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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-14697
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audiohighway.com
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0377306
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
20300 STEVENS CREEK BOULEVARD,
SUITE 100 95014
CUPERTINO, CA (Zip Code)
(Address of principal executive
offices)
</TABLE>
Issuer's Telephone Number: (408) 861-4000
Securities registered under Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH LISTED:
<S> <C>
Common Stock, no par value Boston Stock Exchange
</TABLE>
Securities registered under Section 12(g) of the Act: NONE
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period 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 / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
Revenues for the most recent fiscal year were: $
The aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the closing sale price on March 22,
2000, was $46,020,402*.
The number of shares outstanding of the issuer's Common Stock as of
March 22, 2000 was 5,536,289.*
Documents incorporated by reference: None
Transitional Small Business Disclosure Format. Yes / / No /X/
* Based on a closing price of $8.3125 per share on March 22, 2000. Excludes
813,560 shares of the Registrant's Common Stock held by executive officers,
directors and shareholders whose ownership exceeds 5% of the Common Stock
outstanding. Exclusion of such shares should not be construed to indicate that
any such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the Registrant or that such
person is controlled by or under common control with the Registrant.
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PART I
ITEM 1. BUSINESS
audiohighway.com ("audiohighway" or the "Company") is an online information
and entertainment company which has developed a large and diverse library of
audio content available free to the public on the Internet. The Company is
implementing a second-generation business model that combines compelling content
and e-commerce into an integrated Web platform. Management believes this
multi-faceted approach will allow audiohighway to generate user traffic on a
cost-effective basis, and convert that traffic into a profitable revenue stream.
Furthermore, management believes that its branding efforts will make its Web
site a premier destination for accessing and consuming audio and video on the
Internet.
The Company facilitates consumption of audio and video in one of three ways:
(1) a pre-programmed "channel" format, which offers convenient access to a broad
range of content; (2) individual selection, which allows users to browse through
the content library and listen to their personally-selected choices; and
(3) the Company's My JukeBox product, which allows users to "roll their own"
digital audio/video programming via an easy point-and-click management system.
Using these methods of content distribution, the Company is executing a
strategy whereby it attracts user traffic through compelling content, maximizes
user retention and visit frequency by offering registered users value-added
member services including MP3 enabled email, Internet voice mail and free Web
sites. The Company plans to convert this user traffic to advertising and
e-commerce revenue.
The Company plans to accelerate this momentum into calendar 2000 with a
number of major initiatives, including the development of new content
relationships, the introduction of additional member services and a complete
upgrade of its e-commerce capabilities, scheduled for launch during the second
quarter of 2000.
THE audiohighway.com OPPORTUNITY
Although several alternative means of providing audio content have achieved
acceptance by the general public, the Company believes that Internet
distribution of audio content can have cost or convenience advantages for the
consumer over both radio and physical merchandise, such as compact disks or
audio tapes. For example, a consumer can listen to broadcast radio but only to
whatever happens to be on the air at the time. The radio listener has limited
control over the selection of broadcast content (I.E., he or she can change the
channel) and generally has no control over the time at which specific programs
can be heard. The purchaser of CDs or audio tapes can make selections and
determine when to listen to the content but must pay for the entire recording
even if only selected portions are desired. In addition, the Company believes
that distribution over the Internet can provide significant price and
convenience advantages to users of its Web site by eliminating the need to
physically visit a retail store and to purchase a hard copy out of the store's
inventory.
The Company believes broadcasting audio content over the Internet also
offers advantages over traditional media. Internet technology allows the Company
to conveniently deliver a broad range of popular content directly to the user's
desk top. The Company intends to exploit the advantages of the Internet in
capitalizing on the worldwide popularity of various kinds of audio programming,
including audio books, musical and comedy programs and timely news. By offering
quality audio programming and by using the Web's graphical and interactive
capabilities to add value to its content, the Company hopes to increase brand
recognition for the audiohighway.com name. The Company believes that it can
build upon its brand recognition, its digital library of audio content and its
proprietary technology to pursue multiple revenue opportunities, including,
among others, advertising and e-commerce.
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THE audiohighway.com WEB SITE: CONTENT
Over 10,000 different media files are available for either download or
streaming at audiohighway. The Company typically obtains content through a fully
paid license or revenue sharing agreement with publishers or other audio content
providers. audiohighway has existing relationships with companies such as
Associated Press, CNET Radio News, Dow Jones, Maverick Records, Penguin Books
USA and Newsweek on Air. For the most part, the Company pays for the content on
a "per download" basis, so the Company is not charged simply for having the
content available on its Web site. Content is paid for either on the basis of
download hours or a flat fee for specialized content, including stock market
updates, sports scores and other information.
MUSIC
audiohighway currently features over 2,500 tracks of licensed music,
primarily provided by a selection of unsigned bands and archived radio shows.
Genres include Celtic, Classical, Country, Electronica, Holiday Music, Jazz,
Latin and Salsa, Music Shows, New Age, Popular, Reggae, Rhythm & Blues, Rock &
Roll, Unsigned Bands and World Rhythms. Current popular music in 10 different
genres is also available to audiohighway members on the "Highway Hits" portion
of its Web site.
In addition, audiohighway has content relationships with a number of record
companies. These relationships typically provide the Company with rights to
content on demand, links between audiohighway and the artist's or label's Web
site and promotions for the sale of CD's on the Company's e-commerce Web site.
Periodically, the Company enters into marketing agreements with record companies
to sponsor and promote the works of specific artists to targeted audiences.
These programs are designed to expand the audience for the Company's Web sites
and to increase the number of members.
Highway Hits, a channel on the audiohighway Web site, features playlists of
current hit music, produced by audiohighway in compliance with a statutory
license with the Record Industry Association of America. Highway Hits provides
users with access to continuously streaming music averaging five hours in
length. Current playlists include Pop, Rock, Country, Gothic/Industrial,
Electronica, Jazz, World Music, Movie Soundtracks, Alternative and Rhythm &
Blues/Hip-Hop.
AUDIOBOOKS
audiohighway currently features over 4,000 titles of licensed audiobooks.
They are primarily comprised of a selection of back listed titles from several
audiobook publishers which include Penguin Audio and The Publishing Mills.
Fiction categories and special collections offered on the site include Classics,
General, Kids Corner, Mystery & Suspense, Poetry, Romance, Science Fiction,
Short Stories and Westerns. Non-fiction categories and special collections
offered on the site include Autobiography, Business, Economics, History, Music,
Nature, Philosophy, Religion & Spirituality, Science & Technology, Self-Help and
Sports.
NEWS AND INFORMATION
audiohighway currently features over 350 licensed news programs covering
entertainment, financial and technology news, in addition to real time audio
news feeds from CNET Radio, IT Networks, and The Associated Press. News Programs
include AP News, Business News, Business Shows, Common Ground, Newsweek on Air,
Sports News and Scores, Technology News and U.S. National News.
In November 1999, the Company entered into a content distribution agreement
with Dow Jones & Co. to provide selected articles and information from THE WALL
STREET JOURNAL INTERACTIVE EDITION to audiohighway users in an audio format on a
subscription basis.
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COMEDY AND ENTERTAINMENT
audiohighway currently features over 1,500 tracks of licensed comedy albums,
radio dramas and other radio programs. Content licensors include UpRoar
Entertainment, Radio Spirits, Incorporated, NBG Radio Network and Pearlman and
Baine Publishing. Content categories in this channel include Comedy Shows,
Popular Comedians, Popular Comediennes, Audio Movies, Celebrity Talk, Cyber
Sleuths, Dr. Science, Imagination Theatre, Old Time Radio, The Golden Age of
Radio, Time Out for Trivia, Victoria Johnson and While Reason Sleeps.
FILMS, MUSIC VIDEOS AND MOVIE TRAILERS
In November 1999, audiohighway began featuring movie trailers, promotional
music videos and independent short films. While these works occasionally appear
on the audiohighway.com Home Page, the content library resides on The Buzz.
audiohighway recently launched streaming music videos as a component of its
service. The Company has promotional relationships with various record labels,
which entitle the Company to stream music video content, and include the
following:
<TABLE>
<S> <C> <C>
Bad Boy (Puff Daddy) Hollywood Records Jive Records
CMC International Wind-Up Entertainment Emagine Entertainment
Gotham Records Zomba Atomic Pop
</TABLE>
THE BUZZ
This service, which was added to audiohighway's Web site in November 1999,
is directed towards the younger segment of audiohighway's user base (ages 14 to
24), which is looking for specialized entertainment beyond streaming audio. This
part of the audiohighway Web site includes streaming and downloadable music
videos, independent films, movie trailers and specialized jukeboxes. By signing
up for the service, users also gain access to Member Services (see "--Marketing
and Sales--Member Services"). All pages on the site provide links to Highway
Hits, Killer Boxes (which provides on-demand access to selected tracks and
videos from a number of music categories, including rock, electronic, reggae and
videos, and adds them to My Jukebox for personalized listening), and Live Polls
(which permits users to cast their votes for favorite entertainment offerings).
The site is further divided into the following four content channels:
- Buzz Radio
This channel provides users the opportunity to enjoy a number of types of
music entertainment. Users can access three different original deejay-designed
streaming audio tracks (alternative, dance and rave) containing multiple songs
and can send an e-mail to the deejay who created them. Each show is updated
weekly.
- Music
This channel permits users to view and listen to selected videos and listen
to the day's featured songs. Users are also given the opportunity to rate videos
and submit their comments to be posted on the Web site and to add videos and
songs to My Jukebox.
- Films
Users have the opportunity to view short films and to submit short films to
the site for review and possible posting on the Web site. Users also have access
to trailers for currently playing movies.
- Buzz Board
Users are able to view and post messages on the Web site in a number of
different forums.
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MARKETING AND SALES
TRAFFIC GENERATION
In 1999, the Company spent approximately $5.9 million on marketing. The
Company generally uses several traffic generation tools, including:
(1) strategic partnerships with popular Web sites and affiliate relationships
with smaller sites, (2) direct marketing, (3) member services and (4) online
advertising on other Web sites.
audiohighway partners with companies with a strong Web presence by providing
audio content and customized rich media programming in return for referrals via
graphical links on partners' sites, which join them to the audiohighway Web
site.
In November 1999, audiohighway entered into a one-year agreement with Real
Networks to hard code three of audiohighway.com's channels into the latest
release of Real Player. As a result, audiohighway.com is the "Top Pop" music
site, the "Top Alternative" site and "Top Rock" site in the November 1999
release of the Real Player's Live Station listings. Real Networks projects that
34.5 million copies of the Real Player will be distributed during the term of
the agreement. audiohighway's distribution on the Real Player continues into
November 2000.
Microsoft's Web site, www.windowsmedia.com, features links to audiohighway's
audiobooks channel on its Home Page, Radio and Lifestyle pages. Links to
audiohighway are consistently placed near the top of all links within
WindowsMedia.com. audiohighway's library of free audio content is also available
via headlines on WindowsMedia.com's Music and Entertainment channels. These
programs are designed to create greater awareness of audiohighway's audio
content and drive more traffic to the site.
In March 2000, the Company announced the launch of the AmpliFire Network.
This program is a network of third party sites that link to selected portions of
the audiohighway.com Web site, thereby enabling text-based Web sites to deliver
audio content to their users. The Company is attempting to rapidly grow the
number of sites that link to audiohighway through its agreements with
iSyndicate, which has solicited the Company to offer content to its vast network
of client sites, its agreement with L90 and agreements with other Web sites.
Notable sites that either currently link to audiohighway and/or link to
provide support for special events include the Go Network, Yahoo!, Excite.com,
Lycos.com, Snap.com, MSN.com and EntertainmentTonight.com.
MEMBER SERVICES
Management believes that high user retention and visit frequency are
important drivers of a sustainable, profitable business model for audiohighway.
In October 1999, audiohighway began to offer free Member Services to its
"Registered Users." These additional features include e-mail, a daily horoscope
reading, Web site hosting, paging services and voicemail and fax services. When
a user accesses these services for the first time, a user can become a
Registered User by selecting a user name and password and providing the
following personal information: name, state, zip code, country, date of birth,
gender, industry and occupation. This information is maintained in a database of
current users, which the Company uses to send targeted e-mails advertising
products for sale at its e-commerce site and providing convenient on-demand
access to audiohighway content.
- Streaming E-mail
This service permits users to receive and send e-mail, maintain an address
book, attach a signature and change e-mail preferences, including font size,
screen width and the number of messages appearing in the user's mailbox. This
service also offers 10 megabytes of storage space and enables users to stream
MP3
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audio directly from their messages, providing recipients with the opportunity to
listen to content as it is downloaded.
- Rich Media Web Hosting
audiohighway maintains an agreement with Homestead Technologies, Inc. to
operate the Company's Web hosting service. Through "what you see is what you
get" Web building technology, music and video enthusiasts are able to build
individual entertainment sites, which can occupy as much as 25 megabytes of
storage space. Members are able to post audiohighway's radio stations on their
Web sites, and during the second quarter of 2000, will be able to post
additional value-added content, such as movie trailers and music videos. The
Company is also using its free hosting service to promote the development of fan
sites, such as Nobody's Angel and She Daisy, two pop groups under the Hollywood
Records label. audiohighway is able to leverage its media Web hosting
capabilities to serve advertisements on registered users' personal Web pages.
The Company also plans to grow the number of individual Web sites it hosts
by establishing a referral system between its artist submittals area and the
free Web site building page. The Company currently receives thousands of
inquiries by independent artists seeking to place their content on the
audiohighway site. Implementing a referral program will allow the Company to
address these inquiries while adding more participants to its Web hosting
program.
- Paging
This service provides Registered Users with a free Motorola alphanumeric
pager when they sign up for service. Numeric service is provided at $124 per
year and alphanumeric service is $178 per year, and audiohighway shares this
revenue stream with PageMaster Corporation. In addition to providing normal
paging service, audiohighway provides users with instant updates on sales,
products and services.
- Voicemail
Through an agreement with Z-Tel Technologies, Inc., a competing local
exchange carrier (CLEC), the Company offers Registered Users the opportunity to
check voicemail from the telephone or online at audiohighway. audiohighway
shares in the local and long distance revenues that Z-Tel derives from
audiohighway users. Z-Tel currently offers local dial service in New York City
and expects to roll out service to the rest of New York state, Massachusetts,
Texas and California by the end of the year 2000. The Company expects strong
demand for voicemail from the 14 to 24 year old audience. audiohighway plans to
leverage this service as a tool to retain members, distribute content and post
promotions and advertisements.
REVENUE SOURCES
ADVERTISING
The Company currently derives a significant portion of its revenue from
advertising on its Web sites. In addition to traditional banner ads, the Company
offers "SoundSpot" audio ads and channel sponsorships. The Company targets a
broad spectrum of advertisers ranging from consumer product and service
companies to popular new Web sites. Contracts are short-term, typically one to
six months, or for a fixed number of impressions. Prices are quoted on the basis
of cost per thousand impressions ("CPM") or for a fixed fee based on a minimum
number of impressions. The Company uses NetGravity ad serving software, which
provides advertisers with reports that track data on impressions and
click-throughs applicable to their advertisements. This information enables
advertisers to verify the number of ads served and to monitor advertisement
effectiveness. Ads are sold to customers primarily by the audiohighway sales
force and, to a lesser extent, by third party placement.
Banner advertisements allow interested users to link directly to the
advertisers' own Web sites with a simple click-through. Banner prices range from
$10 per CPM to $20 per CPM based on the number of
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impressions and targeting. The Company's banner advertisers include, among
others, Adauction, MTV and Boxerjam.
