW"),
but instead are being issued under an exemption or exemptions from the
registration and qualification requirements of the 1933 Act and the Law which
impose certain restrictions on Purchaser's ability to transfer the Restricted
Securities.
RESTRICTIONS ON TRANSFER. Shareholder understands that the
Purchaser's issuance of the Restricted Securities to the Company (and the
Company's distribution of any such securities to Shareholder, should such
distribution occur) will not be registered under the Security Act of 1933, as
amended (the "SECURITIES ACT"), under the California Corporate Securities Law of
1968, as amended (the "LAW") or under any state securities law, that neither the
Company nor Shareholder may transfer any Restricted Securities unless such
Restricted Securities are registered under the Securities Act or qualified under
the Law or other applicable state securities laws or unless exemptions from such
registration and qualification requirements are available. Shareholder
understands that only the Purchaser may file a registration statement with the
SEC or the California Commissioner of Corporations or other applicable state
securities commissioners and that the Purchaser is under no obligation to do so
with respect to the Restricted Securities except as set forth in the
Registration Rights Agreement. Shareholder has also been advised that exemptions
from registration and qualification may not be available or may not permit
Shareholder to transfer all or any of the Restricted Securities in the amounts
or at the times proposed by Shareholder.
RULE 144. In addition, Shareholder has been advised that SEC Rule 144
promulgated under the Securities Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the
Registered Securities and, in any event, requires that the Restricted Securities
be held for a minimum of one year after they have been purchased AND PAID FOR
(within the meaning of Rule 144), before they may be resold under Rule 144.
Shareholder understands that Rule 144 may indefinitely restrict transfer of the
Restricted Securities so long as "current public information" about the
Purchaser (as defined in Rule 144) is not publicly available.
LIMITED REGISTRATION RIGHTS. Shareholder understands that
Shareholder's right to register the Restricted Securities are limited to one
piggyback registration pursuant to the Registration Rights Agreement for one
year from the date of the Registration Rights Agreement.
LEGENDS. Shareholder understands and agrees that the Purchaser
will place the appropriate restrictive legends on any stock certificate(s)
evidencing the Restricted Securities, together with any other legends that
Purchaser may consider to be required by state or federal securities laws, the
Purchaser's Articles of Incorporation or
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<PAGE>
Bylaws, any other agreement between Shareholder and the Purchaser or any
agreement between Shareholder and any third party.
STOP-TRANSFER INSTRUCTIONS. Shareholder agrees that the
Purchaser may issue appropriate "stop-transfer" instructions to its transfer
agent, if any, and, if the Purchaser transfers its own securities, it may make
appropriate notations to the same effect in its own records.
REFUSAL TO TRANSFER. The Purchaser will not be required to (i)
transfer on its books any Restricted Securities that have been sold or otherwise
transferred in violation of any of the restrictions placed on the Restricted
Securities or (ii) treat as owner of such Restricted Securities, or to accord
the right to vote or pay dividends, to any shareholder or other trustee to whom
such Restricted Securities have been so transferred.
LIMITATIONS ON THE COMPANY'S DISTRIBUTION OF THE RESTRICTED
SECURITIES. Shareholder recognizes that before the Company may distribute any of
the Restricted Securities to any Shareholder the following requirements must be
satisfied: (i) the initial requirements set forth in Sections 2.2(a) and 7.1 of
the Purchase Agreement; (ii) the indemnification requirements set forth in
Sections 2.2(c), 5.5 and 8 of the Purchase Agreement; or (iii) the transition
requirements set forth in Sections 1.7 and 2.2(b) of the Purchase Agreement.
Before the Shareholder receives any of the Restricted Securities, the
distribution requirements set forth in Sections 5.12 and 5.14 of the Purchase
Agreement (including the requirement that the Company will not make any
distribution until its debts and obligations have been fully paid or provided
for and as otherwise required under Sections 500 et seq. of the California
Corporation Code) must be satisfied.
COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and
transfer of the Restricted Securities will be subject to and conditioned upon
compliance by the Purchaser, Company and Shareholder with all applicable state
and federal laws and regulations and with all applicable requirements of any
stock exchange or automated quotation system on which the Purchaser's Common
Stock may be listed or quoted at the time of such issuance or transfer.
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36
<PAGE>
This consent may be executed in any number of counterparts, each of which when
so executed and delivered to the Corporation shall be deemed an original, and
such counterparts together shall constitute one instrument.
SHAREHOLDER
NAME AND SIGNATURE NO. OF SHARES OF THE COMPANY'S COMMON
STOCK OWNED BY SHAREHOLDER
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
37
<PAGE>
EXHIBIT A
ASSET PURCHASE AGREEMENT
<PAGE>
EXHIBIT C
CONSULTING AGREEMENT
2-
<PAGE>
CONSULTING AGREEMENT
This Consulting Agreement (the "AGREEMENT") is made as of April 14,
1999 (the "EFFECTIVE DATE"), by and between audiohighway.com, a California
corporation ("COMPANY"), and Scott Cole, an individual ("CONSULTANT").
R E C I T A L
Consultant desires to perform, and Company desires to have Consultant
perform consulting services as an independent contractor to Company.
NOW, THEREFORE, the parties agree as follows:
1. SERVICES.
(a) PERFORMANCE. Consultant agrees to use his best efforts to
perform the consulting services (the "SERVICES") described in detail on EXHIBIT
A to this Agreement (the "PROJECT DESCRIPTION") prior to the completion date
specified on the Project Description (the "COMPLETION DATE").
(b) PAYMENT. As sole compensation for the performance of the
Services, Company will:
(i) release the Transition Escrow Shares pursuant to
Section 2.2(b) of the Asset Purchase Agreement by and between
Company and Mass Music. Inc., dated the date hereof and
Section 2(d) of the Escrow Agreement by and among Company,
Mass Music, Inc. and State Street Bank and Trust Company of
California, N.A., dated the date hereof
(ii) pay Consultant the hourly consulting rate stated
in the Project Description for each hour spent in performance
of the Services up to the maximum fee stated.
Reasonable expenses incurred by Consultant in performing the Services will
reimbursed by Company provided the prior written approval of Company is
obtained. Consultant will invoice Company on a monthly basis for the number of
hours spent in performing the Services. Consultant will receive no royalty or
other remuneration on the production or distribution of any products developed
by Company or by Consultant in connection with or based upon the Services
("PRODUCTS").
2. RELATIONSHIP OF PARTIES.
(a) INDEPENDENT CONTRACTOR. Consultant is an independent
contractor and is not an agent or employee of, and has no authority to bind,
Company by contract or otherwise. Consultant will perform the Services under the
general direction of Company, but Consultant will determine, in Consultant's
sole discretion, the manner and means by which the Services are accomplished,
subject to the requirement that Consultant shall at all times comply with
applicable law. Company has no right or authority to control the manner or means
by which the Services are accomplished.
(b) EMPLOYMENT TAXES AND BENEFITS. Consultant will report as
income all compensation received by Consultant pursuant to this Agreement.
Consultant will indemnify
3-
<PAGE>
Company and hold it harmless from and against all claims, damages, losses and
expenses, including reasonable fees and expenses of attorneys and other
professionals, relating to any obligation imposed by law on Company to pay any
withholding taxes, social security, unemployment or disability insurance, or
similar items in connection with compensation received by Consultant pursuant to
this Agreement. Consultant will not be entitled to participate in any plans,
arrangements, or distributions by Company pertaining to any bonus, stock option,
profit sharing, insurance or similar benefits for Company's employees.
(c) Liability Insurance. Consultant will maintain adequate
insurance to protect Consultant from the following: (a) claims under worker's
compensation and state disability acts; (b) claims for damages because of bodily
injury, sickness, disease or death which arise out of any negligent act or
omission of Consultant; and (c) claims for damages because of injury to or
destruction of tangible or intangible property, including loss of use resulting
therefrom, which arise out of any negligent act or omission of Consultant.
3. PROPERTY OF COMPANY.
(a) DEFINITION. For the purposes of this Agreement, "DESIGNS
AND MATERIALS" shall mean all designs, discoveries, inventions, products,
computer programs, procedures, improvements, developments, drawings, notes,
documents, information and materials made, conceived or developed by Consultant
alone or with others which result from or relate to the Services.
(b) ASSIGNMENT OF OWNERSHIP. Consultant hereby irrevocably
transfers and assigns any and all of its right, title, and interest in and to
Designs and Materials, including but not limited to all copyrights, patent
rights, trade secrets and trademarks, to Company. Designs and Materials will be
the sole property of Company and Company will have the sole right to determine
the treatment of any Designs and Materials, including the right to keep them as
trade secrets, to file and execute patent applications on them, to use and
disclose them without prior patent application, to file registrations for
copyright or trademark on them in its own name, or to follow any other procedure
that Company deems appropriate. Consultant agrees: (a) to disclose promptly in
writing to Company all Designs and Materials; (b) to cooperate with and assist
Company to apply for, and to execute any applications and/or assignments
reasonably necessary to obtain, any patent, copyright, trademark or other
statutory protection for Designs and Materials in Company's name as Company
deems appropriate; and (c) to otherwise treat all Designs and Materials as
"Confidential Information," as defined below. These obligations to disclose,
assist, execute and keep confidential will survive any expiration or termination
of this Agreement.