The Company also sells audio ads called "SoundSpots," which are embedded in
audio content and are targeted at consumers based on their listening
preferences. Advertisers are able to combine an audio advertisement with a
synchronized banner linked back to the advertiser's Web site. This advertising
format has demonstrated a click-through rate three times that of traditional
banner advertisements. Another benefit of SoundSpot ads is that the ad, together
with the selected audio content in which it is embedded, continues to stream in
the background, even after the user has clicked through to the advertiser's Web
site. SoundSpots are currently priced from $15 per CPM to $30 per CPM based on
the number of impressions and targeting. The Company's SoundSpot clients
include, among others, Harborfreight and MTV.
Sponsorships enable the Company to charge for focused advertising related to
specific content. For each of the content channels and special areas on the
Company's Web site, such as Highway Hits, The Buzz or Web casts, the Company
offers a premier content sponsorship. These sponsorships are offered to an
advertiser who prefers to be prominently displayed on the Web site. Channel
sponsorships currently last three months, and are priced from $1,000 for a
single button to $15,000 per month, depending on the advertising package, which
may include banner ads, targeted banner ads and SoundSpots. Certain of the
Company's 1999 sponsors included MTV, Auction-Sales.com, UMAX, Jazziz, Excite
and Entertainment Tonight.
The Company participates in revenue sharing agreements with strategic
partners and other Web sites. The initial sources of these shared revenues range
from service fees to banner advertising.
ELECTRONIC COMMERCE
The Company integrated e-commerce functionality into the audiohighway
network with the launch of audioshop in the fourth quarter of 1998 and the
acquisition of Mass Music during the first quarter of 1999. The Company also
created a new search engine for each e-tailing business, which facilitates the
process of locating and purchasing merchandise.
Subsequent to the purchase of Mass Music, the Company expanded the Mass
Music library to include nearly 300,000 titles. It has also added hard-to-find
imports to its inventory, from which it is able to earn higher profit margins.
The Mass Music site produced 3.25 million page views in November 1999 and
3.75 million page views in December 1999, resulting in purchases by 7.4% of
users.
The Company launched audioshop in the fourth quarter of 1998 with an initial
focus on computer-related products. The audioshop inventory has expanded to
include video games, digital cameras, stereo accessories and audio versions of
THE WALL STREET JOURNAL.
The Company is currently integrating Mass Music and audioshop into a single
Web site and is planning to launch this new site in the second quarter of 2000,
with a redesigned back-end and user interface and real-time distribution
capabilities.
RESEARCH AND DEVELOPMENT
Since inception, the Company has devoted significant time and financial
resources to research and development activities to develop its current
technology, products and services. The Company anticipates that a portion of its
ongoing operations will continue to include research and development activities
due to the rapid technological evolution of Internet-based commerce. Operating
and development expenses, which include research and development expenditures,
totaled $1,073,000 and $3,089,000 in 1998 and 1999, respectively.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company has filed several patent applications with respect to certain
aspects of its system for delivering audio content, and four patents have
issued. Although the Company does not believe that its existing patents provide
a competitive advantage, there is no assurance that in the future, patent
protection will not be of substantial importance to the Company's business and
future prospects.
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There is no assurance that patents will be issued pursuant to the pending
applications or that the patents that are issued or may be issued in the future
will not be held invalid or unenforceable by a court having jurisdiction over a
dispute challenging their validity. Even if patents are upheld and are not
challenged, third parties might be able to develop equivalent technologies or
products without infringing such patents or the Company could be required to
expend substantial funds in order to defend its patents.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success and relies on a combination of
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with its employees and with
third parties to establish and protect its proprietary rights. There is no
assurance that these steps will be adequate, that the Company will be able to
secure trademark registrations for all of its marks in the United States or
other countries or that third parties will not infringe upon or misappropriate
the Company's copyrights, trademarks, service marks and similar proprietary
rights. The Company does not own any registered copyrights protecting its
products but claims common law copyrights in its software. There is no assurance
that common law copyright will provide adequate protection for the Company's
related intellectual property. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the content downloaded from the Company's Web site. In the future, litigation
may be necessary to enforce and protect the Company's trade secrets, copyrights
and other intellectual property rights.
The Company has filed several trademarks. The Company intends to pursue the
registration of its trademarks based upon anticipated use internationally. There
is no assurance that the Company will be able to secure adequate protection for
these trademarks in foreign countries. In addition, there could be potential
trademark or trademark infringement claims brought by owners of other registered
trademarks or trademarks.
There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.
There is no assurance that the measures taken by the Company will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. Moreover, the Company may also be subject
to litigation to defend against claims of infringement of the rights of others
or to determine the scope and validity of the intellectual property rights of
others. If competitors of the Company prepare and file applications in the
United States that claim trademarks used or registered by the Company, the
Company may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
the Company. Similarly, actions could be brought by third parties claiming that
the Company's products infringe patents owned by others. An adverse outcome
could require the Company license disputed rights from third parties or to cease
using such trademark or infringing product. Any litigation regarding the
Company's proprietary rights could be costly and divert management's attention,
result in the loss of certain of the Company's proprietary rights, require the
Company to seek licenses from third parties and prevent the Company from selling
its products and services, any one of which could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, inasmuch as the Company licenses a substantial portion of its content
from third parties, its exposure to copyright infringement actions may increase
because the Company must rely upon such third
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parties for information as to the origin and ownership of such licensed content.
The Company generally obtains representations as to the origins and ownership of
such licensed content and generally obtains indemnification to cover any breach
of any such representations; however, there can be no assurance that such
representations will be accurate or that such indemnification will adequately
protect the Company.
COMPETITION
The Company faces intense competition in every aspect of its business,
including competition for consumers of audio materials, advertisers, providers
of audio materials and vendors of products. The business of providing data and
other products using the Internet as a medium is currently experiencing
explosive growth and is characterized by extremely rapid technological
development, rapid changes in consumer habits and preferences, massive infusions
of capital and the emergence of a large number of new and established companies
with aspirations to control as much of the distribution process as possible. A
relatively small number of these companies, including America Online and Yahoo!,
currently control primary or secondary access of significant percentages of all
Internet users and therefore have a competitive advantage in marketing to those
users. Other large and established companies, such as local and long distance
telephone companies, cable companies, satellite programming providers and others
have established relationships with large customer bases and are rapidly
expanding into the provision of Internet services. Although the Company does not
believe that any of these companies currently are direct competitors and
believes that it provides services and has technology that could be attractive
to such companies as customers, substantially all of these companies have
financial, technological, promotional and other resources that are much greater
than those available to the Company. Most, if not substantially all, of such
providers could use or adapt their current technology, or could purchase
technology, to provide a service directly competitive with the Company's.
The Company competes with (i) other Web sites and Internet broadcasters to
acquire and provide content to attract users, (ii) online services, other Web
site operators and advertising networks, as well as traditional media such as
television, radio and print, for a share of advertisers' total advertising
budgets, (iii) local radio and television stations and national radio and
television networks for sales of advertising spots and (iv) other Web site
operators engaged in e-commerce.
Competition among Web sites that provide content such as news, financial
information, music and audio books is intense and is expected to increase
significantly in the future. The Company competes against a variety of
businesses that provide content through one or more media, such as print, radio,
television, cable television and the Internet. The Company competes generally
with other content providers for the time and attention of users and for
advertising revenues. To compete successfully, the Company must license and then
provide sufficiently compelling and popular content to generate users and
support advertising intended to reach such users. The Company believes that the
principal competitive factors in attracting Internet users include the quality
of service and the relevance, timeliness, depth and breadth of content and
services offered. The Company also competes for the time and attention of
Internet users with thousands of Web sites operated by businesses and other
organizations, individuals, governmental agencies and educational institutions.
The Company expects competition to continue to intensify and the number of
competitors to continue to increase significantly in the future. In addition, as
the Company continues to expand the scope of its content and services, it will
compete with a greater number of Web sites and other media companies. Because
the operations and strategic plans of existing and future competitors are
undergoing rapid change, it is extremely difficult for the Company to anticipate
which companies are likely to offer competitive services in the future.
The online commerce market is new, rapidly evolving and intensely
competitive. In addition, the retail music, DVD/video, books, electronics and
software industries are intensely competitive. The Company's current or
potential competitors include (1) online vendors of music, DVDs, videos,
electronics and software, as well as other products, (2) a number of indirect
competitors, including Web portals and Web search engines, that are involved in
online commerce, either directly or in collaboration with other
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retailers, (3) online auction services, (4) Web-based retailers using
alternative distribution capabilities and (5) publishers, distributors,
manufacturers and physical-world retailers of the products the Company sells,
many of which possess significant brand awareness, sales volume and customer
bases, and some of which currently sell, or may sell, products or services
through the Internet, mail order or direct marketing. The Company believes that
the principal competitive factors in its e-commerce market include brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other Web site content, reliability, speed of fulfillment, ease of use and
ability to adapt to changing conditions. As the online commerce market continues
to grow, other companies may enter into business combinations or alliances that
strengthen their competitive positions. audiohighway may not be able to compete
successfully against these and future competitors.
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-based advertising
and the available inventory of advertising space have recently increased
substantially. Accordingly, the Company may face increased pricing pressure for
the sale of advertisements. Reduction in the Company's Web advertising revenues
would have a material adverse effect on the Company's business, results of
operations and financial condition. There is no assurance that the Company will
be able to compete in its chosen market.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as music licensing, broadcast
license fees, copyrights, privacy, pricing, sales taxes and characteristics and
quality of Internet services. It is possible that governments will enact
legislation that may be applicable to the Company in areas such as content,
network security, encryption and the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
majority of such laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any such
export or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase the Company's cost of doing business or increase the Company's legal
exposure, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition.
10
<PAGE>
EMPLOYEES
As of March 15, 2000, the Company has 41 full time employees, 19 in
marketing and sales, 17 in research and development and 5 in finance and
administration. The Company also makes use of 22 consultants and independent
contractors to perform various functions such as programming, engineering,
development, and accounting. The Company believes this approach not only allows
it to limit expenses, but also provides maximum flexibility to react to a
rapidly changing environment. None of the Company's employees is represented by
a labor union. The Company believes that its employee relations are good.
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 annual report on Form 10-KSB and in other public
disclosures of the Company. Any of the following risks could materially and
adversely affect our business, operating results and financial condition.
HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES. The Company was
incorporated in June 1994 to deliver free, personalized audio via the Internet
and was in the development stage until the fourth quarter of 1997. The Company
first recognized revenues in November 1997 and has recorded increasing net
losses each year since its inception. At December 31, 1999 the Company had an
accumulated deficit of approximately $25,189,000. 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, e-commerce and advertising.
Almost none of the companies in these markets have achieved profitability and it
is widely believed that many companies never will. 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. Because of the Company's limited operating
history and the emerging and evolving 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 and e-commerce
is as yet uncertain. The Company currently intends to continue 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 additional 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 revenue generating
activities, either of which
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<PAGE>
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) price competition in the e-commerce arena, (iii) demand for Internet
advertising, (iv) seasonal trends in advertising placements, (v) seasonal trends
in the markets for the products offered on the Company's e-commerce sites,
(vi) the advertising cycles for, or the addition or loss of, individual
advertisers, (vii) the level of traffic on the Company's Web site, (viii) the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, (ix) price competition or pricing changes
in Internet advertising, (x) the level of and seasonal trends in the use of the
Internet, (xi) technical difficulties or system downtime, (xii) the introduction
of new products or services by the Company or its competitors and
(xiii) 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 record companies, recording
artists, 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 sites and, as a result, decreased advertising and or e-commerce
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 will
continue to increase as the Company continues to accumulate content, as Web site
traffic increases 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 Company's success in generating traffic from
user's with demographic characteristics that are attractive to potential
12
<PAGE>
advertisers, (ii) the continued development of the Internet as an advertising
medium, (iii) pricing of advertising on other Web sites, (iv) the development
and expansion of the Company's advertising sales force and (v) the establishment
and maintenance of desirable advertising sales agency relationships. Many
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 continue to 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 continued 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. 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 facility in Santa Clara, 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, hackers 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, access to e-commerce order
processing or an increase in response time could result in a loss of potential
or existing business services to 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, hackers, computer
viruses and other disruptive problems. The Company's primary Web site did suffer
a brief denial of service interruption on one occasion in 1999. Although the
Company did not suffer any material adverse effects from this incident, a party
who is able to circumvent security measures could misappropriate proprietary
information or cause severe 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 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 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) other e-commerce Web sites for the sale of CD's, videos, DVD's, computer
products, home electronics and associated products, (iii) 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 and (iv) local radio and television stations and national radio and
television networks for sales of advertising spots. 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 and with other
e-commerce Web sites. 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
14
<PAGE>
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 number of companies selling
Web-based advertising and the available inventory of advertising space have
recently increased substantially. Accordingly, the Company has faced 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 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.
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The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. Although the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, results of
operations and financial condition.
POTENTIAL LIABILITY FOR INTERNET CONTENT. As a distributor of Internet
content, the Company faces potential liability for negligence, copyright,
patent, trademark, defamation, indecency and other claims based on the nature
and content of the materials that it makes available to Internet users. Such
claims have been brought, and sometimes successfully pressed, against Internet
content distributors. In addition, the Company could be exposed to liability
with respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 2. PROPERTY
The Company's executive offices are located in an approximately 27,000
square foot facility located in Cupertino, California. This space, which houses
the Company's current operations is subject to a lease that expires in
October 2004. The monthly base rental under the combined lease (not including
insurance) is approximately $79,500 per month plus common area expenses of
$19,765 per month. The Company currently subleases approximately 5,000 square
feet of its facility to a subtenant for approximately $14,600 per month. The
term of the sublease ends in October 2001.
ITEM 3. LEGAL PROCEEDINGS
In August 1999, Spirit Partners, L.P. and Gaines Berland, Inc. filed suit
against the Company in the Supreme Court of the State of New York seeking
damages according to proof, punitive damages in the amount of $3,000,000,
attorneys' fees, costs and equitable relief, based on allegations of breach of
contract, negligent misrepresentation and deceptive trade practices relating to
the Company's redemption of its publicly traded warrants during February 1999.
The Company removed the case to United States District Court for the Southern
District of New York. Due to the nature of litigation generally and because the
lawsuit is at an early stage, the Company cannot estimate the total expense,
possible damages or settlement value, if any, that may ultimately be incurred in
connection with the suit, However, the Company believes the suit is wholly
without merit, intends to vigorously oppose the suit and believes that this
matter will not have a material adverse effect on the Company's results of
operations or financial condition.
16
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1999, the Company held its annual meeting of shareholders. At
the meeting, the shareholders voted on the election of directors, an amendment
to the 1996 Stock Option Plan (the "Plan") to increase the size of the Plan to
1,800,000 shares, an amendment to the Plan to provide for automatic grants of
options to non-employee directors and the ratification of independent auditors.
The following six nominees were elected to the board of directors for a one-year
term: Lee M. Gammill, Grant Jasmin, Robert S. Leff, Muninderpal Rehki, Marvin M.