(c) MORAL RIGHTS WAIVER. "MORAL RIGHTS" means any right to
claim authorship of a work, any right to object to any distortion or other
modification of a work, and any similar right, existing under the law of any
country in the world, or under any treaty. Consultant hereby irrevocably
transfers and assigns to Company any and all Moral Rights that Consultant may
have in any Services, Designs and Materials or Products. Consultant also hereby
forever waives and agrees never to assert against Company, its successors or
licensees any and all Moral Rights Consultant may have in any Services, Designs
and Materials or Products, even after expiration or termination of this
Agreement.
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(d) EMPLOYEES' CONFIDENTIALITY AGREEMENT. Consultant will
ensure that each of his employees who will have access to the Designs and
Materials or Confidential Information of Company executes an agreement, the form
of which has been approved by Company (the "CONFIDENTIALITY AGREEMENT"),
acknowledging Company's exclusive ownership and control of the Designs and
Materials, obligating the employee to keep all Confidential Information
confidential and not to use the Designs and Materials or Confidential
Information in any way, commercially or otherwise, except in performing the
Services, and transferring to Company and waiving any and all Moral Rights in
the Services, Designs and Materials and Products.
4. CONFIDENTIAL INFORMATION. Consultant acknowledges that Consultant
will acquire information and materials from Company and knowledge about the
business, products, programming techniques, experimental work, customers,
clients and suppliers of Company and that all such knowledge, information and
materials acquired, the existence, terms and conditions of this Agreement, and
the Designs and Materials, are and will be the trade secrets and confidential
and proprietary information of Company (collectively "CONFIDENTIAL
INFORMATION"). Confidential Information will not include, however, any
information which is or becomes part of the public domain through no fault of
Consultant or that Company regularly gives to third parties without restriction
on use or disclosure. Consultant agrees to hold all such Confidential
Information in strict confidence, not to disclose it to others or use it in any
way, commercially or otherwise, except in performing the Services, to disclose
it to Consultant's employees only on a need-to-know basis and only to employees
who have signed the Confidentiality Agreement, and not to allow any unauthorized
person access to it, either before or after expiration or termination of this
Agreement. Consultant further agrees to take all action reasonably necessary and
satisfactory to protect the confidentiality of the Confidential Information
including, without limitation, implementing and enforcing operating procedures
to minimize the possibility of unauthorized use or copying of the Confidential
Information.
5. INDEMNIFICATION BY CONSULTANT. Consultant will indemnify Company and
hold it harmless from and against all claims, damages, losses and expenses,
including court costs and reasonable fees and expenses of attorneys, expert
witnesses and other professionals, arising out of or resulting from, and, at
Company's option, Consultant will defend Company against:
(a) any action by a third party against Company that is based
on any claim that any Services performed under this Agreement, or their results,
infringe a patent, copyright or other proprietary right or violate a trade
secret; and
(b) any action by a third party against Company that is based
on any negligent act or omission or willful conduct of Consultant or employees
of Consultant and which results in: (i) any bodily injury, sickness, disease or
death; (ii) any injury or destruction to tangible or intangible property
(including computer programs and data) or any loss of use resulting therefrom;
or (iii) any violation of any statute, ordinance, or regulation.
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6. TERMINATION AND EXPIRATION.
(a) BREACH. Either party may terminate this Agreement in the
event of a breach by the other party of this Agreement if such breach continues
uncured for a period of ten (10) days after written notice.
(b) AUTOMATIC. This Agreement terminates automatically, with
no further action of either party, if Consultant is adjudicated bankrupt, files
a voluntary petition of bankruptcy, makes a general assignment for the benefit
of creditors, is unable to meet its obligations in the normal course of business
or if a receiver is appointed on account of Consultant's insolvency.
(c) EXPIRATION. Unless terminated earlier, this Agreement will
expire on the Completion Date.
(d) NO ELECTION OF REMEDIES. The election by Company to
terminate this Agreement in accordance with its terms shall not be deemed an
election of remedies, and all other remedies provided by this Agreement or
available at law or in equity shall survive any termination.
7. EFFECT OF EXPIRATION OR TERMINATION. Upon the expiration or termination
of this Agreement for any reason:
(a) each party will be released from all obligations to the
other arising after the date of expiration or termination, except that
expiration or termination of this Agreement will not relieve Consultant of its
obligations under Sections 2(b), 3, 4, 5, 8, 9(b) and 10, nor will expiration or
termination relieve Consultant or Company from any liability arising from any
breach of this Agreement; and
(b) Consultant will promptly notify Company of all
Confidential Information, including but not limited to the Designs and
Materials, in Consultant's possession and, at the expense of Consultant and in
accordance with Company's instructions, will promptly deliver to Company all
such Confidential Information.
8. LIMITATION OF LIABILITY. IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY
SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION
WITH THIS AGREEMENT, EVEN IF COMPANY HAS BEEN INFORMED IN ADVANCE OF THE
POSSIBILITY OF SUCH DAMAGES.
9. COVENANTS.
(a) PRE-EXISTING OBLIGATIONS. Consultant represents and
warrants that Consultant is not under any pre-existing obligation inconsistent
with the provisions of this Agreement.
(b) SOLICITATION OF EMPLOYMENT. Because of the trade secret
subject matter of Company's business, Consultant agrees that he will not solicit
the services of any of the employees, consultants, suppliers or customers of
Company during the term of this Agreement and for six (6) months thereafter.
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10. GENERAL.
(a) ASSIGNMENT. Consultant may not assign Consultant's rights
or delegate Consultant's duties under this Agreement either in whole or in part
without the prior written consent of Company. Any attempted assignment or
delegation without such consent will be void.
(b) EQUITABLE REMEDIES. Because the Services are personal and
unique and because Consultant will have access to Confidential Information of
Company, Company will have the right to enforce this Agreement and any of its
provisions by injunction, specific performance or other equitable relief without
prejudice to any other rights and remedies that Company may have for a breach of
this Agreement.
(c) ATTORNEYS' FEES. If any action is necessary to enforce the
terms of this Agreement, the substantially prevailing party will be entitled to
reasonable attorneys' fees, costs and expenses in addition to any other relief
to which such prevailing party may be entitled.
(d) GOVERNING LAW; SEVERABILITY. This Agreement will be
governed by and construed in accordance with the laws of the State of California
excluding that body of law pertaining to conflict of laws. If any provision of
this Agreement is for any reason found to be unenforceable, the remainder of
this Agreement will continue in full force and effect.
(e) NOTICES. Any notices under this Agreement will be sent by
certified or registered mail, return receipt requested, to the address specified
below or such other address as the party specifies in writing. Such notice will
be effective upon its mailing as specified.
(f) COMPLETE UNDERSTANDING; MODIFICATION. This Agreement,
together with Exhibit A, constitutes the complete and exclusive understanding
and agreement of the parties and supersedes all prior understandings and
agreements, whether written or oral, with respect to the subject matter hereof.
Any waiver, modification or amendment of any provision of this Agreement will be
effective only if in writing and signed by the parties hereto.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
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IN WITNESS WHEREOF, the parties have signed this Agreement as of the
Effective Date.
COMPANY: CONSULTANT:
By:
----------------------------- ---------------------------------------
Scott Cole
Title:
-------------------------
Federal Tax I.D. Number
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Address: Address:
------------------------- -------------------------------
- ---------------------------------- -----------------------------------------
- ---------------------------------- -----------------------------------------
SIGNATURE PAGE TO CONSULTING AGREEMENT
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EXHIBIT A
PROJECT DESCRIPTION
This Project Description is issued under and subject to all of the
terms and conditions of the Consulting Agreement dated as of April 14, 1999 by
and between Company and Consultant (the "CONSULTING AGREEMENT"). Capitalized
terms used without definitions herein will have the meanings ascribed to such
terms in the Consulting Agreement.
1. RESULTS TO BE ACHIEVED:
Consultant shall assist the transfer of all tangible assets,
intellectual property and company knowledge regarding the maintenance and
operation of the online store and other functional aspects of the URL
"http://www.massmusic.com" (the "SITE"), to Company such that Company can
operate the Site and the business generated from the Site in a self supporting
manner.
Specifically, Consultant shall train Company to, and the Site shall be
operating in such manner that Company can:
(a) operate the scripts and procedures required so as to allow the
Company to operate, update and maintain the Site on the World
Wide Web;
(b) update and maintain music supplier electronic catalogs and all
other external interfaces;
(c) operate back-end reporting systems;
(d) update and maintain the interface to Bargain America;
(e) generate, maintain and mine customer lists from the Site; and
(f) process credit card orders over the Internet.
2. SERVICES TO BE PROVIDED:
In order to achieve these Results:
(a) Consultant agrees to provide up to 80 hours of on-site consulting
services over a three month period in order to facilitate the transition of the
online merchandising service from Mass Music/Bargain America to Company.
Specifically, these 80 hours shall be approximately broken down into:
(i) 15 hours per week for the 2 weeks following the Effective Date;
(ii) 8 hours per week during the subsequent 6 weeks or other times
as may be reasonably requested with at least 48 hours notice by Company,
which may include evenings and weekends.