Reiss and Nathan M. Schulhof. Additionally, the two proposals to amend the Plan
were approved and the appointment of Grant Thornton LLP as the Company's
independent auditors for the year ended December 31, 1999 was ratified. The
number of votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes, for each proposal, are as follows:
A. Election of Directors
<TABLE>
<CAPTION>
DIRECTOR NOMINEE VOTES FOR VOTES WITHHELD
- ---------------- --------- --------------
<S> <C> <C>
Lee M. Gammill.............................................. 4,635,336 81,690
Grant Jasmin................................................ 4,635,336 81,690
Robert S. Leff.............................................. 4,635,336 81,690
Muninderpal Rehki........................................... 4,635,336 46,690
Marvin M. Reiss............................................. 4,635,336 46,690
Nathan M. Schulhof.......................................... 4,635,336 46,690
</TABLE>
B. Amendment of the Plan to increase the number of options to
1,800,000:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
--------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Amendment of Plan to Increase Size
to 1,800,000...................... 1,193,485 276,138 18,209 3,229,194
</TABLE>
C. Amendment of the Plan to provide for automatic grants of options to
non-employee directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
--------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Amendment of Plan to Provide for
Automatic Grants of Options to
Non-employee Directors............ 4,457,041 158,765 20,131 81,089
</TABLE>
D. Ratification of the appointment of Grant Thornton LLP as independent
auditors for the year ending December 31, 1999:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C> <C>
Ratification of the Appointment of Grant Thornton
LLP.............................................. 4,664,455 39,247 13,324
</TABLE>
17
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since December 18, 1998, the Company's Common Stock has been traded in the
over-the-counter market and is quoted on the Nasdaq SmallCap Market under the
symbol "AHWY." The Common Stock also trades on the Boston Stock Exchange under
the symbol "AHY." The following table sets forth the high and low closing sale
prices for the Common Stock as reported on the Nasdaq SmallCap Market for the
period indicated. These prices represent prices among dealers, do not include
retail markups, markdowns or commissions, and may not represent actual
transactions:
<TABLE>
<CAPTION>
HIGH LOW
-------------- --------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Fourth Quarter (commencing December 18, 1998)............. $14 13/16 $6 17/32
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $15 3/8 $7 1/2
Second Quarter............................................ $34 1/8 $11 11/16
Third Quarter............................................. $21 3/4 $8 1/4
Fourth Quarter............................................ $13 1/2 $8 1/4
</TABLE>
On March 22, 2000, the last reported sale price for the Common Stock was
$8 5/16 per share.
As of March 22, 2000, there were approximately 205 record holders of the
Company Common Stock. This number does not reflect the number of beneficial
holders of the Common Stock, which the Company believes is approximately 10,000
holders.
The Company has never paid cash dividends on its Common Stock. At present,
the Company intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable
ITEM 6. 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 financial condition for the two years ended
December 31, 1999 and 1998. The following discussion should be read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in this Annual Report on Form 10-KSB. 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 (1) discuss management's expectations about the
Company's future performance; (2) contain projections of the Company's future
operating results or of the Company's future financial condition; or (3) 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,"
appearing in "Business" 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
18
<PAGE>
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
ACQUISITION
Effective January 1, 1999, the Company completed the acquisition of
substantially all the assets of Mass Music, Inc., an online seller of music
products. The acquisition was accounted for as a purchase. 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
acquisition. Results of operations for Mass Music, Inc. 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, which consisted of
$200,000 in cash and a note payable in the amount of $800,000. In April 1999,
the Company converted the note payable into 36,478 shares of the Company's
Common Stock.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1998
Net revenues were $2,060,000 for the twelve months ended December 31, 1999,
as compared to $139,000 for the same period in 1998. The Company launched its
Web site in November 1997. Revenues generated in 1998 were primarily from
advertising sales. Revenues for 1999 were attributed to e-commerce sales
including revenues generated by the Company's Mass Music and Audioshop
e-commerce web sites, advertising sales and to a lesser extent, revenue sharing
opportunities. The Company had no substantial e-commerce or revenue sharing
arrangements in 1998. The substantial revenue increase in 1999 was primarily
attributable to e-commerce revenue, consisting primarily of the sale of compact
discs.
Cost of products sold through e-commerce exceeded revenue by $324,000 for
the twelve months ended December 31, 1999. This was primarily attributable to
aggressive pricing to meet competition and to increase market share and high
fulfillment costs.
Operating and development expenses were $3,830,000 for the twelve months
ended December 31, 1999, up 199% from $1,283,000 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 sites, use of consulting engineers 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 $6,298,000 for the twelve months ended
December 31, 1999, up 244% from $1,832,000 for the same period in 1998. This
increase is primarily attributable to the increased advertising and marketing
expenses associated with promoting the Company's Web sites, increased payroll
expenses associated with additional sales and marketing staff, as well as
increased expenses for public relations. The Company expects selling and
marketing expenses to continue to increase substantially in future periods as
the Company develops and launches new Web sites and promotes its new and
existing Web sites.
General and administrative expenses ("G&A") were $2,622,000 for the twelve
months ended December 31, 1999, up 316% compared to G&A expenses of $631,000 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.
19
<PAGE>
The operating loss was $12,615,000 for the twelve months ended December 31,
1999 compared to an operating loss for the same period in 1998 of $3,611,000, an
increase of approximately 249%. As noted above, the increased loss was primarily
the result of increased expenditures in the sales and marketing, and operating
and development areas, offset by the $1,921,000 increase in revenue. The
increased operating loss was anticipated in light of the need to substantially
increase expenditures following receipt of the net proceeds from the Company's
initial public offering, in order to expand the business.
Interest expense decreased approximately 49% to $950,000 during the twelve
months ended December 31, 1999 from $1,845,000 in the same period in 1998. This
decrease was primarily the result of 1998 including amortization of the fair
value of the warrants issued in connection with debt to a greater extent than in
1999 as the Company retired a substantial portion of the outstanding debt during
1999. The net carrying value of outstanding debt at December 31, 1998 was
$1,328,000 compared to $440,000 on December 31, 1999. Additionally, in 1998 the
Company recorded $609,000, related to amortization of beneficial conversion
features of convertible debt.
Interest income increased approximately $884,000 during 1999 compared to
1998 as a result of investing the net proceeds from the IPO and its subsequent
warrant call.
As a result of the factors described above, for the twelve months ended
December 31, 1999, the Company incurred a net loss of $12,672,000 compared to a
net loss of $5,867,000 for the same period in 1998, an increase of approximately
116%.
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 $333,000 to holders of Warrants who
chose not to redeem during the 30-day redemption period. As of December 31,
1999, the Company had $13,152,000 in cash and cash equivalents and investments,
$9,524,000 of which was invested in high grade short-term debt instruments. As
of December 31, 1999, the Company had $10,223,000 in working capital. 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 which bear
interest at 8% to 10%, are convertible into Common Stock at rates ranging from
$3.25 to $14.39 per share and other non-convertible debt at rates from 8% to
10%. During 1999, the Company converted $240,000 of debt into Common Stock. The
carrying value of the remaining debt as of December 31, 1999 was $440,000. The
remaining debt is all due on or before June 30, 2000.
As of December 31, 1999, the Company used $10,303,000 in operating
activities compared to $3,478,000 in 1998. This increase was largely due to the
significantly increased net loss in 1998, but also reflected increased uses of
cash in most aspects of operating activities, other than Common Stock issued for
services and amortization of debt discounts and conversion features, which were
larger in 1998. The Company also used $10,522,000 in investing activities
compared to $55,000 in 1998. The most significant portion of the 1999 increase
was from the purchase of held-to-maturity investment securities. Net cash
provided by financing activities decreased in 1999, from $16,535,000 in 1998 to
$11,446,000 in 1999, primarily because the net proceeds of the Company's initial
public offering were received in 1998. The
20
<PAGE>
$11,446,000 received in 1999 was primarily the result of the sale of Common
Stock in connection with the warrant call.
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, 1999, 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, 1999, the Company had approximately $21,899,000 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 $10,335,000 of California net
operating loss carryforwards for tax reporting purposes which begin to expire in
2000.
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 therefore, utilization of the
Company's net operating loss carryforwards may be limited.
IMPACT OF YEAR 2000
In prior years, the Company implemented a Year 2000 project to address the
issue of computer software and hardware correctly processing dates through and
beyond the Year 2000. The goal of this project was to ensure that all computer
software and hardware that the Company uses or relies upon was retired, replaced
or made Year 2000 compliant before December 31, 1999. To date, the Company has
not experienced any Year 2000-related operational issues and is not aware of any
material potential problems that may arise as a result of Year 2000 issues
either from its own internal systems or from the products and services of third
parties upon which it relies.
ITEM 7. FINANCIAL STATEMENTS
The Balance Sheet of the Company at December 31, 1999 and the related
Statements of Operations, Stockholders' Equity and Cash Flows for the years
ended December 31, 1998 and 1999, and the Notes to Financial Statements are
located on pages 22 through 37 of this Report. The Report of Independent
Certified Public Accountants, Financial Statements and Notes to Financial
Statements are incorporated into this Item 7.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FORM 10-KSB
PAGE NUMBER
-----------
<S> <C>
Report of Independent Certified Public Accountants.......... 23
Balance Sheet at December 31, 1999.......................... 24
Statements of Operations for the years ended December 31,
1999 and 1998............................................... 25
Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998.................................. 26
Statement of Cash Flows for the years ended December 31,
1999 and 1998............................................... 27
Notes to Financial Statements............................... 28
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
audiohighway.com
We have audited the accompanying balance sheet of audiohighway.com (the
"Company"), as of December 31, 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1999, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with accounting principles generally
accepted in the United States.
San Jose, California
April 12, 2000
23
<PAGE>
audiohighway.com
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,628
Investments............................................... 9,524
Accounts receivable, less allowance for doubtful accounts
of $125................................................. 212
Accrued interest receivable............................... 236
Prepaid expenses.......................................... 140
--------
Total current assets................................ 13,740
Property and equipment, net............................... 1,048
Note receivable from director............................. 107
Lease deposits............................................ 400
Other assets, less accumulated amortization of $500....... 500
--------
TOTAL ASSETS................................................ $ 15,795
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt......................... $ 440
Current portion of capital lease obligations.............. 47
Accounts payable.......................................... 1,770
Accrued expenses and other current liabilities............ 1,260
--------
Total current liabilities........................... 3,517
Capital lease obligations, less current portion............. 111
--------
Total liabilities................................... 3,628
Stockholders' equity:
Preferred stock, no par value; 5,000 shares authorized;
none issued............................................. --
Common stock, no par value; 50,000 shares authorized;
5,746 shares issued and outstanding..................... 33,162
Additional paid-in capital................................ 4,194
Accumulated deficit....................................... (25,189)
--------
Total stockholders' equity.......................... 12,167
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 15,795
========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
audiohighway.com
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues:
e-commerce................................................ $ 6 $ 1,601
Advertising............................................... 133 459
------- --------
Total revenues...................................... 139 2,060
Costs and expenses:
Costs of products sold through e-commerce................. 4 1,925
Operating and development................................. 1,283 3,830
Sales and marketing....................................... 1,832 6,298
General and administrative................................ 631 2,622
------- --------
Total costs and expenses............................ 3,750 14,675
------- --------
Loss from operations........................................ (3,611) (12,615)
Other income (expense):
Interest expense.......................................... (1,845) (950)
Interest income........................................... 12 896
Other..................................................... 2 (3)
------- --------
Net loss before extraordinary item.................. (5,442) (12,672)
Extraordinary loss on conversion of subordinated debt....... 425 --
------- --------
Net loss............................................ $(5,867) $(12,672)
======= ========
Basic and diluted net loss per share from continuing
operations................................................ $ (4.75) $ (2.37)
Basic and diluted net loss per share from extraordinary
item...................................................... (0.37) --
------- --------
Basic and diluted net loss per share........................ $ (5.12) $ (2.37)
======= ========
Shares used in computing basic and diluted net loss per
share..................................................... 1,146 5,345
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
audiohighway.com
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
TWO YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998..................... 944 $ 2,321 $1,884 $ (6,650) $ (2,445)
Public Offering of Common Stock, net of
issuance costs of $2,343................... 2,530 14,052 -- -- 14,052
Conversion of Subordinated Notes and accrued
interest to Common Stock................... 626 2,730 -- -- 2,730
Issuance of Common Stock from exercise of
warrants................................... 3 18 -- -- 18
Issuance of Common Stock for services........ 1 9 -- -- 9
Beneficial conversion feature on convertible
notes...................................... -- -- 609 -- 609
Issuance of warrants with debt............... -- -- 1,701 -- 1,701
Net loss..................................... -- -- -- (5,867) (5,867)
----- ------- ------ -------- --------
Balance at December 31, 1998................... 4,104 19,130 4,194 (12,517) 10,807
Conversion of Subordinated Notes to Common
Stock...................................... 80 240 -- -- 240
Issuance of Common Stock from exercise of
options and warrants, net of costs of
$333....................................... 1,526 12,992 -- -- 12,992
Conversion of note payable to Common Stock
related to the acquisition of Mass Music,
Inc........................................ 36 800 -- -- 800
Net loss..................................... -- -- -- (12,672) (12,672)
----- ------- ------ -------- --------
Balance at December 31, 1999................... 5,746 $33,162 $4,194 $(25,189) $ 12,167
===== ======= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
audiohighway.com
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,867) $(12,672)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 100 679
Common Stock issued for services........................ 9 --
Amortization of debt discounts and conversion
features.............................................. 1,948 853
Provision for doubtful accounts......................... -- 125
Changes in operating assets and liabilities:
Accounts receivable................................... (78) (257)
Accrued interest receivable........................... -- (236)
Prepaid expenses...................................... (5) (93)
Lease deposits........................................ -- (400)
Accounts payable...................................... 305 642
Accrued expenses and other current liabilities........ 110 1,056
------- --------
Net cash used in operating activities............... (3,478) (10,303)
Cash flows from investing activities:
Purchase of held-to-maturity investment securities........ -- (11,529)
Proceeds on maturity of held-to-maturity investment
securities.............................................. -- 2,005
Acquisition of Mass Music, Inc............................ -- (200)
Acquisition of property and equipment..................... (55) (691)
Issuance of note receivable............................... -- (107)
------- --------
Net cash used in investing activities............... (55) (10,522)
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................... 14,070 12,992
Proceeds from issuance of long term debt.................. 2,613 --
Principal payments on long term debt...................... (148) (1,501)
Principal payments on capital lease obligations........... -- (45)
------- --------
Net cash provided by financing activities........... 16,535 11,446
------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 13,002 (9,379)
Cash and cash equivalents at beginning of year.............. 5 13,007
------- --------
Cash and cash equivalents at end of year.................... $13,007 $ 3,628
======= ========
Cash paid during the year for:
Interest.................................................. $ 87 $ 88
======= ========
Income taxes.............................................. $ -- $ --
======= ========
Noncash investing and financing activities:
The Company acquired equipment under capital lease obligations totaling $203
during the year ended December 31, 1999.
The Company converted Subordinated Notes and accrued interest thereon of $240
and $2,730 to Common Stock during the years ended December 31, 1999 and 1998,
respectively.
The Company converted an $800 note payable to Common Stock in connection with
the acquisition of Mass Music, Inc. during the year ended December 31, 1999.
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
audiohighway.com (the "Company") is an online retailer and a global Internet
media company that offers a library of pre-recorded audio content via the
World Wide Web (the "Web"). The Company contracts with an outside vendor for
fulfillment services to deliver e-commerce products to customers and
therefore maintains no inventories. The Company was incorporated in
California in 1994 and conducts its business within one operating segment.
REVENUE RECOGNITION
The Company's revenues are derived principally from the e-commerce sale of
music products, primarily compact discs, through the Company's Web site.
Revenues from sales of music products are recognized at the time of shipment
of music products. Revenues also include audio commercials included in its
downloaded programming ("deliveries") and from the sale of banner
advertisements, both on short-term contracts. Advertising revenues on both
banner advertisements and deliveries are recognized in the period in which
the advertisement is delivered, provided that collection of the resulting
receivable is probable. Advertisers are charged on a per impression or
delivery basis or for a fixed number of impressions as specified in the
contract. The Company generally does not guarantee a minimum number of
impressions or deliveries. Revenue sharing agreements with advertisers may
provide that the Company receive revenues from e-commerce transactions.
These revenues are recognized by the Company upon notification from the
advertiser of revenues earned.
OPERATING AND DEVELOPMENT
Operating and development expenses consist primarily of data communications
expenses, content and software licensing fees, operating supplies, related
overhead and expenses incurred by the Company to maintain, monitor and
manage the Company's Web site. The Company recognizes Web site development
costs in accordance with Statement of Position ("SOP") 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. As
such, the Company expenses all costs incurred that relate to the planning
and post implementation phases of development. Costs incurred in the
development phase are capitalized and recognized over the product's
estimated useful life if the product is expected to have a useful life
beyond one year. Costs associated with repair or maintenance of the existing
site or the development of Web site content are included in operating and
development expenses in the accompanying statements of operations.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company does not incur any
direct-response advertising costs. Advertising expenses totaled $343 and
$1,816 for 1998 and 1999, respectively.
CASH AND CASH EQUIVALENTS
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents. Cash equivalents include short term
investments in low risk investment grade securities.
28
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments in debt securities purchased with maturities greater than three
months are classified as held-to-maturity in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, and related amendments.
Held-to-maturity investments are debt securities that the Company has the
positive intent and ability to hold to maturity. These investments are
recorded at cost adjusted for amortization of premiums and accretion of
discounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash
equivalents, investments, and accounts receivable. Substantially all of the
Company's cash and cash equivalents and investments are managed by one
financial institution. Accounts receivable are typically unsecured and are
derived from revenues earned from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally two to five years. For
leasehold improvements, amortization is computed over the shorter of the
lease terms or the estimated useful lives of the improvements.
INCOME TAXES
Income taxes are computed using an asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided against deferred tax
assets when realization of the asset is not expected.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and complies with
the disclosure provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Under APB No. 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
29
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
BASIC AND DILUTED NET LOSS PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of
the incremental common shares issuable upon conversion of convertible
securities (using the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect
is anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable, accrued
interest receivable, and trade payables approximates carrying value due to
the short term nature of such instruments. The fair value of the related
party note receivable is not determinable because of the related party
nature of the instrument. The fair value of investment securities are based
on quoted market prices of comparable instruments. The carrying amount and
estimated fair value of investment securities as of December 31, 1999 was
$9,524 and $9,516, respectively. The fair value of long-term obligations,
including subordinated debt, approximates carrying value based on terms
available for similar instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to 1998 amounts and disclosures to
conform to the 1999 presentation.
NOTE 2--ACQUISITION OF MASS MUSIC, INC.
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. 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 acquisition. Results of operations for
Mass Music, Inc. 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 which consisted of $200 in cash and a note payable in
the amount of $800. In April 1999,
30
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--ACQUISITION OF MASS MUSIC, INC. (CONTINUED)
the Company converted the note payable into 36 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.............................................. $ 874
Software operating systems.................................. 102
Other....................................................... 24
------
Total....................................................... $1,000
======
</TABLE>
Customer lists and other intangible assets are amortized on a straight-line
basis over a period of two years. Amortization expense for the year ended
December 31, 1999 was $500.
The following unaudited pro-forma results of operations for the year ended
December 31, 1998 assume that the purchase occurred on January 1, 1998.
<TABLE>
<S> <C>
Revenues.................................................... $ 929
Net loss before extraordinary item.......................... $(6,031)
Net loss.................................................... $(6,456)
Basic and diluted net loss per share from continuing
operations................................................ $ (5.26)
Basic and diluted net loss per share from extraordinary
item...................................................... $ (0.37)
Basic and diluted net loss per share........................ $ (5.63)
</TABLE>
NOTE 3--BALANCE SHEET COMPONENTS
Investments
The amortized cost, unrealized gains and losses, and fair values of the
Company's held-to-maturity investment securities at December 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate Debt Securities............ $1,004 $ -- $4 $1,000
U.S. State Debt Securities........... 8,520 -- 4 8,516
------ --------- -- ------
$9,524 $ -- $8 $9,516
====== ========= == ======
</TABLE>
The following table lists the maturities of debt securities held at
December 31, 1999 classified as held-to-maturity:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
-------------------------------------
AMORTIZED COST ESTIMATED FAIR VALUE
-------------- --------------------
<S> <C> <C>
Due in one year or less...................... $9,524 $9,516
</TABLE>
31
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--BALANCE SHEET COMPONENTS (CONTINUED)
Property and Equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Computers and equipment................................... $1,085
Computers and equipment held under capital leases......... 203
Furniture and fixtures.................................... 113
Leasehold improvements.................................... 31
------
1,432
Less: accumulated depreciation and amortization........... (384)
------
$1,048
======
</TABLE>
The accumulated depreciation associated with computers and equipment held
under capital lease was $24 at December 31, 1999.
Accrued Expenses and Other Current Liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Compensation costs........................................ $ 723
Interest.................................................. 149
Litigation settlements.................................... 250
Other..................................................... 138
------
$1,260
======
</TABLE>
NOTE 4--LONG TERM DEBT
Prior to 1999, the Company issued promissory notes (the "Notes") bearing
interest at rates ranging from 8% to 10%, convertible into Common Stock at
rates ranging from $3.25 to $14.39 per share. During 1999, the Company
converted $240 of the Notes into Common Stock. During 1998, the Company
converted $2,466 of the Notes and accrued interest of $264 into Common
Stock, including $1,738 that immediately converted upon closing of the
Company's initial public offering in December 1998. The remaining Notes are
all due by June 30, 2000. Officers and directors of the Company had
purchased $130 of the Notes, of which none are outstanding at December 31,
1999.
The Company has issued 1,221 warrants to purchase shares of Common Stock in
connection with the issuance and conversion of the Notes and for guarantees
provided by stockholders. As of December 31, 1999, 963 warrants are
outstanding. The Company calculated the fair value of the warrants at the
date of issuance and is amortizing this amount as interest expense over the
life of the related debt.
32
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--LONG TERM DEBT (CONTINUED)
The carrying value of the debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Debt principal.............................................. $ 617
Unamortized discount........................................ (177)
-----
Carrying value.............................................. $ 440
=====
</TABLE>
NOTE 5--CAPITALIZED LEASE OBLIGATIONS
The Company leases certain computers and equipment, which have been
capitalized. The leases are non-cancelable and expire on various dates
through 2004. The following is a schedule, by years, of future minimum
payments under capital leases together with the present value, calculated at
the Company's incremental borrowing rate at the inception of the leases, of
future minimum rentals as of December 31, 1999:
<TABLE>
<S> <C>
Year ended December 31,
2000...................................................... $ 61
2001...................................................... 58
2002...................................................... 43
2003...................................................... 37
2004...................................................... 5
----
Total minimum lease payments................................ 204
Amount representing interest................................ (46)
Current portion of capital lease obligations................ (47)
----
Present value of long term obligations under capital
leases.................................................... $111
====
</TABLE>
NOTE 6--STOCKHOLDERS' EQUITY
In December 1998, the Company completed an initial public offering (IPO)
whereby 2,530 units were sold at a price of $6.50. Each unit consisted of
one share of Common Stock and one warrant to purchase one share of Common
Stock at $9.75 (the "Unit Warrants", collectively the "Units"). The net
proceeds received by the Company totaled $14,052. The Unit Warrants
contained a call provision, which was exercised by the Company in
January 1999 (the "Warrant Call"). The Warrant Call and other warrant
exercises resulted in net proceeds to the Company of approximately $12,992.
As a result of the Warrant Call no Unit Warrants are outstanding as of
December 31, 1999.
The underwriter of the initial public offering was granted a warrant to
acquire 220 Units, exercisable at $7.80 per Unit (the "Representative's
Warrants"). The Representative's Warrants expire in December 2003 and all of
them remain outstanding as of December 31, 1999.
33
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
The Board of Directors and the stockholders approved a 1 for 3.837 reverse
split of the Common Stock that was effective on December 11, 1998. All
references to the number of shares of Common Stock, weighted average common
shares, and per share amounts in the accompanying financial statements and
notes reflect this reverse split.
The 1996 Stock Option Plan (the "Plan") allows for the issuance of incentive
stock options, non-qualified stock options and stock purchase rights to
purchase shares of the Company's Common Stock. During 1999, the Plan was
amended and the Company reserved for issuance an aggregate of 1,800 shares
under the Plan and 1,535 shares remain available for granting at
December 31, 1999.
Under the Plan, incentive stock options may be granted to employees,
directors, and officers of the Company, and non-qualified stock options and
stock purchase rights may be granted to consultants, employees, directors,
and officers of the Company. Options granted under the Plan are for periods
not to exceed ten years, and must be issued at prices not less than 100% and
85%, for incentive and nonqualified stock options, respectively, of the fair
market value of the stock on the date of grant. Options granted to
stockholders who own greater than 10% of the outstanding stock are for
periods not to exceed five years and must be issued at prices not less than
110% of the fair market value of the stock on the date of grant. Options
granted under the Plan generally vest within 3 to 5 years.
The Company has also granted options and warrants to purchase Common Stock
outside of the Plan to employees, directors and consultants. These
instruments generally vest within 3 to 5 years.
Stock option and warrant activity, excluding warrants issued in connection
with long term debt, the Unit Warrants, and the Representative's Warrants,
is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Balance at January 1, 1998.................................. 272 $ 6.98
Granted................................................... 164 6.50
Exercised................................................. -- --
Cancelled................................................. (31) 13.19
--- ------
Balance at December 31, 1998................................ 405 6.29
Granted................................................... -- --
Exercised................................................. (47) 5.88
Cancelled................................................. (3) 6.50
--- ------
Balance at December 31, 1999................................ 355 $ 6.49
=== ======
</TABLE>
34
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options and warrants
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICE OUTSTANDING PRICE TERM (YEARS) EXERCISABLE PRICE
- --------------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.92 - $ 5.76 155 $ 4.46 4 155 $ 4.46
$ 5.77 - $11.50 153 $ 6.50 9 147 $ 6.50
$11.51 - $14.39 47 $13.11 8 40 $13.39
--- ---
355 342
=== ===
</TABLE>
The following table depicts the pro forma results of operations had
compensation expense been determined based on the fair value at the grant
dates, as prescribed in SFAS No. 123.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net loss
As reported............................................ $(5,867) $(12,672)
Pro forma.............................................. $(6,305) $(13,090)
Basic and diluted net loss per share
As reported............................................ $ (5.12) $ (2.37)
Pro forma.............................................. $ (5.50) $ (2.45)
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant has been determined on the date of grant using the minimum
value method. After the Company's initial public offering, the fair value of
option grants has been determined using the Black-Scholes option pricing
model. The weighted average fair value of options and warrants granted to
employees was $5.84 for 1998. The following weighted average assumptions
were used to perform the calculations: expected life of 3 years; interest
rate of 5.5%, volatility of 200% (for grants after the initial public
offering) and no dividend yield. The pro forma disclosures may not be
representative of pro forma effects on reported financial results for future
years.
35
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7--INCOME TAXES
No provision for federal and state income taxes has been recorded, as the
Company has incurred net operating losses through December 31, 1999. The
following table sets forth the primary components of deferred tax assets at
December 31, 1999:
<TABLE>
<S> <C>
Net operating loss and credit carryforwards................. $ 8,353
Valuation allowance......................................... (8,353)
-------
$ --
=======
</TABLE>
At December 31, 1999, the Company fully provided against its deferred tax
assets. The valuation allowance was increased by $4,429 during the year
ended December 31, 1999. 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, 1999, the Company had
approximately $21,899 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 $10,335 of California net operating loss carryforwards for tax
reporting purposes which will expire beginning in 2000.
Federal and state laws impose restrictions on the utilization of net
operating loss carryforwards in the event of an "ownership change" as
defined in Section 382 of the Internal Revenue Code. As a result of the
initial public offering, the Company believes an ownership change has
occurred and utilization of the net operating losses may be limited.
NOTE 8--COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS
Litigation
In August 1999, Spirit Partners, L.P. and Gaines Berland, Inc, filed suit
against the Company in the Supreme Court of the State of New York seeking
damages according to proof, punitive damages in the amount of $3,000,
attorneys' fee, costs and equitable relief, based on allegations of breach
of contract, negligent misrepresentation and deceptive trade practices
relating to the Company's redemption of its publicly traded warrants during
February 1999. The Company removed the case to the United States District
Court for the Southern District of New York. Due to the nature of litigation
generally and because the lawsuit is at an early stage, the Company cannot
estimate the total expense, possible damages or settlement value, if any,
that may ultimately be incurred in connection with the suit. However, the
Company believes that the suit is wholly without merit, intends to
vigorously oppose the suit and believes that the matter will not have a
material adverse effect on the Company's results of operations or financial
condition.
The Company is engaged in various other claims and legal actions arising out
of the normal course of business, either as plaintiff or defendant. In the
opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
statements.
36
<PAGE>
audiohighway.com
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (CONTINUED)
Operating Leases
The Company leases various operating facilities and equipment under
noncancelable operating lease agreements that expire at various dates though
2004. A portion of the operating facilities is subleased under a lease which
expires in 2001. Total future minimum sublease rentals amount to $329. Rent
expense under these operating lease agreements totaled $429 and $1,213 in
1998 and 1999, respectively.
The future minimum rental commitments, excluding sublease income, under
operating lease agreements are as follows:
<TABLE>
<S> <C>
Year ended December 31,
2000...................................................... $1,148
2001...................................................... 1,186
2002...................................................... 1,161
2003...................................................... 1,080
2004...................................................... 931
------
Total future minimum lease payments required................ $5,506
======
</TABLE>
Concentrations
During the year, the Company entered into a distribution agreement in which
a single outside vendor provides direct-to-customer order fulfillment
services for e-commerce orders placed over the Web. The original terms of
the agreement expired on December 31, 1999; however the agreement provides
that the term will automatically be renewed for a subsequent one-year term,
unless the Company or the outside vendor provides notice to the other party
at least 30 days prior to December 31, 1999 or any subsequent one-year term
of its intent not to renew the agreement. Although management believes other
vendors could provide fulfillment services on similar terms, it believes a
change in the outside vendor could adversely affect operating results by
causing a delay in fulfilling orders and a possible loss of e-commerce
revenues.
NOTE 9--RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998 and 1999, the Company incurred $264
and $713, respectively, in expenses to TDP, Inc., for software consulting
and systems development expenses. Mr. Rehki, a member of the Board of
Directors of the Company, was the Chief Executive Officer of TDP, Inc. until
February 1999. As of December 31, 1999, $85 of this amount was unpaid.
On February 23, 1999, the Company made an unsecured loan to Mr. Rehki in the
amount of $107, bearing interest at the rate of 10% per annum and due
February 23, 2000. In February 2000, the Company extended the maturity date
of the unsecured loan to February 23, 2001.
37
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company as of March 24, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- -------- ---------------------------------------------------
<S> <C> <C>
Nathan M. Schulhof..................... 50 President, Chief Executive Officer and Director
Grant Jasmin(1)........................ 48 Executive Vice President, Chief Operating Officer,
Vice President Finance, Secretary and Director
Robert S. Leff......................... 53 Director
Lee M. Gammill(2)...................... 63 Director
Muninderpal Rehki(1)(2)................ 50 Director
Marvin M. Reiss........................ 55 Director
Gregory Sutyak......................... 43 Chief Financial Officer
Theodore Richards...................... 53 Vice President and Creative Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Schulhof is one of the founders of the Company and has served as Chief
Executive Officer, President and a Director since the Company's inception in
June 1994. Mr. Schulhof received a Bachelor of Arts degree in English from the
University of Wisconsin.