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(b) Beyond the 90 days after the start date hereof or 80 hours of
Services, whichever expires first, Consultant agrees to provide, after receiving
at least 48 hours notice, which may include evening and weekends, ongoing
engineering support at a rate of $100.00 per hour. Such ongoing assistance shall
be provided only at the request of Company
All Services shall be performed under the direction and management of
Company. Although both parties recognize that time is of the essence in the
electronic commerce industry, both parties shall reasonably accommodate the
scheduling conflicts of the other, provided the Services are performed in a
timely manner. If the abovementioned Results are achieved to the reasonable
satisfaction of Company before the 90 days have elapsed or 80 hours of Service
has been provided by the Consultant, Company may, in its discretion, waive the
remaining hours of Service required of Consultant.
3. HOURLY CONSULTING RATE: The first 80 hours of Services to be performed
within 90 days after the Start Date the Hourly Consulting Rate shall be $50.00
per hour. After 80 hours of Service have been provided or 90 days have elapsed
the Hourly Consulting Rate shall be $100.00 per hour.
4. MAXIMUM NUMBER OF HOURS: 200
5. MAXIMUM CONSULTING FEE: $25,000
6. START DATE: April 15, 1999
7. COMPLETION DATE: 90 days after the Start Date
AGREED AS OF APRIL 14, 1999
COMPANY:
By:
-----------------------------------
Title:
-----------------------------------
CONSULTANT:
- --------------------------------------------
Scott Cole
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EXHIBIT D
ESCROW AGREEMENT
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ESCROW AGREEMENT
This Escrow Agreement (this "AGREEMENT") is made and entered into as of
April 14, 1999, by and among audiohighway.com, a California corporation
("PURCHASER"), Mass Music, Inc., a California corporation ("COMPANY") and State
Street Bank and Trust Company of California, N.A., as escrow agent (the "ESCROW
AGENT").
RECITALS
A. This Agreement is entered into in connection with and is ancillary
to that certain Asset Purchase Agreement by and between Purchaser and Company,
dated as of January 1, 1999 (the "PURCHASE Agreement"), a copy of which is
attached hereto as EXHIBIT A, pursuant to which Purchaser shall purchase
substantially all of the assets of Company (the "PURCHASE"). Capitalized terms
that are used in this Agreement and are not otherwise defined herein will have
the same meanings that such terms have in the Purchase Agreement.
B. The Purchase Agreement provides that 100% of the shares of Purchaser
Common Stock that are to be issued in the Purchase to the Company (the "ESCROW
SHARES") and $150,000.00 in cash are to be withheld by Purchaser and placed in
an escrow account (the "ESCROW ACCOUNT") to secure certain indemnification
obligations of the Company to Purchaser and other Indemnified Parties (as
defined in the Purchase Agreement) under the Purchase Agreement on the terms and
conditions set forth herein. 37.5% of the Escrow Shares and the $150,000.00 in
cash are referred to herein as the "INITIAL ESCROW SHARES AND CASH." 31.25% of
the Escrow Shares are referred to herein as the "TRANSITION ESCROW SHARES." The
remaining 31.25% of the Escrow Shares are referred to herein as the
"INDEMNIFICATION ESCROW SHARES." The Escrow Shares of Company required to be
deposited in the Escrow Account pursuant to this Agreement are shown on EXHIBIT
B attached hereto.
C. The parties hereto desire to establish the terms and conditions
pursuant to which the Escrow Shares will be deposited, held in, and disbursed
from the Escrow Account.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
1. ESCROW AND INDEMNIFICATION.
(a) DEPOSIT OF ESCROW SHARES. Purchaser will give the Escrow
Agent prompt written notice of the closing of the Purchase (the "EFFECTIVE
TIME"). Promptly after the Effective Time, Purchaser or its transfer agent will
deliver and deposit with the Escrow Agent the Purchaser stock certificates
registered in the name of the Company representing the Escrow Shares (the
"PRINCIPAL ESCROW SHARES"), who will hold them in escrow as collateral for the
obligations of the Company under the Purchase Agreement until Purchaser is
required to release its interest in such Escrow Shares pursuant to the terms of
this Agreement. As used herein, the
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"Escrow Shares" will include any "Additional Escrow Shares" as that term is
defined in Section 2(b) hereof. The Escrow Agent agrees to accept delivery of
the Escrow Shares and to hold such Escrow Shares in escrow subject to the terms
and conditions of this Agreement. In the event Purchaser issues any Additional
Escrow Shares, the Purchaser stock certificates representing such Additional
Escrow Shares will be delivered by Purchaser or its transfer agent to the Escrow
Agent in the same manner as the certificates for the Principal Escrow Shares
were to be delivered under the foregoing provisions of this Section 1(a). Unless
and until the Escrow Agent receives such Additional Escrow Shares, it may assume
that none have been issued.
(b) DEPOSIT OF CASH. Promptly after the Effective Time,
Purchaser will deliver and deposit $150,000.00 in cash (the "CASH") with the
Escrow Agent, who will hold the Cash in escrow as collateral for the closing
obligations of the Company under Section 7.1 of the Purchase Agreement until
Purchaser is required to release its interest in the Cash pursuant to the terms
of this Agreement. The Escrow Agent agrees to accept delivery of the Cash and to
hold such Cash in escrow subject to the terms and conditions of this Agreement.
The Cash will remain uninvested while held by the Escrow Agent and Company will
not be entitled to any interest thereupon.
(c) INDEMNIFICATION. Purchaser and the other Indemnified
Parties are indemnified pursuant to the terms of Section 8 of the Purchase
Agreement (which terms are incorporated herein by reference) from and against
any Damages, subject to the limitations set forth in Section 8 of the Purchase
Agreement and in this Agreement. (For purposes of this Agreement, references to
Purchaser with respect to such indemnification will include all other
Indemnified Parties, as applicable.) The Escrow Shares will be security for this
indemnity obligation, subject to the limitations, and in the manner provided, in
Section 8 of the Purchase Agreement and in this Agreement. Following the receipt
by Purchaser of notice or discovery of any claim, damage or legal action or
proceeding giving rise to indemnification rights under the Purchase Agreement,
Purchaser will give Company and the Escrow Agent written notice of such claim,
damage, legal action or proceeding in accordance with Section 3 hereof.
Purchaser may assert a claim for indemnification pursuant to Section 8 of the
Purchase Agreement for which Purchaser may recover Escrow Shares (a "CLAIM") by
giving Company and the Escrow Agent written notice of such Claim in accordance
with Section 3 below at any time prior to the Indemnification Escrow Release
Date (as defined in Section 2(e) below).
2. DEPOSIT OF STOCK POWERS; RELEASE FROM ESCROW.
(a) DELIVERY OF STOCK POWERS. Prior to the Effective Time,
Company has delivered to the Escrow Agent three (3) duly endorsed stock powers
for each certificate representing Company's Principal Escrow Shares bearing a
medallion stamp guarantee in the form of EXHIBIT C attached hereto. In the event
any Additional Escrow Shares are issued, Company will promptly execute and
deliver to the Escrow Agent three (3) additional stock powers for each
certificate representing Company's Additional Escrow Shares (as defined in
Section 2(b) below).
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(b) DIVIDENDS, VOTING AND RIGHTS OF OWNERSHIP. Except for
tax-free dividends paid in stock declared with respect to the Escrow Shares
pursuant to Section 305(a) of the Internal Revenue Code of 1986, any shares of
Purchaser stock issued as a result of, or issued upon the conversion or exercise
of any security issued as a result of, any stock dividend, reclassification,
stock split, subdivision or combination of shares, recapitalization, merger or
other events occurring with respect to the Escrow Shares while they are held in
escrow under this Agreement ( "ADDITIONAL ESCROW SHARES") will be held in escrow
in the same manner and in the same proportions as the Escrow Shares, and will be
considered to be Escrow Shares. Company will have the right to vote the Escrow
Shares deposited in the Escrow Account for the account of Company so long as
such Escrow Shares are held in escrow, and Purchaser will take all reasonable
steps necessary to allow the exercise of such rights. While the Escrow Shares
are registered in the name of Company and remain in the Escrow Agent's
possession pursuant to this Agreement, Company will retain and will be able to
exercise all other incidents of ownership of said Escrow Shares that are not
inconsistent with the terms and conditions hereof.
(c) DISTRIBUTION TO COMPANY OF INITIAL ESCROW SHARES AND CASH.
Upon receipt by the Escrow Agent of a certificate of the Purchaser to the effect
that the Company and others have complied with the closing obligations of the
Company specified in Section 7.1 of the Purchase Agreement (the date such
receipt being referred to as the "INITIAL ESCROW RELEASE DATE"), on which
certificate the Escrow Agent may rely without inquiry, the Escrow Agent will
release, or cause Purchaser's stock transfer agent to release, from escrow
Company's Initial Escrow Shares and Cash, including Company's Additional Escrow
Shares derived therefrom. Within ten (10) business days of the Initial Escrow
Release Date or, after the date when the applicable release condition hereunder
is met, the Escrow Agent will deliver to the Company the requisite number of
Escrow Shares to be released to Company as identified by Purchaser in writing
within such ten (10) business day period. Such delivery will be in the form of
Purchaser stock certificates issued in the name of Company, delivered to
Company's address set forth in Exhibit B. Cash in amounts furnished to the
Escrow Agent by Purchaser will be paid in lieu of fractions of Escrow Shares in
an amount equal to the product determined by multiplying such fraction by the
Common Stock Price (as defined in Section 4(c)). Within five (5) business days
after written request from Company, Purchaser will submit to the Escrow Agent
and Company a certified schedule of the cash amounts payable for fractional
shares and will deposit with Escrow Agent sufficient funds to pay such cash
amounts for fractional shares. If not all of the cash delivered by Purchaser to
the Escrow Agent is immediately distributable, the Escrow Agent will hold
uninvested the undistributed cash pending later distribution. All cash deposited
with the Escrow Agent pursuant to the Purchase Agreement or this Agreement will
remain uninvested while held by the Escrow Agent and Company will not be
entitled to any interest thereupon.
(d) DISTRIBUTION TO COMPANY OF TRANSITION ESCROW SHARES. Upon
receipt by the Escrow Agent of a certificate of the Purchaser to the effect that
the Company and others have complied with the transfer obligations specified in
Section 1.7 of the Purchase Agreement and the Consulting Agreement by and
between Scott Cole and audiohighway.com dated April 14, 1999, substantially in
the form attached to the Purchase Agreement as Exhibit C (the date of such
receipt being referred to as the "TRANSITION ESCROW RELEASE DATE"), on which
certificate the Escrow Agent may rely without inquiry, the Escrow Agent will
release or cause Purchaser's
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stock transfer agent to release from escrow Company's Transition Escrow Shares,
including Company's Additional Escrow Shares derived therefrom. Within ten (10)
business days of the Transition Escrow Release Date or, after the date when the
applicable release condition hereunder is met, the Escrow Agent will deliver to
the Company the requisite number of Escrow Shares to be released to Company as
identified by Purchaser in writing within such ten (10) business day period.
Such delivery will be in the form of Purchaser stock certificates issued in the
name of Company, delivered to Company's address set forth in Exhibit B. Cash in
amounts furnished to the Escrow Agent by Purchaser will be paid in lieu of
fractions of Escrow Shares in an amount equal to the product determined by
multiplying such fraction by the Common Stock Price (as defined in Section 4(c).
Within five (5) business days after written request from Company, Purchaser will
submit to the Escrow Agent and Company a certified schedule of the cash amounts
payable for fractional shares and will deposit with Escrow Agent sufficient
funds to pay such cash amounts for fractional shares. If not all of the cash
delivered by Purchaser to the Escrow Agent is immediately distributable, the
Escrow Agent will hold uninvested the undistributed cash pending later
distribution.
(e) DISTRIBUTION TO COMPANY OF INDEMNIFICATION ESCROW SHARES.
On the first anniversary of the Effective Time (the "INDEMNIFICATION ESCROW
RELEASE DATE"), the Escrow Agent will release or cause Purchaser's stock
transfer agent to release from escrow Company's Indemnification Escrow Shares,
including Company's Additional Escrow Shares derived therefrom, less (A) any
Escrow Shares delivered to Purchaser in accordance with Section 4 hereof in
satisfaction of Claims by Purchaser and less (B) any Escrow Shares that may be
subject to delivery to Purchaser in accordance with Section 4 hereof with
respect to any then pending but unresolved Claims of Purchaser. Any Escrow
Shares held as a result of clause (B) will be released to the Company or
released to Purchaser for cancellation (as appropriate in accordance with the
terms of this Agreement) promptly upon resolution of each specific Claim
involved. Within ten (10) business days of the Indemnification Escrow Release
Date or, with respect to any Escrow Shares held as a result of clause (B) above,
after the date when the applicable release condition hereunder is met, the
Escrow Agent will deliver to the Company, the requisite number of Escrow Shares
to be released to Company as identified by Purchaser in writing within such ten
(10) business day period. Such delivery will be in the form of Purchaser stock
certificates issued in the name of Company, delivered to Company's address set
forth in Exhibit B. Cash in amounts furnished to the Escrow Agent by Purchaser
will be paid in lieu of fractions of Escrow Shares in an amount equal to the
product determined by multiplying such fraction by the Common Stock Price (as
defined below). Within five (5) business days after written request from
Company, Purchaser will submit to the Escrow Agent and Company a certified
schedule of the cash amounts payable for fractional shares and will deposit with
Escrow Agent sufficient funds to pay such cash amounts for fractional shares. If
not all of the cash delivered by Purchaser to the Escrow Agent is immediately
distributable, the Escrow Agent will hold uninvested and undistributed cash
pending later distribution.
(f) LEGENDS. Certificates representing Escrow Shares will
(until they are released to the Company in accordance with this Agreement) bear
the following legend indicating that they are subject to this Agreement:
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"THE SECURITIES REPRESENTED HEREBY MAY ONLY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN ACCORDANCE WITH THE
TERMS OF AN ESCROW AGREEMENT BY AND AMONG THE ISSUER, THE HOLDER
THEREOF AND STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., A
COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
ISSUER."
(g) NO ENCUMBRANCE. No Escrow Shares or any beneficial
interest therein may be pledged, sold, assigned or transferred by Company, other
than by operation of law or the laws of descent (and in either such case, the
transferee will be subject to all terms and provisions of this Agreement), or be
taken or reached by any legal or equitable process in satisfaction of any debt
or other liability of Company (other than Company's obligations under Section
8.3 of the Purchase Agreement), prior to the delivery by the Escrow Agent to
Company of the stock certificates representing such Escrow Shares.
(h) Power to Transfer Escrow Shares. The Escrow Agent is
hereby granted the power to effect any transfer of Escrow Shares contemplated by
this Agreement. Purchaser will cooperate with the Escrow Agent and cause its
transfer agent to cooperate in promptly issuing stock certificates to effect
such transfers.
3. NOTICE OF CLAIM.
(a) Each notice of a Claim by Purchaser given pursuant to
Section 1(c) above (the "NOTICE OF CLAIM") will be in the form of a certificate
delivered to the Escrow Agent and Company and will contain the following
information:
(i) Purchaser's good faith estimate of the reasonably
foreseeable maximum amount of the alleged Damages (which amount may be the
amount of damages claimed by a third party plaintiff in an action brought
against Purchaser or Company based on alleged facts, which if true, would
constitute a breach of Company's representations and warranties); and
(ii) a brief description, in reasonable detail (to
the extent reasonably available to Purchaser), of the facts, circumstances or
events giving rise to the alleged Damages based on Purchaser's good faith belief
thereof, including, without limitation, the identity and address of any
third-party claimant (to the extent reasonably available to Purchaser) and
copies of any formal demand or complaint.
(b) The Escrow Agent will not transfer any of the Escrow
Shares held in the Escrow Account to Purchaser pursuant to a Notice of Claim
until such Notice of Claim has been resolved in accordance with Section 4 below.
4. RESOLUTION OF NOTICE OF CLAIM AND TRANSFER OF ESCROW SHARES. Any
Notice of Claim received by Company and the Escrow Agent pursuant to Section 3
above will be resolved as follows:
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(a) UNCONTESTED CLAIMS. In the event that (i) Company does not
contest a Notice of Claim pursuant to Section 4(b) and (ii) the Escrow Agent has
not received from the Purchaser, within thirty (30) calendar days after a Notice
of Claim containing a statement of the claimed Damages has been received by the
Escrow Agent pursuant to Section 3(a) above, written notice that the Company has
paid the amount demanded, then the Escrow Agent will promptly deliver to
Purchaser for cancellation that number of Escrow Shares having a value
(determined pursuant to Section 4(c) hereof but rounded down to the next highest
whole number of shares) equal to the amount of Damages specified in the Notice
of Claim and will notify Company of such transfer. In the case of such rounding
down, the Escrow Agent will distribute to Purchaser, from funds furnished by
Company, cash-in-lieu of the fractional shares not distributed. If not all of
the cash delivered by Purchaser to the Escrow Agent is immediately
distributable, the Escrow Agent will hold uninvested the undistributed cash
pending its later distribution.
(b) CONTESTED CLAIMS. In the event that Company gives
Purchaser and the Escrow Agent written notice contesting all, or a portion of, a
Notice of Claim (a "CONTESTED CLAIM") within the thirty (30) day period provided
above, matters that are subject to third party claims brought against Purchaser
or Company in a litigation or arbitration will await the final decision, award
or settlement of such litigation or arbitration, while matters that arise
between Purchaser on the one hand and Company on the other hand ("ARBITRABLE
CLAIMS"), will be settled by binding arbitration between Purchaser and Company
in accordance with the terms and provisions of this Agreement. Any portion of
the Notice of Claim that is not contested (the Escrow Agent being entitled to
assume that, unless it has received written notice of a Contested Claim within
the thirty (30) day period set forth in Section 4(a), Company has no objection
to a Notice of Claim) will be resolved as set forth above in Section 4(a). The
final decision of the arbitrator (such arbitrator to be appointed pursuant to
the provisions of Section 4(b)(iii) of this Agreement) will be furnished to the
Escrow Agent, Company and Purchaser in writing and will constitute a conclusive
determination of the issue in question, binding upon the Company and Purchaser.
After the Escrow Agent has received written notice contesting a Notice of Claim
within the thirty (30) day period set forth above, the Escrow Agent will set
aside and continue to hold in the Escrow Account Escrow Shares having a value
(determined pursuant to Section 4(c) hereof) sufficient to cover the amount of
such Claim (notwithstanding the expiration of the Escrow Release Date) until (i)
execution of a settlement agreement by Purchaser and Company setting forth a
resolution of the Notice of Claim, or (ii) receipt of a copy of the final award
of the arbitrator regarding such Claim.