Mr. Jasmin is one of the founders of the Company and has served as Executive
Vice President, Chief Operating Officer, Secretary and a Director since the
Company's inception in June 1994. From June 1994 until January 1998, Mr. Jasmin
also served as the Company's Vice President, Finance. He again was appointed
Vice President, Finance in December 1998. Mr. Jasmin received the degree of
Juris Doctor from the University of California Hastings College of the Law,
Master of Business Administration from the University of Santa Clara and a
Bachelor of Arts degree in Economics from San Jose State University.
Mr. Leff has served as a Director of the Company since February 1995.
Mr. Leff has served as an independent financial consultant since December 1994.
Mr. Leff holds both a Master of Science degree and a Bachelor of Science degree
from the State University of New York at Albany.
Mr. Gammill has served as a Director of the Company since November 1997.
Since May 1997, Mr. Gammill has served as Chief Executive Officer of The Gammill
Group, a consultant to the insurance and financial industry. In May 1997,
Mr. Gammill retired from 40 year career with New York Life Insurance Company
where he served as Vice Chairman of the Board of Directors. Mr. Gammill also
serves on the Board of Directors of Guarantee Life Insurance Company, Omaha
Nebraska, and is a Trustee of the American College, Bryn Mawr, Pennsylvania.
Mr. Gammill received a Bachelor of Arts degree in Business Administration from
Dartmouth College.
Mr. Rehki has served as a Director of the Company since April 1998. Since
February 1999, Mr. Rehki has been an independent business consultant. Mr. Rehki
was Chief Executive Officer of TDP, Inc., a high technology software consulting
firm, from January 1998 until February 1999. From October 1997 to January 1998,
he was Chief Executive Officer of TransWeb, a software consulting firm to the
medical industry. TransWeb is a wholly-owned subsidiary of CyberPlus, an
Internet-based software medical support company in which Mr. Rehki served as
Chief Executive Officer and Director from February 1996 to
38
<PAGE>
October 1997. From December 1993 to January 1996, Mr. Rehki was Vice President
of Operations for Intellimatch, Inc., an Internet-based human resources company.
Mr. Rehki received a Bachelor of Arts degree in Economics and a Master of Arts
degree in Economics from Christ Church College, India.
Mr. Reiss has served as a Director of the Company since October 1998. For
more than the past five years, Mr. Reiss has been Chairman and Chief Executive
Officer of The Rebot Corporation, a record company that produces, manufactures
and distributes recorded music under various labels including Arabesque
Recordings. Mr. Reiss received the degrees of Master of Business Administration,
Master of International Affairs and Master of Arts in Sociology from Columbia
University, Bachelor of Law degree from Brooklyn Law School, Master of Science
degree in Physiology from the Fairleigh Dickenson Dental School, Master of
Science degree in Microbiology from Marquette University School of Medicine and
Bachelor of Arts degree in Biology from Yeshiva University.
Mr. Sutyak has served as Chief Financial Officer since January 1998. From
January 1995 through December 1997, Mr. Sutyak served as a consultant to the
Company performing financial services. From March 1996 through December 1997,
Mr. Sutyak was an independent consultant. From May 1993 through February 1996,
Mr. Sutyak was Chief Financial Officer for TestDrive. Mr. Sutyak received a
Bachelor of Arts degree in Economics from the University of Pittsburgh and a
Masters of Business Administration degree from the University of San Francisco.
Mr. Richards has served as Vice President and Creative Director since
July 1996. From November 1994 to July 1996, Mr. Richards was Vice President of
User Interface Design and Creative Director for SoftAd, a firm specializing in
the design and implementation of sales force automation and integrated
client-server-based Web sites. Mr. Richards received a Bachelor of Arts degree
in Creative Writing from San Francisco State University.
All members of the Board of Directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation, or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the General Corporation Law of California (the "Corporations
Code"), the Company's Articles of Incorporation eliminate, to the fullest extent
permitted under California law, the personal liability of a director to the
Company for monetary damages in an action brought by or in the right of the
Company for breach of a director's duties to the Company and its shareholders.
Under current California law, liability is not eliminated for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law; (ii) acts or omissions that a director believed to be contrary
to the best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director; (iii) any transaction from
which a director derived an improper personal benefit; (iv) acts or omissions
that show a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders; (v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders;
(vi) contracts or other transactions between corporations and directors having
interrelated directors in violation of Section 310 of the Corporations Code; and
(vii) distributions, loans or guarantees made in violation of Section 316 of the
Corporations Code. In addition, the Company's Articles of Incorporation and
bylaws provide for indemnification, to the fullest extent permitted under the
Corporations Code, of directors, officers and agents of the Company and persons
who serve at the request of the Company as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
39
<PAGE>
The Company has also entered into indemnification agreements with its
directors and executive officers, as permitted under the bylaws. The
indemnification agreements provide that the directors and executive officers
will be indemnified to the fullest extent permitted by applicable law against
all expenses (including attorneys' fees), judgments, fines and amounts
reasonably paid or incurred by them for settlement in any threatened, pending or
completed action, suit or proceeding, including any derivative action, on
account of their services as a director or executive officer of the Company or
of any subsidiary of the Company or of any other company or enterprise in which
they are serving at the request of the Company. No indemnification will be
provided under the indemnification agreements, however, to any director or
executive officer in certain limited circumstances, including on account of
knowingly fraudulent, deliberately dishonest or willful misconduct. To the
extent the provisions of the indemnification agreements exceed the
indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy. In addition, in the
opinion of the Securities and Exchange Commission, indemnification for
liabilities arising under the Securities Act of 1933, as amended (the "Act"), is
against public policy and, therefore, unenforceable. Accordingly, these
indemnification provisions may not limit the liability of directors and
executive officers under the Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a class of the Company's equity
securities registered under the Exchange Act, to file with the Commission
reports of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Executive officers, directors and greater than ten
percent stockholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on review
of this information, including written representations that no other reports
were required, the Company believes that during the fiscal year ended
December 31, 1999, each of the Company's executive officers, directors and
holders of ten percent or more of the Company's Common Stock timely filed all
reports required to be filed pursuant to Section 16(a) of the Exchange Act.
However, each of Messrs. Schulhof, Jasmin and Leff filed Amended Form 3s during
February 2000 to reflect an inadvertent mistake with respect to the application
of the December 11, 1998 reverse stock split on warrants originally reported on
the Form 3s filed on December 17, 1998.
40
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1999 to the Company's
Chief Executive Officer and to each of the other three executive officer who
received salary and bonus in excess of $100,000 in 1999 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------------- ----------------- ALL OTHER
SALARY BONUS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($$) ($$) OPTIONS/SAR'S (#) ($$)
- --------------------------- -------- -------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Nathan M. Schulhof...................... 1999 200,000 100,000 175,000 --
Chief Executive Officer and 1998 170,500 75,000 20,850 --
President 1997 157,500 -- -- --
Grant Jasmin............................ 1999 196,000 107,500 175,000 --
Executive Vice President, 1998 140,000 37,500 20,850 172,000*
Chief Operating Officer and 1997 108,000 -- -- --
Vice President, Finance
Theodore Richards....................... 1999 144,000 50,000 75,000 --
Vice President and 1998 114,500 31,000 -- --
Creative Director 1997 99,500 4,000 -- --
Greg Sutyak............................. 1999 120,000 50,000 75,000 --
Chief Financial Officer 1998 66,000 10,000 -- --
1997 -- -- -- --
</TABLE>
- ------------------------
* Represents payroll accrued during earlier periods which was paid during 1998.
DIRECTORS' COMPENSATION
Each non-employee director receives an automatic option to purchase 75,000
shares of common stock upon election to the Board and an automatic additional
annual grant of options to purchase 10,000 shares of common stock at a price
equal to the fair market value on the date of grant.
EMPLOYMENT AGREEMENTS
The Company presently has no formal employment agreements with any of the
Named Executive Officers.
STOCK OPTION GRANTS AND EXERCISES
At the 1999 annual meeting of shareholders, the shareholders approved an
increase in the number of shares available under the Company's 1996 Stock Option
Plan (the "1996 Plan"), authorizing the grant of up to 1,800,000 options. The
1996 Plan was adopted to promote and advance the interests of the Company and
its shareholders by (i) enabling the Company to attract, retain and reward
managerial and other key employees, non-employees and directors and
(ii) strengthening the mutuality of interests between participants in the 1996
Plan and the shareholders of the Company in its long-term growth, profitability
and financial success by offering stock options.
41
<PAGE>
The following table sets forth information regarding the grant of stock
options during the year ended December 31, 1999 to the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS
OPTIONS/SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
(#) FISCAL YEAR ($/SHARE) DATE
------------ ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Nathan M. Schulhof............................ 175,000 25% $5.50 3/12/09
Grant Jasmin.................................. 175,000 25% $5.50 3/12/09
50,000 7% $6.50 12/18/08
25,000 4% $7.50 3/12/09
Theodore Richards.............................
50,000 7% $6.50 12/18/08
25,000 4% $7.50 3/12/09
Gregory Sutyak................................
</TABLE>
The following table sets forth information regarding exercises of stock
options and other related information as of the year ended December 31, 1999 by
the executive officers named in the Summary Compensation Table:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Nathan M. Schulhof............... 0 $ 0 20,850 0 43,003(1) 0(1)
20,850 0 58,432(2) 0(2)
128,125 46,875 392,383(3) 143,554(3)
Grant Jasmin..................... 0 $ 0 20,850 0 43,003(1) 0(1)
20,850 0 58,432(2) 0(2)
128,125 46,875 392,383(3) 143,554(3)
Theodore Richards................ 0 $ 0 26,062 0 73,039(2) 0(2)
18,750 31,250 64,453(1) 38,672(1)
4,167 20,833 4,427(4) 22,135(4)
Gregory Sutyak................... 0 $ 0 18,750 31,250 64,453(1) 38,672(1)
4,167 20,833 4,427(4) 22,135(4)
</TABLE>
- ------------------------
(1) Calculated as the difference between the fair market value of the Common
Stock at December 31, 1999 of $8 9/16 and the option exercise price of $6.50
per share.
(2) Calculated as the difference between the fair market value of the Common
Stock at December 31, 1999 of $8 9/16 and the option exercise price of $5.76
per share.
(3) Calculated as the difference between the fair market value of the Common
Stock at December 31, 1999 of $8 9/16 and the option exercise price of $5.50
per share.
(4) Calculated as the difference between the fair market value of the Common
Stock at December 31, 1999 of $8 9/16 and the option exercise price of $7.50
per share.
42
<PAGE>
ITEM 11. SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 2000 with
respect to the shares of Common Stock beneficially owned by (i) persons known by
the Company to own more than five percent of the outstanding shares of Common
Stock; (ii) each director of the Company; (iii) the Named Executive Officers
(see "Executive Compensation") and (iv) all directors and executive officers of
the Company as a group. Ownership information is based upon information
furnished by the respective individuals.
<TABLE>
<CAPTION>
NAME & ADDRESS OF DIRECTORS NUMBER OF SHARES
& 5% SHAREHOLDERS (2) BENEFICIALLY OWNED (1) PERCENT
- --------------------------- ---------------------- --------
<S> <C> <C>
Nathan M. Schulhof................................ 508,112(3) 7.7%
Grant Jasmin...................................... 394,769(3) 6.0%
Gregory Sutyak.................................... 37,599(4) *
Theodore Richards................................. 55,752(5) *
Robert S. Leff.................................... 157,176(6) 2.5%
Lee M. Gammill.................................... 63,562(7) *
Muninderpal Rehki................................. 98,500(6) *
Marvin M. Reiss................................... 182,847(8) 1.5%
All Executive Officers and Directors as a Group (8
persons)........................................ 1,277,871(9) 18.2%
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership of shares by directors, officers and 5% or more
shareholders includes both outstanding Common Stock and shares issuable upon
exercise of warrants or options that are currently exercisable or will be
exercisable within 60 days after the date of this table. Except as indicated
in the footnotes to this table and pursuant to applicable community property
laws the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock beneficially owned by them.
(2) The address of Messrs. Schulhof, Jasmin, Sutyak, Richards, Leff, Gammill,
Rehki and Reiss is c/o audiohighway.com, 20300 Stevens Creek Boulevard,
Suite 100, Cupertino, California 95014.
(3) Includes 179,200 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of March 31,
2000.
(4) Includes 27,084 shares of Common Stock issuable upon exercise of outstanding
options exercisable within 60 days of March 31, 2000.
(5) Includes 53,146 shares of Common Stock issuable upon exercise of outstanding
options exercisable within 60 days of March 31, 2000.
(6) Includes 37,500 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of March 31, 2000.
(7) Includes 63,562 shares of Common Stock issuable upon exercise of outstanding
warrants and options exercisable within 60 days of March 31, 2000.
(8) Includes (i) 75,737 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of March 31,
2000, (ii) 32,828 shares of Common Stock issuable upon exercise of
outstanding warrants exercisable within 60 days of March 31, 1999 held by
Susan L. Reiss, Mr. Reiss's spouse.
(9) Includes 685,757 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of March 31,
2000.
43
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From October 1996 through June 1998, Marvin M. Reiss, a director of the
Company since October 1998, together with his wife, invested in the Company from
time to time by purchasing Common Stock and by participating in certain of the
Company's convertible promissory note offerings. During the three year period
ended December 31, 1999, Mr. Reiss invested a total of $350,000, all of which
occurred prior to 1999. For his various investments, he received 10% convertible
notes and warrants to purchase an aggregate of 23,589 shares of the Company's
Common Stock. The warrants are exercisable at exercise prices ranging from $4.88
to $7.67.
The Company incurred $265,221 and $713,122 in expenses to TDP, Inc., during
1998 and 1999, respectively for software consulting and systems development
expenses. Mr. Rehki, a member of the Board of Directors of the Company, was the
CEO of TDP, Inc. until February 1999.
On February 23, 1999, the Company made an unsecured loan to Mr. Rehki in the
amount of $107,250 bearing interest at the rate of 10% per annum due
February 23, 2001.
The Company has adopted a policy with respect to future related party
transactions. Pursuant to that policy, any future transactions with officers,
directors or affiliates of the Company will be approved or ratified by a
majority of independent, outside members of the Board of Directors who do not
have an interest in the transactions, and such transactions will be no less
favorable to the Company than those that can be obtained from unaffiliated third
parties. At all times, the Company expects to maintain at least two independent
directors on its Board.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
3.1.1(1) Articles of Incorporation of the Registrant
3.1.2(1) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.1.3(2) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.1.4(2) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
4.2(1) Form of Representative's Warrants
10.1(3) Office Lease dated June 14, 1999 between audiohighway.com
and Symantec Corporation for premises located at
20300 Stevens Creek Boulevard, Cupertino, California
10.2(3) Sublease dated October 1, 1999 between audiohighway.com and
Be Here Corporation for premises located at 20300 Stevens
Creek Boulevard, Suite 100B, Cupertino, California
10.3(3) Landlord's Consent to Sublease of Symantec Corporation dated
October 28, 1999
10.4(1) High Speed Services agreement dated April 3, 1998 between
Audio Highway and UUNET Technologies, Inc.