(i) ARBITRATION. Any Contested Claim will be settled by
arbitration in Santa Clara County, California, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA RULES") then in effect. However, in all
events, these arbitration provisions will govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator will have the authority to grant
any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve a Contested Claim, provided,
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however, that any such remedy may be satisfied exclusively from shares held in
escrow pursuant to this Agreement.
(ii) COMPENSATION OF ARBITRATOR. Any such arbitration will
be conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(iii) SELECTION OF ARBITRATOR. The American Arbitration
Association will have the authority to select an arbitrator from a list of
arbitrators who are partners in a nationally recognized firm of independent
certified public accountants from the management advisory services department
(or comparable department or group) of such firm; provided, however, that such
firm cannot be the firm of certified public accountants then auditing the books
and records of either party or providing management or advisory services for
either party.
(iv) PAYMENT OF COSTS. Purchaser and the Company will each
pay 50% of the initial compensation to be paid to the arbitrator in any such
arbitration and 50% of the costs of transcripts and other normal and regular
expenses of the arbitration proceedings; provided, however, that the prevailing
party in any arbitration will be entitled to an award of attorneys' fees and
costs, and all costs of arbitration, including those provided for above, will be
paid by the losing party, and the arbitrator will be authorized to make such
determinations. The Company's liability for such fees and expenses of
arbitration will be paid by Purchaser and will be exclusively recovered as a
Claim hereunder out of the Escrow Shares.
(v) BURDEN OF PROOF. For any Arbitrable Claim submitted to
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
(vi) AWARD. Upon the conclusion of any arbitration
proceedings hereunder, the arbitrator will render findings of fact and
conclusions of law and a written opinion setting forth the basis and reasons for
any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
(vii) TERMS OF ARBITRATION. The arbitrator chosen in
accordance with these provisions will not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the provisions of
this Agreement or the Purchase Agreement.
(viii) EXCLUSIVE REMEDY. Except as specifically otherwise
provided in this Agreement or the Purchase Agreement, arbitration will be the
sole and exclusive remedy of the parties for any Arbitrable Claim arising out of
this Agreement.
(c) DETERMINATION OF AMOUNT OF CLAIMS. Any amount owed to
Purchaser hereunder, determined pursuant to Section 4(a) or (b) above, will be
promptly payable to Purchaser by distributions of whole numbers of Escrow Shares
and cash-in-lieu amounts
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attributable to fractional shares then held by the Escrow Agent valued at the
Common Stock Price for Purchaser's Common Stock (determined as provided in the
following sentence). For the purpose of determining the number of Purchaser's
shares to be delivered to Purchaser out of the Escrow Fund or for the purpose of
determining the cash-in-lieu of fractions pursuant to Section 2(d), Purchaser's
shares will be valued by Purchaser at the average of the closing prices (the
"AVERAGE CLOSING PRICE") of Purchaser's Common Stock on the Nasdaq National
Market or other securities market, as reported in THE WALL STREET JOURNAL or
similar financial publication for the five (5) consecutive trading days ending
on the date that is two (2) trading days prior to the date on which a Notice of
Claim is received by the Escrow Agent. For purpose of such determination once
Purchaser's shares are traded on the Nasdaq National Market or other securities
exchange, Purchaser will deliver a certificate, signed by an authorized officer
of Purchaser, certifying the Average Closing Price applicable to a Claim.
(d) NO EXHAUSTION OF REMEDIES. Purchaser need not exhaust any
other remedies that may be available to it but will proceed directly in
accordance with the provisions of this Agreement. Purchaser may institute Claims
against the Escrow Shares and in satisfaction thereof may recover Escrow Shares,
in accordance with the terms of this Agreement, without making any other Claims
directly against the Company and without rescinding or attempting to rescind the
transactions consummated pursuant to the Purchase Agreement. The assertion of
any single Claim for indemnification hereunder will not bar Purchaser from
asserting other Claims hereunder, PROVIDED, HOWEVER, that if all Escrow Shares
have been released to the Company or Purchaser pursuant to this Agreement,
including, but not limited to, Sections 2(e), 4(a), and 4(b), Purchaser will be
barred from asserting any further Claims (other than fraud, willful misconduct
or breach of Company's representations in Section 3 of the Purchase Agreement).
5. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent (i) will not be responsible for, or be
charged with knowledge of, the Purchase Agreement or any other agreement
referred to herein but will be obligated only for performance of such duties as
are specifically set forth in this Agreement; (ii) will not be obligated to take
any legal or other action hereunder which might in its judgment involve any
expense or liability unless it will have been furnished with acceptable
indemnification; (iii) may rely on and will be protected in acting or refraining
from acting upon any written notice, instruction, instrument, statement, request
or document furnished to it hereunder and believed by it to be genuine and to
have been signed or presented by the proper person, and will have no
responsibility for determining the accuracy thereof; and (iv) may consult
counsel satisfactory to it, including house counsel, and the opinion of such
counsel, will be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
accordance with the opinion of such counsel.
(b) Neither the Escrow Agent nor any of its directors, officers
or employees will be liable to anyone for any action or omitted to be taken by
it or any of its directors, officers or employees hereunder except in the case
of gross negligence or willful misconduct. Each party hereto (other than the
Escrow Agent), jointly and severally (each an "INDEMNIFYING PARTY" and together
the "INDEMNIFYING PARTIES"), covenants and agrees to indemnify the Escrow Agent
and
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hold it harmless without limitation from and against any loss, liability or
expense of any nature incurred by the Escrow Agent arising out of or in
connection with this Agreement or with the administration of its duties
hereunder, including but not limited to legal fees and other costs and expenses
of defending or preparing to defend against any claim or liability in the
premises, unless such loss, liability or expense will be caused by the Escrow
Agent's willful misconduct or gross negligence. In no event will the Escrow
Agent be liable for indirect, punitive, special or consequential damages.
(c) The Indemnifying Parties, jointly and severally, agree to
assume any and all obligations imposed now or hereafter by any applicable tax
law with respect to the payment of any funds under this Agreement, and to
indemnify and hold the Escrow Agent harmless from and against any taxes,
additions for late payment, interest, penalties and other expenses, that may be
assessed against the Escrow Agent on any such payment or other activities under
this Agreement. The Indemnifying Parties undertake to instruct the Escrow Agent
in writing with respect to the Escrow Agent's responsibility for withholding and
other taxes, assessments or other governmental charges, certifications and
governmental reporting in connection with its acting as Escrow Agent under this
Agreement. The Indemnifying Parties, jointly and severally, agree to indemnify
and hold the Escrow Agent harmless from any liability on account of taxes,
assessments or other governmental charges, including without limitation the
withholding or deduction or the failure to withheld or deduct same, and any
liability for failure to obtain proper certifications or to properly report to
governmental authorities, to which the Escrow Agent may be or become subject in
connection with or which arises out of this Agreement, including costs and
expenses (including reasonable legal fees), interest and penalties.
Notwithstanding the foregoing, no distributions will be made to an individual
unless the Escrow Agent is supplied with an original, signed W-9 form or its
equivalent prior to distribution.
(d) The Escrow Agent hereby warrants that the Escrow Agent will
notify Purchaser and Company by letter, or by telephone or telecopy confirmed by
letter, of any receipt by the Escrow Agent of a written assertion of a claim
against the Escrow Agent, or any action commenced against the Escrow Agent,
within ten (10) business days after the Escrow Agent's receipt of written notice
of such claim. However, the Escrow Agent's failure to so notify each
Indemnifying Party will not operate in any manner whatsoever to relieve an
Indemnifying Party from any liability that it may have otherwise than on account
of this Section 5.
(e) In the event conflicting demands are made or conflicting
notices are served upon the Escrow Agent with respect to the Escrow Account, the
Escrow Agent will have the absolute right, at the Escrow Agent's election, to do
either or both of the following: (i) resign so a successor can be appointed
pursuant to Section 9 hereof or (ii) file a suit in interpleader and obtain an
order from a court of competent jurisdiction requiring the parties to interplead
and litigate in such court their several claims and rights among themselves. In
the event such interpleader suit is brought, the Escrow Agent will thereby be
fully released and discharged from all further obligations imposed upon it under
this Agreement, and Purchaser will pay the Escrow Agent all costs, expenses and
reasonable attorney's fees expended or incurred by the Escrow Agent pursuant to
the exercise of Escrow Agent's rights under this Section 5 (such costs, fees and
expenses will be treated as extraordinary fees and expenses for the purposes of
Section 8 hereof).
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Purchaser will be entitled to reimbursement from the Company of any
extraordinary fees and expenses of Escrow Agent in the event Purchaser
prevails in such dispute pursuant to Section 8 hereof. Company's liability for
such extraordinary fees and expenses may be exclusively recovered by Purchaser
out of the Escrow Shares. Purchaser will make such recovery by furnishing a
Notice of Claim to the Escrow Agent in accordance with Section 3(a).
(f) Each Indemnifying Party may participate at its own expense in
the defense of any claim or action that may be asserted against the Escrow
Agent, and if the Indemnifying Parties so elect, the Indemnifying Parties may
assume the defense of such claim or action; PROVIDED, HOWEVER, that if there
exists a conflict of interest that would make it inappropriate, in the sole
discretion of the Escrow Agent, for the same counsel to represent both the
Escrow Agent and the Indemnifying Parties, the Escrow Agent's retention of
separate counsel will be reimbursable as provided above. The Escrow Agent's
right to indemnification hereunder will survive the Escrow Agent's resignation
or removal as Escrow Agent and will survive the termination of this Agreement by
lapse of time or otherwise.
(g) The Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either directly or
by or through its agents or attorneys. The Escrow Agent will have no liability
for the conduct of any outside attorneys, accountants or other similar
professionals it retains. Nothing in this Agreement will be deemed to impose
upon the Escrow Agent any duty to qualify to do business or to act as a
fiduciary or otherwise in any jurisdiction other than the State of California.
6. NOTICES. Any notice required or permitted to be given under
this Agreement will be in writing and will be effective upon: (i) receipt if
hand delivered; (ii) the next business day after dispatch by fax transmission or
nationally recognized overnight express courier and addressed as set forth
herein; or (iii) three days after dispatch by certified or registered United
States mail, postage prepaid, addressed as set forth herein.
(a) IF TO COMPANY:
Mass Music, Inc.
3410 Bowman Ct.
Santa Cruz, CA 95065
Attn: Thomas Tansy
Fax No.: (831) 479-4610
WITH A COPY TO:
Bryan Duckworth, Esq.
101 Park Center Plaza
Suite 1007
San Jose, CA 95113
Fax No.: (408) 292-1257
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<PAGE>
(b) IF TO PURCHASER:
audiohighway.com
20600 Mariani Ave.
Cupertino CA 95014
Attn: Grant Jasmin
Fax No.: (408) 255-5591
WITH A COPY TO:
Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: R. Gregory Roussel, Esq.
Fax No.: (650) 494-1417
(c) IF TO ESCROW AGENT:
State Street Bank and Trust Company of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Attn: Corporate Trust Department
(audiohighway.com/Mass Music escrow)
Fax No.: (213) 362-7357
or to such other address as Purchaser, Company or the Escrow Agent, as the case
may be, designates in a writing delivered to each of the other parties hereto.
Notwithstanding the foregoing, notices delivered to the Escrow Agent will be
effective only upon receipt. The Escrow Agent may assume without inquiry that
any document, Claim or notice required to be delivered to the Escrow Agent and
any other person has been received by such other person if it has been received
by the Escrow Agent.
7. GENERAL.
(a) SEVERABILITY. If any provision of this Agreement is found
by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent that
it is found to be invalid or unenforceable and to the extent that to do so would
not deprive one of the parties of the substantial benefit of its bargain. Such
provision will, to the extent allowable by law and the preceding sentence, not
be voided or canceled but will instead be modified by such arbitrator or court
so that it becomes enforceable and, as modified, will be enforced as any other
provision hereof, all the other provisions hereof continuing in full force and
effect.
(b) AMENDMENT; WAIVER. This Agreement may be amended,
modified, superseded, canceled, renewed or extended only by an agreement in
writing executed by the
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<PAGE>
parties hereto. The failure by any party at any time to require performance or
compliance by the other of any of its obligations or agreements will in no way
affect the right to require such performance or compliance at any time
thereafter. The waiver by any party of a breach of any provision of this
Agreement will not be treated as a waiver of any preceding or succeeding breach
of such provision or as a waiver of the provision itself. No waiver of any kind
will be effective or binding, unless it is in writing and is signed by the
party against whom such waiver is sought to be enforced.
(c) ASSIGNMENT. The Company as registered owner of Escrow Shares
cannot assign any rights or obligations under this Agreement without the prior
written consent of Purchaser. Purchaser may assign its rights, together with its
obligations hereunder, to any parent, subsidiary, affiliate or successor of
Purchaser, or in connection with any sale, transfer or other disposition of all
or substantially all the business and assets of Purchaser or any of its
subsidiaries or affiliates, whether by sale of stock, sale of assets, merger,
consolidation or otherwise; PROVIDED that any such assignee assumes Purchaser's
obligations hereunder. This Agreement will be binding upon, and inure to the
benefit of, the persons or entities who are permitted, by the terms of this
Agreement, to be successors, assigns and personal representatives of the
respective parties hereto.
(d) GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws.
(e) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed an original but all of which, taken together,
constitute one and the same agreement.
(f) ENTIRE AGREEMENT. Except as otherwise set forth in the
Purchase Agreement, this Agreement constitutes the entire understanding and
agreement of the parties with respect to the subject matter of this Agreement
and supersedes all prior agreements or understandings, written or oral, between
the parties with respect to the subject matter hereof.
(g) TITLES. The titles and captions of the sections and
paragraphs of this Agreement are included for convenience of reference only and
will have no effect on the construction or meaning of this Agreement.
(h) RULES OF CONSTRUCTION. It is intended by the parties hereto
that this Agreement will not be construed against the party that has drafted all
or any portion of this Agreement.
(i) TAX IDENTIFICATION NUMBERS. Each party hereto, other than the
Escrow Agent and Purchaser, will provide the Escrow Agent with such party's Tax
Identification Number as assigned by the Internal Revenue Service and as set
forth in Exhibit B.
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<PAGE>
8. EXPENSES OF ESCROW AGENT. All fees and expenses of the Escrow Agent
incurred in the ordinary course of performing its responsibilities hereunder
will be paid by Purchaser upon receipt of a written invoice submitted by Escrow
Agent. A schedule of the fees of the Escrow Agent is attached hereto as EXHIBIT
D. Any extraordinary fees and expenses, including without limitation any fees or
expenses (including the fees or expenses of counsel to the Escrow Agent)
incurred by the Escrow Agent in connection with a dispute over the distribution
of Escrow Shares or the validity of a Notice of Claim, will be paid by Purchaser
upon receipt of a written invoice submitted by Escrow Agent. The Company will be
liable for any extraordinary fees and expenses of the Escrow Agent arising in
connection with a dispute hereunder, in the event Purchaser prevails in such
dispute. Such extraordinary fees and expenses will be paid by Purchaser and
recovered as a Claim hereunder out of the Escrow Shares. The Escrow Agent will
have no duty to solicit any payments which may be due it hereunder.
9. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by giving
notice of its resignation to the parties to this Agreement, specifying a date
not less than thirty (30) days following such notice date of when such
resignation will take effect. Purchaser will designate a successor Escrow Agent
prior to the expiration of such thirty (30) day period by giving written notice
to the Escrow Agent and Company. Purchaser may appoint a successor Escrow Agent
without the consent of Company so long as such successor is a bank with (or if
such successor is a subsidiary of a bank holding company its holding company
will have) assets of at least $50 million, and may appoint any other successor
Escrow Agent with the consent of Company, which will not be unreasonably
withheld. If, however, Purchaser fails to name a successor Escrow Agent prior to
the expiration of such thirty (30) day period, the Escrow Agent may apply to a
court of competent jurisdiction for appointment of a successor Escrow Agent. The
Escrow Agent will promptly transfer the Escrow Shares to such designated
successor. Any corporation into which the Escrow Agent may be merged or
consolidated, or any corporation to which the Escrow Agent may transfer all or
substantially all of its corporate trust business (including the escrow
contemplated by this Agreement) shall be the Escrow Agent without further act
and without needing to secure the consent of the other parties to this
Agreement.
10. CONSENT TO JURISDICTION AND VENUE. Purchaser and Company hereby
absolutely and irrevocably consent and submit to the jurisdiction of the courts
of the State of California and of any Federal court located in the Northern
District of California in connection with any actions or proceedings arising out
of or relating to this Escrow Agreement. In any such action or proceeding, the
Company hereby absolutely and irrevocably waives personal service of any
summons, complaint, declaration or other process and hereby absolutely and
irrevocably agree that the service thereof may be directed to Company in
accordance with Section 6 hereof.
11. AMENDMENT. This Agreement may be amended by the written agreement
of Purchaser, the Escrow Agent and Company, provided that, if the Escrow Agent
does not agree to an amendment agreed upon by Purchaser and Company, the Escrow
Agent will resign and Purchaser will appoint a successor Escrow Agent in
accordance with Section 9 above. No
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<PAGE>
amendment of the Purchase Agreement will increase Escrow Agent's
responsibilities or liability hereunder without Escrow Agent's written
agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER COMPANY
AUDIOHIGHWAY.COM MASS MUSIC, INC.
By:
----------------------------------------------------------------------------
ESCROW AGENT
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
By:
-----------------------------------------------
Authorized Officer
SIGNATURE PAGE TO
ESCROW AGREEMENT
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<PAGE>
EXHIBIT A
ASSET PURCHASE AGREEMENT
A-1
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
COMPANY'S NAME, ADDRESS AND TIN ESCROW SHARES CERTIFICATE NUMBER
<S> <C> <C>
Mass Music, Inc. 13,680 ____
3410 Bowman Ct.
Santa Cruz, CA 95065
Mass Music, Inc. 11,399 ____
3410 Bowman Ct.
Santa Cruz, CA 95065
Mass Music, Inc. 11,399 ____
3410 Bowman Ct.
Santa Cruz, CA 95065
</TABLE>
B-1
<PAGE>
EXHIBIT C
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
In connection with the purchase of substantially all of the assets of
Mass Music, Inc., a California corporation (the "COMPANY"), by audiohighway.com,
a California corporation ("PURCHASER"), held by the undersigned is receiving
shares of the Purchaser's Common Stock and cash held by the undersigned prior to
the purchase.