10.5(1) Edge Information Systems Mission Critical Tricord
Maintenance Agreement dated March 28, 1997 between Audio
Highway and Edge Information Systems, Inc.
10.6(1) Settlement Agreement and Mutual Release dated April 24, 1998
between Tricord Systems, Inc. and Audio Highway
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
10.7(1) Mobile Audio Delivery Agreement dated July 13, 1998 between
Sycom Technologies, Inc. and Audio Highway
10.8(3) Amended and Restated 1996 Stock Option Plan(4)
10.9(3) Content Distribution Agreement, dated May 14, 1999 between
Dow Jones & Company, Inc. and audiohighway.com
10.10(3) Audio File Production Services Agreement, dated as of
July 28, 1999 between audiohighway.com and Audio Concepts
10.11(3) AEC One Stop Group, Inc. Database License and Consumer
Direct Fulfillment Services Agreement, dated as of
November , 1999 between AEC One Stop Group, Inc. and
audiohighway.com
10.12(3) Distribution and Fulfillment Agreement dated December 10,
1999 between audiohighway.com and Ingram Entertainment
Inc.
23(3) Consent of Grant Thornton LLP
27.1(3) Financial Data Schedule
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Registrant's original filing of the Registration
Statement on Form SB-2, filed July 24, 1998.
(2) Filed as an exhibit to the Registrant's Pre-effective Amendment No. 2 to the
Registration Statement on Form SB-2, filed December 11, 1998.
(3) Filed herewith.
(4) Denotes a contract or compensatory plan or arrangement.
(b) There were no reports on Form 8-K filed by the Registrant during the
last quarter covered by this Report.
45
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: April 14, 2000 audiohighway.com
By: /s/ NATHAN M. SCHULHOF
-----------------------------------------
Nathan M. Schulhof
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Nathan M. Schulhof and Grant Jasmin and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, as amended, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ NATHAN M. SCHULHOF President, Chief Executive
------------------------------------------- Officer and Director April 14, 2000
Nathan M. Schulhof (Principal Executive Officer)
/s/ GREGORY SUTYAK Chief Financial Officer
------------------------------------------- (Principal Accounting and April 14, 2000
Gregory Sutyak Financial Officer)
/s/ GRANT JASMIN Chief Operating Officer, Vice
------------------------------------------- President, Finance and April 14, 2000
Grant Jasmin Director
/s/ ROBERT S. LEFF
------------------------------------------- Director April 14, 2000
Robert S. Leff
/s/ LEE M. GAMMILL
------------------------------------------- Director April 14, 2000
Lee M. Gammill
</TABLE>
46
<PAGE>
<TABLE>
<C> <S> <C>
/s/ MUNINDERPAL REHKI
------------------------------------------- Director April 14, 2000
Muninderpal Rehki
/s/ MARVIN M. REISS
------------------------------------------- Director April 14, 2000
Marvin M. Reiss
</TABLE>
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
3.1.1(1) Articles of Incorporation of the Registrant
3.1.2(1) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.1.3(2) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.1.4(2) Certificate of Amendment of Articles of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant
4.1(2) Specimen Common Stock Certificate
4.2(1) Form of Representative's Warrants
10.1(3) Office Lease dated June 14, 1999 between audiohighway.com
and Symantec Corporation for premises located at
20300 Stevens Creek Boulevard, Cupertino, California
10.2(3) Sublease dated October 1, 1999 between audiohighway.com and
Be Here Corporation for premises located at 20300 Stevens
Creek Boulevard, Suite 100B, Cupertino, California
10.3(3) Landlord's Consent to Sublease of Symantec Corporation dated
October 28, 1999
10.4(1) High Speed Services agreement dated April 3, 1998 between
Audio Highway and UUNET Technologies, Inc.
10.5(1) Edge Information Systems Mission Critical Tricord
Maintenance Agreement dated March 28, 1997 between Audio
Highway and Edge Information Systems, Inc.
10.6(1) Settlement Agreement and Mutual Release dated April 24, 1998
between Tricord Systems, Inc. and Audio Highway
10.7(1) Mobile Audio Delivery Agreement dated July 13, 1998 between
Sycom Technologies, Inc. and Audio Highway
10.8(3) Amended and Restated 1996 Stock Option Plan(4)
10.9(3) Content Distribution Agreement, dated May 14, 1999 between
Dow Jones & Company, Inc. and audiohighway.com
10.10(3) Audio File Production Services Agreement, dated as of
July 28, 1999 between audiohighway.com and Audio Concepts
10.11(3) AEC One Stop Group, Inc. Database License and Consumer
Direct Fulfillment Services Agreement, dated as of
November , 1999 between AEC One Stop Group, Inc. and
audiohighway.com
10.12(3) Distribution and Fulfillment Agreement dated December 10,
1999 between audiohighway.com and Ingram Entertainment
Inc.
23(3) Consent of Grant Thornton LLP
27.1(3) Financial Data Schedule
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Registrant's original filing of the Registration
Statement on Form SB-2, filed July 24, 1998.
(2) Filed as an exhibit to the Registrant's Pre-effective Amendment No. 2 to the
Registration Statement on Form SB-2, filed December 11, 1998.
(3) Filed herewith.
(4) Denotes a contract or compensatory plan or arrangement.
48
<PAGE>
EXHIBIT 10.1
SYMANTEC CORPORATION
AND
AUDIOHIGHWAY.COM
LEASE
<PAGE>
SUMMARY OF LEASE
CUPERTINO CITY CENTER
1. DATE OF LEASE:
2. LANDLORD: Symantec Corporation
3. TENANT: Audiohighway.com,
a California corporation
4. PREMISES: 20300 Steven Creek Blvd., Suite 100
Cupertino, California 95014
5. SQUARE FEET: 26,967 sq. ft.
6. PERMITTED USE: General office use
7. TERM: Five (5) years
(a) SCHEDULED COMMENCEMENT DATE: November 1, 1999
(b) SCHEDULED EXPIRATION DATE: October 31, 2004
8. RENT:
(a) BASIC RENT: $79,552.65 per month (Lease months 1-12)
$82,734.76 per month (Lease months 13-24)
$86,044.15 per month (Lease months 25-36)
$89,485.91 per month (Lease months 37-48)
$93,065.35 per month (Lease months 49-60)
(b) TENANT'S ESTIMATED SHARE OF
DIRECT EXPENSES: $19,524.11 per month
9. SECURITY DEPOSIT: $400,000
10. PARKING SPACES PROVIDED: One Hundred Five (105) spaces
11. OTHER IMPORTANT PROVISIONS:
12. EXHIBITS: Exhibit A - Premises
Exhibit B - Project
Exhibit C - Work Letter Agreement
Exhibit D - Sublease Recapture Exemption
Space
<PAGE>
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE
ATTACHED LEASE. IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE
PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL
GOVERN.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- -----------------------------------------------------------------------------
1. USE
2. TERM
3. POSSESSION
4. MONTHLY RENT
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
6. RESTRICTION ON USE
7. COMPLIANCE WITH LAWS
8. ALTERATIONS
9. REPAIR AND MAINTENANCE
10. LIENS
11. INSURANCE
12. UTILITIES AND SERVICE
13. TAXES AND OTHER CHARGES
14. ENTRY BY LANDLORD
15. COMMON AREA; PARKING
16. DAMAGE BY FIRE; CASUALTY
17. INDEMNIFICATION
18. ASSIGNMENT AND SUBLETTING
19. DEFAULT
20. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
21. EMINENT DOMAIN
22. NOTICE AND COVENANT TO SURRENDER
23. TENANT'S QUITCLAIM
24. HOLDING OVER
25. SUBORDINATION
26. CERTIFICATE OF ESTOPPEL
27. SALE BY LANDLORD
28. ATTORNMENT TO LENDER OR THIRD PARTY
29. DEFAULT BY LANDLORD
30. CONSTRUCTION CHANGES
31. MEASUREMENT OF PREMISES
32. ATTORNEY FEES
33. SURRENDER
34. WAIVER
35. EASEMENTS; AIRSPACE RIGHTS
36. RULES AND REGULATIONS
37. NOTICES
38. NAME
39. GOVERNING LAW; SEVERABILITY
40. DEFINITIONS
41. TIME
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
43. ENTIRE AGREEMENT
44. AUTHORITY
<PAGE>
45. RECORDING
46. EXHIBITS AND ATTACHMENTS
47. REAL ESTATE BROKERS
48. ENVIRONMENTAL MATTERS
49. SIGNAGE
50. SUBMISSION OF LEASE
51. TENANT IMPROVEMENTS
52. ADDITIONAL RENT
53. LANDLORD'S OPTION TO RELOCATE PREMISES
<PAGE>
OFFICE LEASE
THIS LEASE is made this _____ day of _______________________, 1999, by
and between SYMANTEC CORPORATION, a Delaware corporation, ("Landlord"), and
AUDIOHIGHWAY.COM, a California corporation ("Tenant").
W I T N E S S E T H :
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises") commonly known as 20300
Stevens Creek Boulevard, Suite 100, Cupertino, California, which Landlord and
Tenant hereby agree consists of approximately twenty-six thousand nine hundred
sixty-seven (26,967) square feet. As used herein the term "Project" shall mean
and include all of the land described in Exhibit B and all the buildings,
improvements, fixtures and equipment now or hereafter situated on said land.
Tenant covenants, as a material part of the consideration of this
lease, to perform and observe each and all of the terms, covenants and
conditions set forth below, and this lease is made upon the condition of such
performance and observance.
1. USE
Subject to the restrictions contained in paragraph 6, Tenant shall
use the Premises for general office use and shall not use or permit the
Premises to be used for any other purpose.
2. TERM
(a) The term shall be for five (5) years (unless sooner
terminated as hereinafter provided) and, subject to paragraphs 2(b) and 3,
shall commence on November 1, 1999 and end on October 31, 2004.
(b) Possession of the Premises shall not be deemed tendered
and the term shall not commence until Landlord notifies Tenant of substantial
completion of all work to be done by Landlord pursuant to Exhibit C to this
lease (exclusive of telephones or other communication systems and punchlist
items) and the Premises can be legally occupied by Tenant, except that (i) if
Landlord is prevented from or delayed in completing its work under Exhibit C to
this lease due to the acts or omissions of Tenant
<PAGE>
or Tenant caused delays (as defined in Exhibit C), then the Premises shall be
deemed tendered and the term shall commence upon the date by which such work
would have been substantially completed but for such acts or omissions of
Tenant and Tenant caused delays, and (ii) if Tenant occupies or otherwise
enters into possession of all or any part of the Premises prior to the
scheduled commencement date, unless otherwise agreed in writing by Landlord,
the term shall commence upon the date of such entry and Tenant's obligation
to pay basic rent and direct expenses shall commence as of such lease
commencement date.
3. POSSESSION
(a) If Landlord for any reason cannot deliver possession of
the Premises to Tenant by the scheduled commencement date set forth in paragraph
2(a), this lease shall not be void or voidable, Landlord shall not be liable to
Tenant for any loss or damage on account thereof and, unless Landlord's failure
to deliver possession of the Premises to Tenant by the scheduled commencement
date set forth in paragraph 2(a) is caused by the acts or omissions of Tenant or
Tenant caused delays, Tenant shall not be liable for rent until the commencement
of the term is determined in accordance with paragraph 2(b). If the term
commences on a date other than the date specified in paragraph 2(a) above, then
the parties shall immediately execute an amendment to this lease stating (or a
letter acknowledging) the actual date of commencement and the revised expiration
date. The expiration date of the term shall be extended by the same number of
days that Tenant's possession of the Premises was delayed from that set forth in
paragraph 2(a).
(b) Tenant's inability or failure to take possession of the
Premises when delivery is tendered by Landlord (with the improvements to be done
pursuant to Exhibit C to this lease substantially completed) shall not delay the
commencement of the term of this lease or Tenant's obligation to pay rent.
Tenant acknowledges that Landlord shall incur significant expenses upon the
execution of this lease, even if Tenant never takes possession of the Premises,
including without limitation brokerage commissions and fees, legal and other
professional fees, the costs of space planning and the costs of construction of
improvements in the Premises. Tenant acknowledges that all of said expenses
shall be included in measuring Landlord's damages should Tenant breach the terms
of this lease.
4. MONTHLY RENT
(a) BASIC RENT. Tenant shall pay to Landlord as basic rent for
the Premises, in advance and subject to adjustment as provided in paragraph 5,
the sum of Seventy-Nine Thousand Five Hundred Fifty-Two and 65/100 Dollars
($79,552.65) on or before the first day of the first full calendar month of the
term and on or before the first day of each and every successive calendar month.
Basic rent for any partial month shall be payable in advance and shall be
prorated based on the actual number of days during the lease term occurring in
such month divided by the total number of days in such month.
<PAGE>
(b) DIRECT EXPENSES. In addition to the above basic rent and
as additional rent, Tenant shall pay to Landlord, subject to adjustment and
reconciliation as provided in paragraph 5(b) of this lease, the sum of Nineteen
Thousand Five Hundred Twenty-Four and 11/100 Dollars ($19,524.11) on or before
the first day of the first full calendar month of the term and on the first day
of each and every successive calendar month, said sum representing Tenant's
estimated payment of its proportionate share of direct expenses as provided for
in paragraph 5(b) of this lease. Payment for direct expenses for any partial
month shall be payable in advance and shall be prorated based on the actual
number of days during the lease term occurring in such month divided by the
total number of days in such month.
(c) MANNER AND PLACE OF PAYMENT. All payments of basic rent
and direct expenses shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, c/o McCandless Management
Corporation at 3945 Freedom Circle, Suite 640, Santa Clara, California 95054, or
to such other person or place as Landlord may from time to time designate in
writing.
(d) FIRST MONTH'S RENT. Concurrently with Tenant's execution
of this Lease, Tenant shall deposit with Landlord the sum of Ninety-Nine
Thousand Seventy-Six and 76/100 Dollars ($99,076.76) to be applied against the
basic rent and direct expenses for the first lease month of the term.
(e) SECURITY DEPOSIT.Concurrently with Tenant's execution of
this lease, Tenant shall deposit with Landlord the sum of Four Hundred Thousand
Dollars ($400,000), which sum shall be held by Landlord as a security deposit
for the faithful performance by Tenant of all of the terms, covenants and
conditions of this lease to be kept and performed by Tenant. Provided that
Tenant has not been in default under this lease at any time, the amount of the
security deposit required hereunder shall be reduced in accordance with the
following schedule:
Lease months 1-24 $400,000
Lease months 25-36 $300,000
Lease months 37-48 $200,000
Lease months 49-60 $100,000
If Tenant defaults with respect to any provision of
this lease, including but not limited to the provisions relating to the
payment of basic rent and direct expenses, Landlord may (but shall not be
required to) use, apply or retain all or any part of this security deposit
for the payment of any amount which Landlord may spend by reason of Tenant's
default or to compensate Landlord for any other loss or damage which Landlord
may suffer by reason of Tenant's default. If any portion of said deposit is
so used, Tenant shall, within ten (10) days after written demand therefor,
deposit cash with Landlord in the amount sufficient to restore the security
deposit to its original amount; Tenant's failure to do so shall be a material
breach of this lease. Landlord shall not be required to keep this security
deposit separate from its general
<PAGE>
funds and Tenant shall not be entitled to interest on such deposit. If Tenant
is not in default at the expiration or termination of this lease, the
security deposit or any balance thereof shall be returned to Tenant after
Tenant has vacated the Premises. In the event of termination of Landlord's
interest in this lease, Landlord shall transfer said deposit to Landlord's
successor in interest, and Tenant agrees that Landlord shall thereupon be
released from liability for the return of such deposit or any accounting
therefor.