FOR VALUE RECEIVED, and pursuant to that certain Asset Purchase
Agreement by and among Purchaser and Company dated as of January 1, 1999, and
that certain Escrow Agreement dated as of April 14, 1999, executed in connection
therewith (the "ESCROW AGREEMENT"), the undersigned hereby assigns and transfers
unto State Street Bank and Trust Company of California, N.A., as Escrow Agent
(the "AGENT") pursuant to the Purchase Agreement and the Escrow Agreement,
13,680, 11,399 or 11,399, as applicable, shares of Purchaser's Common Stock (the
"SHARES").
The undersigned does hereby irrevocably constitute the Agent, as
attorney-in-fact, with full power of substitution and re-substitution, to hold
such Shares in escrow and to transfer such shares on the books of Purchaser in
the event that all or a portion of the Shares are retained by Purchaser in
accordance with the Escrow Agreement in satisfaction of the undersigned's
indemnification obligations under the Purchase Agreement. The undersigned hereby
acknowledges that the Shares will be held in escrow until required to be
released pursuant to the Escrow Agreement and that the number of Shares released
from escrow will be equal to the number of Shares listed above less any amount
retained in satisfaction of Claims as set forth in the Escrow Agreement.
Dated: April 14, 1999
Signature:
----------------------------------------------
Print Name:
---------------------------------------------
Title (if applicable):
----------------------------------
MEDALLION GUARANTEE:
C-1
<PAGE>
EXHIBIT D
FEE SCHEDULE
ACCEPTANCE FEE $500.00
ANNUAL ESCROW FEE $3,500.00 billed in advance, first
year payable upon signing of the
Agreement by Purchaser
CLAIMS Uncontested: $250.00 each claim
Contested: Billed at cost
EXTRAORDINARY ADMINISTRATIVE EXPENSES Fees for services not specifically set
forth in this schedule will be paid by
the Company or Purchaser, as
appropriate, pursuant to Section 8.
Such services may include, but are not
limited to, additional responsibilities
and services incurred in case of
default.
INVESTMENT FEE $65.00 per security purchased (cash
shall remain uninvested)
OUT OF POCKET EXPENSES Out of pocket expenses such as
counsel fees, telephone, postage,
insurance, shipping charges, outside
investment charges and supplies will
be charged at cost and apid by
Purchaser.
PREPARATION OF 1099'S (IF APPLICABLE) $15.00 each 1099
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of April 14, 1999 (the "EFFECTIVE DATE"), by and between
audiohighway.com, a California corporation (the "COMPANY"), and Mass Music,
Inc., a California corporation ("INVESTOR").
A. Investor has agreed to receive from the Company, and the Company has
agreed to convey to Investor, shares of the Company's common stock ("COMMON
STOCK") on the terms and conditions set forth in that certain Asset Purchase
Agreement by and between the Company and Investor, dated as of January 1, 1999,
(the "ASSET PURCHASE AGREEMENT").
B. The Asset Purchase Agreement provides that Investor shall be granted
one time piggyback registration rights, which are more fully set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 Definitions. For purposes of this Agreement:
(a) REGISTRATION. The terms "REGISTER," "REGISTRATION"
and "REGISTERED" and refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(b) REGISTRABLE SECURITIES. The term "REGISTRABLE
SECURITIES" means: all the shares of Common Stock of the Company issued under
the Asset Purchase Agreement that are now owned or may hereafter be acquired by
Investor or by any of Investor's permitted successors and assigns; and (2) any
shares of Common Stock of the Company issued as a dividend or other distribution
with respect to, or in exchange for or in replacement of, any or all of the
shares of Common Stock described in clause (1) of this subsection 1.1(b);
EXCLUDING in all cases, however, (i) any Registrable Securities sold by a person
in a transaction in which rights under this Section 1 are not assigned in
accordance with this Agreement or (ii) any Registrable Securities sold to the
public or sold pursuant to Rule 144 promulgated under the Securities Act.
(c) REGISTRABLE SECURITIES THEN OUTSTANDING. The number
of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall mean the number of
shares of Common Stock which are Registrable Securities and are then issued and
outstanding.
(d) HOLDER. The term "HOLDER" means any person owning of
record Registrable Securities that have not been sold to the public or pursuant
to Rule 144 promulgated under the Securities Act or any assignee of record of
such Registrable Securities to whom rights under this Section 1 have been duly
assigned in accordance with this Agreement.
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<PAGE>
(e) SEC. The term "SEC" or "COMMISSION" means the U.S.
Securities and Exchange Commission, or any successor governmental agency or
authority.
1.2 ONE TIME PIGGYBACK REGISTRATIONS. For a period of one year
after the date hereof the Company shall notify all Holders of Registrable
Securities in writing at least 30 days prior to filing the next registration
statement under the Securities Act for purposes of effecting a public offering
of securities of the Company after the date hereof (including, but not limited
to, registration statements relating to secondary offerings of securities of the
Company, but EXCLUDING registration statements relating to any employee benefit
plan or a corporate reorganization) and will afford each such Holder an
opportunity to include in such registration statement all or any part of the
Registrable Securities then held by such Holder. Each Holder desiring to include
in any such registration statement all or any part of the Registrable Securities
held by such Holder shall, within 20 days after receipt of the above-described
notice from the Company, so notify the Company in writing, and in such notice
shall inform the Company of the number of Registrable Securities such Holder
wishes to include in such registration statement. If a Holder decides not to
include all of its Registrable Securities in any registration statement
thereafter filed by the Company, such Holder shall not have the right to include
any or all of its remaining Registrable Securities in any subsequent
registration statement or registration statements as may be filed by the Company
with respect to offerings of its securities, all upon the terms and conditions
set forth herein.
(a) UNDERWRITING. If a registration statement under which
the Company gives notice under this Section 1.2 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities in its
original notice to the Holders of such offering. In such event, the right of any
such Holder's Registrable Securities to be included in a registration pursuant
to this Section 1.2 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall enter
into an underwriting agreement in customary form with the managing underwriter
or underwriter(s) selected for such underwriting. Notwithstanding any other
provision of this Agreement, if the managing underwriter requires a limitation
of the number of shares to be underwritten, then the managing underwriter(s) may
exclude any or all shares from the registration and the underwriting. If any
Holder disapproves of the terms of any such underwriting, such Holder may elect
to withdraw therefrom by written notice to the Company and the underwriter,
delivered at least 20 days prior to the effective date of the registration
statement. Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the current registration as
well as any future registrations of the Company. For any Holder that is a
partnership or corporation, the partners, retired partners and shareholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "Holder," and any pro rata reduction with respect to such
"Holder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"Holder," as defined in this sentence.
-4-
<PAGE>
(b) EXPENSES. All expenses incurred in connection with a
registration pursuant to this Section 1.2 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company shall be borne by the Company.
1.3 OBLIGATIONS OF THE COMPANY. Whenever required to effect
the registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use
reasonable, diligent efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of
the Registrable Securities registered thereunder, keep such
registration statement effective for up to 60 days subject to Section
1.7.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by them that are included in such
registration.
(d) Use reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders, provided that the Company shall
not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter(s) of such
offering. Each Holder participating in such underwriting shall also
enter into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
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<PAGE>
1.4 FURNISH INFORMATION. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to Sections 1.2 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of their Registrable Securities.
1.5 INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under Sections 1.2:
(a) BY THE COMPANY. To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the partners, officers,
stockholders, and directors of each Holder, any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the Securities
Exchange Act of 1934, as amended, (the "1934 ACT"), against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the l934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively, "VIOLATIONS" and, individually, a "VIOLATION"):
(1) any untrue statement or alleged untrue
statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto;
(2) 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; or
(3) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any federal or state
securities law or any rule or regulation promulgated under the
Securities Act, the 1934 Act or any federal or state securities law
in connection with the offering covered by such registration
statement;
and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED HOWEVER, that the
indemnity agreement contained in this subsection 1.5(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
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<PAGE>
(b) BY SELLING HOLDERS. To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, and any underwriter, against any losses, claims, damages or liabilities
(joint or several) to which the Company or any such director, officer,
controlling person or underwriter may become subject under the Securities Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; PROVIDED, HOWEVER, that the indemnity agreement contained in this
subsection 1.5(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld; and
PROVIDED FURTHER, that the total amounts payable in indemnity by a Holder under
this Section 1.5(b) in respect of any Violation shall not exceed the net
proceeds received by such Holder in the registered offering out of which such
Violation arises.
(c) NOTICE. Promptly after receipt by an indemnified party
under this Section 1.5 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.5,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.5, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.5.
(d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing
indemnity agreements of the Company and Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL
PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was timely furnished to the indemnified
party and was not furnished to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act.
-7-
<PAGE>
(e) CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (1) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 1.5 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 1.5 provides
for indemnification in such case, or (2) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
1.5; then, and in each such case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in proportion to their relative fault
as determined by the court or jury, as applicable; PROVIDED, HOWEVER, that, in
any such case, (A) no such Holder will be required to contribute any amount in
excess of the net proceeds received by such Holder in the registered offering
out of which such claim for contribution arises; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
(f) SURVIVAL. The obligations of the Company and Holders
under this Section 1.5 shall survive the completion of any offering of
Registrable Securities in a registration statement, and otherwise.