(f) APPLICATION OF PAYMENTS. All payments received by
Landlord from Tenant may be applied by Landlord in Landlord's sole discretion
to the oldest payment obligation(s) owed by Tenant to Landlord or in such
other order as Landlord determines in Landlord's sole and absolute
discretion. No designation by Tenant, either in a separate writing or on a
check or money order, shall modify this clause or have any force or effect.
Notwithstanding the above, Landlord's determination not to apply such
payments to the oldest payment obligations first as specified above shall not
constitute a waiver by Landlord with respect to Landlord's claims against
Tenant for such prior payment obligation(s) of Tenant or Landlord's right to
apply future payments to such prior payment obligation(s) of Tenant in such
order as Landlord may determine in Landlord's sole and absolute discretion.
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
(a) ADJUSTMENTS TO BASIC RENT. The basic rent provided for in
paragraph 4(a) shall be adjusted periodically and the monthly basic rent for
each period shall be as set forth below:
Lease Months 1 - 12 $79,552.65 per month
Lease Months 13 - 24 $82,734.76 per month
Lease Months 25 - 36 $86,044.15 per month
Lease Months 37 - 48 $89,485.91 per month
Lease Months 49 - 60 $93,065.35 per month.
(b) ADJUSTMENTS TO DIRECT EXPENSES. Tenant's proportionate
share of direct expenses of the Project shall be sixteen and seventy-eight
one-hundredths percent (16.78%).
Tenant shall be required to pay to Landlord, as additional
rent in accordance with paragraph 4(b) of this lease, Tenant's proportionate
share of direct expenses for each calendar year (or portion thereof) during the
term of this lease. Tenant's estimated share of the monthly direct expenses
payable by Tenant during the calendar year in which the term commences is set
forth in paragraph 4(b) of this lease. A written estimate of Tenant's monthly
share of direct expenses for each succeeding calendar year shall be delivered to
Tenant prior to the commencement of each such succeeding calendar year (or as
soon as practicable thereafter). Tenant shall pay to Landlord in accordance with
paragraph 4(b) of this lease its monthly share of direct expenses as estimated
by Landlord. Landlord reserves the right to revise such written
<PAGE>
estimate during a calendar year if Landlord's actual or projected direct
expenses shows an increase or decrease in excess of ten percent (10%) from
that of an earlier written estimate delivered to Tenant, and if Landlord
elects to revise the earlier estimate, Landlord shall deliver the revised
estimate to Tenant, together with an explanation of the reasons therefor, and
Tenant shall revise its payments accordingly. Statements of the actual direct
expenses for the calendar year in which the term commences and for each
succeeding calendar year (herein called "statement of actual direct
expenses") shall be delivered to Tenant within one hundred twenty (120) days
following the expiration of each such calendar year (or as soon as
practicable thereafter). If the statement of actual direct expenses for any
such calendar year shows that Tenant's proportionate share of actual direct
expenses for the year is in excess of the aggregate amount Tenant has paid as
direct expenses for that calendar year, Tenant shall pay such excess to
Landlord within ten (10) days after receipt of the statement of actual direct
expenses. If Tenant fails to pay such excess amount due within said ten (10)
day period, Tenant shall pay an additional ten percent (10%) of the amount
due as a penalty. In the event that any statement of actual direct expenses
shall show that Tenant has paid Landlord an aggregate amount in excess of the
actual direct expenses for the preceding calendar year and Tenant is not in
default in the performance or observance of any of the terms, covenants or
conditions of this lease at the time such statement of actual direct expenses
is delivered, Landlord shall, at its option, promptly either refund such
excess to Tenant or credit the amount thereof to the monthly direct expenses
next becoming due from Tenant. The respective obligations of Landlord and
Tenant under this paragraph shall survive the expiration or other termination
of this lease.
As used in this lease, "direct expenses" shall include, but
not be limited to, (i) real property taxes, assessments, and other costs
identified as direct expenses in paragraph 13, (ii) insurance premiums and other
costs identified as direct expenses in paragraph 11, (iii) the cost of all
utilities and services including water, gas and sewer charges, electricity,
heat, air conditioning, refuse collection, and janitorial services identified as
direct expenses in paragraph 12, (iv) the costs of operating and maintaining the
Common Area identified as direct expenses in paragraph 15, including, but not
limited to, the landscaping, elevators, parking lots, paving, sidewalks,
showers, and security and exterminator services, (v) the costs and expenses of
maintaining and repairing the Project identified as direct expenses in paragraph
9, including, but not limited to mechanical, electrical, plumbing and sewage
systems, windows, glazing, gutters, downspouts, heating and ventilating and air
conditioning systems, walls, floorcoverings, roofs, structural elements,
exterior walls and the cost of maintenance contracts and supplies, materials,
equipment and tools used in connection therewith, (vi) the cost of certain
alterations identified as direct expenses in paragraph 8, (vii) amortization of
such capital improvements having a useful life greater than one year as Landlord
may have installed for the purpose of reducing operating costs and/or to comply
with all laws, rules and regulations of federal, state, county, municipal and
other governmental authorities now or hereafter in effect (the cost of such
capital improvement shall be amortized over its useful life, including interest
at the rate of 2% over the then current Prime Rate as published by the Wall
Street Journal on the date
<PAGE>
nearest to the date that such cost is incurred, and the monthly amortized
cost thereof shall be included in direct expenses), (viii) wages, salaries,
employee benefits (including union benefits) and related expenses of all
on-site and off-site personnel engaged in the operation and maintenance of
the Project (or the building in which the Premises are located) and payroll
taxes applicable thereto and all costs incurred to maintain a management
office in or near the Project (including, without limitation, rental payments
therefor or the reasonable rental value of the space so occupied), (ix)
supplies, materials, equipment and tools used or required in connection with
the operation and maintenance of the Project, (x) licenses, permits and
inspection fees, (xi) a reasonable reserve for repairs and replacement of
equipment used in the maintenance and operation of the Project, and (xii) all
other operating costs incurred by Landlord in maintaining and operating the
Project.
6. RESTRICTION ON USE
Tenant shall not do or permit to be done in or about the
Premises or the Project, nor bring or keep or permit to be brought or kept in or
about the Premises or Project, anything which is prohibited by or will in any
way increase the existing rate of, or otherwise affect, fire or any other
insurance covering the Project or any part thereof, or any of its contents, or
will cause a cancellation of any insurance covering the Project or any part
thereof, or any of its contents. Tenant shall not do or permit to be done
anything in or about the Premises or the Project which will constitute waste or
which will in any way obstruct or interfere with the rights of other tenants or
occupants of the Project or injure or annoy them, or use or allow the Premises
to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit
any nuisance in or about the Premises or the Project. No loudspeaker or other
device, system or apparatus which can be heard outside the Premises shall be
used in or at the Premises without the prior written consent of Landlord. Tenant
shall not use the Premises for sleeping, washing clothes, cooking or in any
manner that will cause or emit any objectionable odor, noise or light into the
adjoining premises or Common Area. Tenant shall not do anything on the Premises
that will cause damage to the Project and Tenant shall not overload the floor
capacity of the Premises or the Project. No machinery, apparatus or other
appliance shall be used or operated in or on the Premises that will in any
manner injure, vibrate or shake the Premises. Landlord shall be the sole judge
of whether such odor, noise, light or vibration is such as to violate the
provisions of this paragraph 6. No waste materials or refuse shall be dumped
upon or permitted to remain upon any part of the Premises or the Project except
in trash containers placed inside exterior enclosures designated for that
purpose by Landlord, or where otherwise designated by Landlord; and no toxic or
hazardous materials shall be disposed of through the plumbing or sewage system.
No materials, supplies, equipment, finished products or semi-finished products,
raw materials or articles of any nature shall be stored or permitted to remain
outside of the building proper. No retail sales shall be made on the Premises.
7. COMPLIANCE WITH LAWS
<PAGE>
Tenant shall, in connection with its use and occupation of
the Premises, at its sole cost and expense, promptly observe and comply with
(i) all laws, statutes, ordinances and governmental rules, regulations and
requirements of federal, state, county, municipal and other governmental
authorities, now or hereafter in effect, which shall impose any duty on
Landlord or Tenant with respect to the use, occupancy or alteration of the
Premises, (ii) with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted and (iii) with any direction
or occupancy certificate issued pursuant to law by any public authority;
provided, however, that no such failure shall be deemed a breach of these
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or
the admission of Tenant in any action against Tenant (whether or not Landlord
is a party thereto), that Tenant has violated any such law, statute,
ordinance or governmental rule, regulation, requirement, direction or
provision, shall be conclusive of that fact as between Landlord and Tenant.
This lease shall remain in full force and effect notwithstanding any loss of
use or other effect on Tenant's enjoyment of the Premises by reason of any
governmental laws, statutes, ordinances, rules, regulations and requirements
now or hereafter in effect. Tenant shall comply with any covenant, condition
or restriction ("C.C.& R.'s") affecting the Premises.
8. ALTERATIONS
Tenant shall not make or suffer to be made any alteration,
addition or improvement to or of the Premises or any part thereof (collectively
referred to herein as "alterations") without (i) the prior written consent of
Landlord, (ii) a valid building permit issued by the appropriate governmental
authority and (iii) otherwise complying with all applicable laws, regulations
and requirements of governmental agencies having jurisdiction and with the
rules, regulations and requirements of any board of fire underwriters or similar
body. Notwithstanding the foregoing, Tenant may make non-structural alterations
costing in the aggregate less than $10,000 in any one lease year of the term
without the prior written consent of Landlord, provided that prior to making
such alteration Tenant informs Landlord in writing of the nature of the
alteration, the cost thereof and the contractor engaged or proposed to be
engaged to perform such work, and provided further that all such work complies
with clauses (ii) and (iii) above. Landlord's consent to any requested
alteration shall not create on the part of Landlord or cause Landlord to incur
any responsibility or liability for such alteration's compliance with all laws,
rules and regulations of federal, state, county, municipal and other
governmental authorities. Any alteration made by Tenant (excluding moveable
furniture and trade fixtures not attached to the Premises) shall at once become
a part of the Premises and belong to Landlord. Without limiting the foregoing,
all heating, lighting, electrical (including all wiring, conduit, outlets,
drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery,
window covering and carpet installations made by Tenant, regardless of how
attached to the Premises, together with all other alterations that have become
an integral part of the Project in which the Premises are a part, shall be and
become part of the Premises and belong to Landlord upon installation and shall
not be deemed trade fixtures and, subject to Landlord's right to require removal
and
<PAGE>
restoration as specified herein, shall remain upon and be surrendered with
the Premises at the termination of the lease.
Regardless of whether Landlord's consent is required in
connection with the making of any alteration by Tenant, if Landlord consents
to the making of any alteration by Tenant, the same shall be made by Tenant
at its sole risk, cost and expense and only after Landlord's written approval
of any contractor or person selected by Tenant for that purpose, and the same
shall be made at such time and in such manner as Landlord may from time to
time designate. Tenant shall, if required by Landlord, secure at Tenant's
cost a completion and lien indemnity bond for such work. Upon the expiration
or sooner termination of the term, Landlord may, at its sole option, require
Tenant, at Tenant's sole cost and expense, to promptly remove any such
alteration made by Tenant and designated by Landlord to be removed, repair
any damage to the Premises caused by such removal and restore the Premises to
their condition prior to Tenant's alteration. Any moveable furniture and
equipment or trade fixtures remaining on the Premises at the expiration or
other termination of the term shall become the property of the Landlord;
provided, however, in addition to all other remedies available to Landlord at
law or in equity, Landlord may (i) require Tenant to remove same or (ii)
remove same at Tenant's cost, and Tenant shall be liable to Landlord for all
damages incurred by Landlord related thereto.
If during the term any alteration, addition or change of
the Premises is required by law, regulation, ordinance or order of any public
authority, Tenant, at its sole cost and expense, shall promptly make the
same. If during the term any alterations, additions or changes to the Common
Area or to the Project or building in which the Premises is located is
required by law, regulation, ordinance or order of any public or quasi-public
authority, and, in Landlord's judgment, it is impracticable for the tenants
of the Project to individually make such alterations, additions or changes,
Landlord shall make such alterations, additions or changes and the cost
thereof shall be a direct expenses charge and Tenant shall pay its percentage
share of said costs to Landlord as provided in paragraphs 4 and 5.
9. REPAIR AND MAINTENANCE
Subject to paragraph 16, Landlord shall maintain and keep
in good repair the Common Area and the mechanical, electrical, plumbing and
sewage systems, windows, window frames, plate glass, glazing, elevators,
gutters and downspouts, the roof, exterior walls, structural elements and the
heating, ventilating and air conditioning systems (excepting special air
conditioning of Tenant's computer room(s) as set forth below) of the Premises
and the Project; provided, however, that Landlord shall not be required to
perform repairs made necessary by the negligence or abuse of such
improvements or property by Tenant or its employees, agents, subtenants or
permitees. The cost of all maintenance and repairs made by Landlord pursuant
to this paragraph 9, including without limitation maintenance contracts and
supplies, materials, equipment and tools used in such repairs and
maintenance, shall be direct expenses and Tenant
<PAGE>
shall pay its percentage share of such costs to Landlord as provided in
paragraphs 4 and 5.
By entry hereunder Tenant accepts the Premises as being in
good and sanitary order, condition and repair (excepting only punchlist items).
Subject to paragraphs 16 and 21, and excepting repairs and maintenance required
by this paragraph 9 to be made by Landlord, Tenant at its cost shall keep the
Premises and every part thereof in good and sanitary order, condition and repair
and Tenant shall be solely responsible for the cost and maintenance of, and
electricity supplied to, any special air conditioning for Tenant's computer
facilities. Further, Tenant shall repair (or, at the option of Landlord,
reimburse Landlord if Landlord elects to repair) damage to improvements or other
property located on or about the Project where such repairs are made necessary
by the negligence of or abuse of such improvement or other property by Tenant or
its employees, agents, subtenants or permitees. Tenant waives all rights and
benefits under California Civil Code Sections 1932(1), 1941, and 1942 and under
any similar law, statute or ordinance now or hereafter in effect.
10. LIENS
Tenant shall keep the Premises and the Project free from
any liens arising out of any work performed, materials furnished or
obligations incurred by Tenant, its agents, employees or contractors. Upon
Tenant's receipt of a preliminary twenty (20) day notice filed by a claimant
pursuant to California Civil Code Section 3097, Tenant shall immediately
provide Landlord with a copy of such notice. Should any lien be recorded
against the Project, Tenant shall give immediate notice of such lien to
Landlord. In the event that Tenant shall not, within ten (10) days following
the imposition of such lien, cause the same to be released of record,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right, but no obligation, to cause the same to be released by such
means as it shall deem proper, including payment of the claim giving rise to
such lien. All sums paid by Landlord for such, and all expenses (including
attorneys' fees) incurred by it in connection therewith, shall be payable to
Landlord by Tenant on demand with interest at the rate of eighteen percent
(18%) per annum or the maximum rate permitted by law, whichever is less.
Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law, or which Landlord shall
deem proper for the protection of Landlord, the Premises and the Project and
any other party having an interest therein, from mechanics' and materialmen's
liens and like liens. Tenant shall give Landlord at least fifteen (15) days'
prior notice of the date of commencement of any construction on the Premises
in order to permit the posting of such notices. In the event Tenant is
required to post an improvement bond with a public agency in connection with
any work performed by Tenant on or to the Premises, Tenant shall include
Landlord as an additional obligee.