1.6 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to:
(a) use reasonable efforts to make and keep public
information available, as those terms are understood and defined in
Rule 144 under the Securities Act, at all times after the effective
date of the first registration under the Securities Act filed by the
Company for an offering of its securities to the general public;
(b) use reasonable efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the 1934 Act (at any time after it has
become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of
said Rule 144 (at any time after 90 days after the effective date of
the first registration statement filed by the Company for an offering
of its securities to the general public), and of the Securities Act
and the 1934 Act (at any time after it has become subject to the
reporting requirements of the 1934 Act), a copy of the most recent
annual or quarterly report of the Company, and such other reports
-8-
<PAGE>
and documents of the Company as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing
a Holder to sell any such securities without registration (at
any time after the Company has become subject to the reporting
requirements of the 1934 Act).
1.7 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company
shall have no obligations pursuant to Section 1.2 with respect to: (a) any
request or requests for registration made by any Holder on a date more than one
year after the closing date of the Company's initial registered public offering
of securities; or (b) any Registrable Securities proposed to be sold by a Holder
in a registration pursuant to Section 1.2 if, in the opinion of counsel to the
Company, all such Registrable Securities proposed to be sold by a Holder may be
sold in a three-month period without registration under the Securities Act
pursuant to Rule 144 under the Securities Act.
1.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company may, without the prior written
consent of the Holders, enter into any agreement with any holder or prospective
holder of any securities of the Company which would allow such holder or
prospective holder to include such securities in any registration.
2. ASSIGNMENT; AMENDMENT.
2.1 ASSIGNMENT OF REGISTRATION RIGHTS. Notwithstanding
anything herein to the contrary, the registration rights of a Holder under
Section 2 hereof may be assigned only to a person who is a shareholder of
Investor on the Closing Date ( as defined in the Asset Purchase Agreement,
PROVIDED, HOWEVER that no party may be assigned any of the registration rights
under Section 2 hereof unless the Company is given written notice by the
assigning party at the time of such assignment stating the name and address of
the assignee and identifying the securities of the Company as to which the
rights in question are being assigned; and PROVIDED FURTHER that any such
assignee shall receive such assigned rights subject to all the terms and
conditions of this Agreement, including without limitation the provisions of
this Section 2.
2.2 AMENDMENT OF RIGHTS. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holders of a majority of the Registrable
Securities then outstanding.
3. GENERAL PROVISIONS.
3.1 NOTICES. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or if deposited in the U.S. mail by
registered or certified mail, return receipt requested, postage prepaid, as
follows:
(a) if to Investor, at 3410 Bowman Court, Santa Cruz,
California 95065.
-9-
<PAGE>
(b) if to the Company, at 20600 Mariani Ave., Cupertino,
California 95104.
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. A notice shall conclusively be
deemed to have been given hereunder when personally delivered or when deposited
in the mail in the manner set forth above. Upon any assignment of rights under
this Agreement by Investor to an Investor Successor or other party, the parties
shall amend Exhibit A hereto to add such assignee's address for notice
hereunder.
3.2 ENTIRE AGREEMENT. This Agreement, together with all
Exhibits hereto, constitutes and contains the entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof.
3.3 GOVERNING LAW. This Agreement shall be governed by and
construed exclusively in accordance with the internal laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within California, excluding that body of law relating
to conflict of laws and choice of law.
3.4 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, then such provision(s) shall
be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
3.5 THIRD PARTIES. Nothing in this Agreement, express or
implied, is intended to confer upon any person, other than the parties hereto
and their permitted successors and assigns, any rights or remedies under or by
reason of this Agreement.
3.6 SUCCESSORS AND ASSIGNS. Subject to the provisions of
Section 2.1, the provisions of this Agreement shall inure to the benefit of, and
shall be binding upon, the permitted successors and assigns of the parties
hereto.
3.7 CAPTIONS. The captions to sections of this Agreement have
been inserted for identification and reference purposes only and shall not be
used to construe or interpret this Agreement.
3.8 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.9 COSTS AND ATTORNEYS' FEES. In the event that any action,
suit or other proceeding is instituted concerning or arising out of this
Agreement or any transaction contemplated hereunder, the prevailing party shall
recover all of such party's costs and attorneys' fees incurred in each such
action, suit or other proceeding, including any and all appeals or petitions
therefrom.
-10-
<PAGE>
3.10 ADJUSTMENTS FOR STOCK SPLITS, ETC. Wherever in this
Agreement there is a reference to a specific number of shares of Common Stock or
Preferred Stock of the Company of any class or series, then, upon the occurrence
of any subdivision, combination or stock dividend of such class or series of
stock, the specific number of shares so referenced in this Agreement shall, for
purposes of this Agreement, be thereafter automatically be deemed to have been
proportionally adjusted to reflect the effect on the outstanding shares of such
class or series of stock of such subdivision, combination or stock dividend.
3.11 AGGREGATION OF STOCK. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first written above.
THE COMPANY: INVESTOR:
AUDIOHIGHWAY.COM MASS MUSIC, INC.
By By:
--------------------------------- --------------------------------
Grant Jasmin, Chief Operating Scott Cole, President and
Officer Chief Financial Officer
By: By:
-------------------------------- ---------------------------------
Nathan M. Schulhof, President Thomas F. Tansy, Chief Executive
and Chief Executive Officer Officer
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
-12-
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
SHARES OF COMMON STOCK
INVESTOR ACQUIRED
- --------------------------- --------------------------
Mass Music, Inc., 36,478
3410 Bowman Court
Santa Cruz, CA 95068
<PAGE>
SCHEDULE 1.1(A)
SOFTWARE
SOFTWARE
Complete source code file for the web site including but not limited to:
Site Source Code, including HTML, cgi and .pl files; and UNIX shell scripts
All software licenses including:
Linux operating system
Apache web server
BSAD-DB data based management system
Perl interface libraries
<PAGE>
SCHEDULE 1.1(B)
PATENTS, COPYRIGHTS AND APPLICATIONS THEREFOR
None.
<PAGE>
SCHEDULE 1.1(C)
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
TRADEMARKS
Registered Name: Mass Music
Registration Number: 2,169,558
Registration Date: June 30, 1998
Serial Number: 75/306,392
Filing Date: June 6, 1997
<PAGE>
SCHEDULE 1.1(D)
CONTRACTS
None.
<PAGE>
SCHEDULE 1.1(E)
OTHER TANGIBLE ASSETS
COMPUTER SYSTEM
Mass Music Servers
Dual Pentium Pro, 200mhz
656 Mb of RAM
8 GB RAID device
<PAGE>
SCHEDULE 1.2
ASSUMED LIABILITIES
None.
<PAGE>
SCHEDULE 2.2
VALUATION OF ASSETS
<TABLE>
<CAPTION>
MASS MUSIC, INC. - LIST OF ASSETS TO BE PURCHASED
<S> <C>
COMPUTER SYSTEM: Mass Music servers. $2,000
Dual Pentium Pro, 200mhz
656 Mb of RAM
8 GB RAID device
SOFTWARE: Complete source code file for the web site $100,000
including, but not limited to:
Site Source Code, including HTML, cgi and
.pl files; and UNIX shell scripts
All software licenses including:
Linux operating system
Apache web server
BSAD-DB data based management system
Perl interface libraries
CUSTOMER LISTS: 27,369 unique names of people who $684,225
have purchased products through the Mass Music
Web Site. Valued at $25 per name.
ADDITIONAL EMAIL ADDRESSES: 279,757 unique names $189,291
of people subscribing to the Mass Music e-zine.
Valued at $0.75 per name.
REFERRAL LINKS: 2,205 $0
WEB SITE: URL-MassMusic.com $4,484
TRADEMARKS: $20,000
Registered Name: Mass Music
Registration Number: 2,169,558
Registration Date: June 30, 1998
Serial Number: 75/306,392
Filing Date: June 6, 1997
PATENTS: N/A
</TABLE>
<PAGE>
COPYRIGHTS: N/A
TRADE NAMES: N/A
SERVICE MARKS: N/A
<PAGE>
SCHEDULE 3
SCHEDULE OF EXCEPTIONS
Unless otherwise defined, any capitalized terms in this Schedule of
Exceptions shall have the same meanings assigned to such terms in the Asset
Purchase Agreement to which this Schedule of Exceptions is attached. Nothing in
this Schedule of Exceptions constitutes an admission of any liability or
obligation of Company to any third party, nor an admission against Company's
interests.
<PAGE>
SCHEDULE 3.6
DISTRIBUTION AGREEMENTS
None.
<PAGE>
SCHEDULE 3.13
LIST OF CREDITORS
None.
<PAGE>
SCHEDULE 3.14
INSIDER TRANSACTIONS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,542
<SECURITIES> 0
<RECEIVABLES> 248
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,458
<PP&E> 583
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,791
<CURRENT-LIABILITIES> 1,215
<BONDS> 241
0
0
<COMMON> 32,641
<OTHER-SE> 4,194
<TOTAL-LIABILITY-AND-EQUITY> 21,791
<SALES> 414
<TOTAL-REVENUES> 414
<CGS> 0
<TOTAL-COSTS> 4,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295
<INCOME-PRETAX> (3,983)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,983)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