11. INSURANCE
<PAGE>
Tenant, at its sole cost and expense, shall keep in force
during the term (i) commercial general liability and property damage
insurance with a combined single limit of at least $2,000,000 per occurrence
insuring against personal or bodily injury to or death of persons occurring
in, on or about the Premises or Project and any and all liability of the
insureds with respect to the Premises or arising out of Tenant's maintenance,
use or occupancy of the Premises and all areas appurtenant thereto, (ii)
direct physical loss-special insurance covering the leasehold improvements in
the Premises and all of Tenant's equipment, trade fixtures, appliances,
furniture, furnishings, and personal property from time to time located in,
on or about the Premises, with coverage in the amount of the full replacement
cost thereof, and (iii) Worker's Compensation Insurance as required by law,
together with employer's liability coverage with a limit of not less than
$1,000,000 for bodily injury for each accident and for bodily injury by
disease for each employee. Tenant's commercial general liability and property
damage insurance and Tenant's Workers Compensation Insurance shall be
endorsed to provide that said insurance shall not be cancelled or reduced
except upon at least thirty (30) days prior written notice to Landlord.
Further, Tenant's commercial general liability and property damage insurance
shall be primary and shall be endorsed to provide that Landlord and
McCandless Management Corporation (or other property management company
designated by Landlord) and their respective partners, officers, directors
and employees and such other persons or entities as directed from time to
time by Landlord shall be named as additional insureds for all liability
using ISO Bureau Form CG20111185 (or a successor form) or such other
endorsement form reasonably acceptable to Landlord; shall contain a
severability of interest clause and a cross-liability endorsement; shall be
endorsed to provide that the limits and aggregates apply per location using
ISO Bureau Form CG25041185 (or a successor form) or such other endorsement
form reasonably acceptable to Landlord; and shall be issued by an insurance
company admitted to transact business in the State of California and rated
A+VIII or better in Best's Insurance Reports (or successor report). The
deductibles for all insurance required to be maintained by Tenant hereunder
shall be satisfactory to Landlord. The commercial general liability insurance
carried by Tenant shall specifically insure the performance by Tenant of the
indemnification provisions set forth in paragraph 17 of this lease provided,
however, nothing contained in this paragraph 11 shall be construed to limit
the liability of Tenant under the indemnification provisions set forth in
said paragraph 17. If Landlord or any of the additional insureds named on any
of Tenant's insurance, have other insurance which is applicable to the
covered loss on a contributing, excess or contingent basis, the amount of the
Tenant's insurance company's liability under the policy of insurance
maintained by Tenant shall not be reduced by the existence of such other
insurance. Any insurance carried by Landlord or any of the additional
insureds named on Tenant's insurance policies shall be excess and
non-contributing with the insurance so provided by Tenant.
Tenant shall, prior to the commencement of the term and at
least thirty (30) days prior to any renewal date of any insurance policies
required to be maintained by Tenant pursuant to this paragraph, provide
Landlord with a completed Certificate of
<PAGE>
Insurance, using a form acceptable in Landlord's reasonable judgement,
attaching thereto copies of all endorsements required to be provided by
Tenant under this lease. Tenant agrees to increase the coverage or otherwise
comply with changes in connection with said commercial general liability,
property damage, direct physical loss and Worker's Compensation Insurance as
Landlord or Landlord's lender may from time to time require.
Landlord shall obtain and keep in force a policy or
policies of insurance covering loss or damage to the Premises and Project, in
the amount of the full replacement value thereof, providing protection
against those perils included within the classification of "all risk"
insurance, with increased cost of reconstruction and contingent liability
(including demolition), plus a policy of rental income insurance in the
amount of one hundred percent (100%) of twelve (12) months' rent (including
sums paid as additional rent) and such other insurance as Landlord or
Landlord's lender may from time to time require. Landlord may, but shall not
be obligated to, obtain flood and/or earthquake insurance. Landlord shall
have no liability to Tenant if Landlord elects not to obtain flood and/or
earthquake insurance. The cost of all such insurance purchased by Landlord,
plus any charges for deferred payment of premiums and the amount of any
deductible incurred upon any covered loss within the Project, shall be direct
expenses and Tenant shall pay to Landlord its percentage share of such costs
as provided in paragraphs 4(b) and 5(b). If the cost of insurance is
increased due to Tenant's use of the Premises, then Tenant shall pay to
Landlord upon demand the full cost of such increase.
Landlord and Tenant hereby mutually waive any and all
rights of recovery against one another for real or personal property loss or
damage occurring to the Premises or the Project, or any part thereof, or to
any personal property therein, from perils insured against under fire and
extended insurance and any other property insurance policies existing for the
benefit of the respective parties so long as such insurance permits waiver of
liability and contains a waiver of subrogation without additional premiums.
If Tenant does not take out and maintain insurance as
required pursuant to this paragraph 11, Landlord may, but shall not be
obligated to, take out the necessary insurance and pay the premium therefor,
and Tenant shall repay to Landlord promptly on demand, as additional rent,
the amount so paid. In addition, Landlord may recover from Tenant and Tenant
agrees to pay, as additional rent, any and all reasonable expenses (including
attorney fees) and damages which Landlord may sustain by reason of the
failure of Tenant to obtain and maintain such insurance, it being expressly
declared that the expenses and damages of Landlord shall not be limited to
the amount of the premiums thereon.
12. UTILITIES AND SERVICE
Landlord shall furnish to the Premises and to the Project,
during reasonable hours of generally recognized business days, to be
determined by Landlord,
<PAGE>
and subject to the rules and regulations of the Project, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and the Project, heat and air conditioning required in Landlord's
judgment for the comfortable use and occupation of the Premises and the
Project, refuse collection and janitorial services. Heating and air
conditioning shall be made available to the Premises at all times, provided
that Tenant shall be charged the reasonable cost for providing such service
after normal business hours as reasonably determined by Landlord, which cost
is currently $35 per hour and such charges shall be deemed additional rent
hereunder and due and payable upon demand. Tenant agrees that at all times it
will cooperate fully with Landlord and abide by all regulations and
requirements that Landlord may prescribe for the proper functioning and
protection of the heating, ventilating and air conditioning systems. The cost
of all utilities and services furnished by Landlord to the Premises and to
the Project shall be direct expenses and Tenant shall pay its percentage
share of such costs to Landlord as provided in paragraphs 4 and 5.
Landlord shall not be liable for, and Tenant shall not be
entitled to any abatement or reduction of rent by reason of, Landlord's
failure to furnish any of the foregoing services when such failure is caused
by accident, breakage, repairs, strikes, lockouts or other labor disturbances
or labor disputes of any character, governmental moratoriums, regulations or
other governmental actions, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord. In addition, Tenant shall not be
relieved from the performance of any covenant or agreement in this lease
because of any such failure, and no eviction of Tenant shall result from such
failure.
Tenant will not, without the written consent of Landlord,
use any apparatus or device in the Premises (including, without limitation,
electronic data processing machines, punch card machines or machines using
current in excess of 110 volts) which will in any way increase the amount of
electricity, water or air conditioning usually furnished or supplied to
premises in the Project being used as general office space, or connect with
electric current (except through existing electrical outlets in the Premises)
or with water pipes any apparatus or device for the purpose of using electric
current or water. If Tenant shall require water or electric current in excess
of that usually furnished or supplied to premises in the Project being used
as general office space, then Tenant shall first obtain the written consent
of Landlord, which consent shall not be unreasonably withheld, and Tenant
shall pay to Landlord promptly on demand, as additional rent, the full cost
of such excess use. Landlord may cause an electric current or water meter to
be installed in the Premises in order to measure the amount of electric
current or water consumed for any such excess use. The cost of any such meter
and of the installation, maintenance and repair thereof, and all charges for
such excess water and electric current consumed (as shown by meters and at
the rates then charged by the furnishing public utility) plus any additional
expense incurred by Landlord in keeping account of electric current or water
so consumed, shall be paid by Tenant, and Tenant agrees to pay Landlord
therefor promptly upon demand by Landlord. Whenever heat generating machines
or equipment are used in the Premises by Tenant which affect the temperature
otherwise maintained by the air conditioning system, Landlord shall have the
right to install supplementary air conditioning units in
<PAGE>
the Premises and the cost thereof, including the cost of installation and the
cost of operation and maintenance thereof, shall be paid by Tenant to
Landlord upon demand by Landlord as additional rent.
Landlord acknowledges that Tenant will operate a modest
Server Facility that will be run on a 24 hour, 7 day per week basis and any
alterations required to be made to the Premises in connection with such
facility shall be subject to Landlord's consent and the requirements of
paragraph 8 of this lease. HVAC to the Server Facility will be supplementary.
Tenant shall be solely responsible for all maintenance and repair costs
related to the Server Facility and any equipment installed therein. Tenant
shall pay to Landlord the reasonable cost of the excess electricity used for
the Server Facility as reasonably determined by Landlord.
13. TAXES AND OTHER CHARGES
All real estate taxes and assessments and other taxes, fees
and charges of every kind or nature, foreseen or unforeseen, which are
levied, assessed or imposed upon Landlord and/ or against the Premises,
building, Common Area or Project or any part thereof by any federal, state,
county, regional, municipal or other governmental or quasi-governmental or
special district authority, together with any increases therein whether
resulting from increased rate and/or valuation, shall be a direct expense and
Tenant shall pay its percentage share of such costs to Landlord as provided
in paragraphs 4 and 5. By way of illustration and not limitation, "other
taxes, fees and charges" as used herein include any and all taxes payable by
Landlord (other than state and federal personal or corporate income taxes
measured by the net income of Landlord from all sources, premium taxes and
Landlord's franchise, estate, inheritance and gift taxes), whether or not now
customary or within the contemplation of the parties hereto, (i) upon,
allocable to, or measured by the rent payable hereunder, including, without
limitation, any gross income or excise tax levied by the local, state or
federal government with respect to the receipt of such rent, (ii) upon or
with respect to the possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any part
thereof, (iii) upon or measured by the value of Tenant's personal property or
leasehold improvements located in the Premises, (iv) upon this transaction or
any document to which Tenant is a party creating or transferring an interest
or estate in the Premises, (v) upon or with respect to vehicles, parking or
the number of persons employed on or about the Project, and (vi) any tax,
license, franchise fee or other imposition upon Landlord which is otherwise
measured by or based in whole or in part upon the Project or any portion
thereof. If Landlord contests any such tax, fee or charge, the cost and
expense incurred by Landlord thereby (including, but not limited to, costs of
attorneys and experts) shall also be direct expenses and Tenant shall pay its
percentage share of such costs to Landlord as provided in paragraphs 4 and 5.
In the event the Premises and any improvements installed therein by Tenant or
Landlord are valued by the assessor disproportionately higher than those of
other tenants in the building or Project or in the event alterations or
improvements are made to the Premises, Tenant's percentage share of such
taxes, assessments, fees and/or charges shall be readjusted upward
accordingly and Tenant
<PAGE>
agrees to pay such readjusted share. Such determination shall be made by
Landlord from the respective valuations assigned in the assessor's work sheet
or such other information as may be reasonably available and Landlord's
determination thereof shall be conclusive.
Tenant agrees to pay, before delinquency, any and all taxes
levied or assessed during the term hereof upon Tenant's equipment, furniture,
fixtures and other personal property located in the Premises, including
carpeting and other property installed by Tenant notwithstanding that such
carpeting or other property has become a part of the Premises. If any of
Tenant's personal property shall be assessed with the Project, Tenant shall
pay to Landlord, as additional rent, the amounts attributable to Tenant's
personal property within ten (10) days after receipt of a written statement
from Landlord setting forth the amount of such taxes, assessments and public
charges attributable to Tenant's personal property.
14. ENTRY BY LANDLORD
Landlord reserves, and shall at all reasonable times have,
the right to enter the Premises (i) to inspect the Premises, (ii) to supply
services to be provided by Landlord hereunder, (iii) to show the Premises to
prospective purchasers, lenders or tenants and to put 'for sale' or 'for
lease' signs thereon, (iv) to post notices required or allowed by this lease
or by law, (v) to alter, improve or repair the Premises and any portion of
the Project, and (vi) to erect scaffolding and other necessary structures in
or through the Premises or the Project where reasonably required by the
character of the work to be performed. Landlord shall not be liable in any
manner for any inconvenience, disturbance, loss of business, nuisance or
other damage arising from Landlord's entry and acts pursuant to this
paragraph 14 and Tenant shall not be entitled to an abatement or reduction of
rent if Landlord exercises any rights reserved in this paragraph 14. For each
of the foregoing purposes, Landlord shall at all times have and retain a key
with which to unlock all of the doors in, on and about the Premises
(excluding Tenant's vaults, safes and similar areas designated in writing by
Tenant in advance), and Landlord shall have the right to use any and all
means which Landlord may deem proper to open said doors in an emergency in
order to obtain entry to the Premises. Any entry by Landlord to the Premises
pursuant to this paragraph 14 shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into or a detainer of the
Premises or an eviction, actual or constructive, of Tenant from the Premises
or any portion thereof.
15. COMMON AREA; PARKING
Subject to the terms and conditions of this lease and such
rules and regulations as Landlord may from time to time prescribe, Tenant and
Tenant's employees and invitees shall, in common with other occupants of the
Project, and their respective employees and invitees and others entitled to
the use thereof, have the
<PAGE>
nonexclusive right to use those areas of the Common Area designated by
Landlord for the general use and convenience of the occupants of the Project
(which areas and facilities shall include, but not be limited to, common
lobbies, corridors, restrooms and showers; telephone, electrical, janitorial
and mechanical rooms; elevators, stairwells, vertical duct shafts; sidewalks;
parking, refuse, landscape and plaza areas; roofs; building exteriors;
electrical, mechanical, plumbing and HVAC systems; and storage areas), which
areas and facilities are referred to herein as "Common Area". This right
shall terminate upon the termination of this lease.
Landlord reserves the right from time to time to make
changes in the shape, size, location, amount and extent of the Common Area.
Landlord shall also have the right at any time to change the name, number or
designation by which the Project is commonly known. Landlord further reserves
the right to promulgate such rules and regulations relating to the use of the
Common Area, and any part thereof, as Landlord may deem appropriate for the
best interests of the occupants of the Project. The rules and regulations
shall be binding upon Tenant upon delivery of a copy of them to Tenant and
Tenant shall abide by them and cooperate in their observance. Such rules and
regulations may be amended by Landlord from time to time, with or without
advance notice.
Tenant shall have the nonexclusive use of one hundred five
(105) parking spaces in the Common Area as designated from time to time by
Landlord. Landlord reserves the right at its sole option to assign and label
parking spaces, but it is specifically agreed that Landlord is not
responsible for policing any such parking spaces. Tenant shall not at any
time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others, adjacent to loading areas so as to
interfere in any way with the use of such areas; nor shall Tenant at any time
park or permit the parking of Tenant's vehicles or trucks, or the vehicles or
trucks of Tenant's suppliers or others, in any portion of the Common Area not
designated by Landlord for such use by Tenant. Tenant shall not park or
permit any inoperative vehicle or equipment to be parked on any portion of
the Common Area.
Landlord shall operate, manage and maintain the Common
Area. The manner in which the Common Area shall be operated, managed and
maintained and the expenditures for such operation, management and
maintenance shall be at the sole discretion of Landlord. The cost of such
maintenance, operation and management of the Common Area, together with the
costs of security and exterminator services and salaries and employee
benefits (including union benefits) of on-site and accounting personnel
engaged in such maintenance and operations management, shall be a direct
expense and Tenant shall pay to Landlord its percentage share of such costs
as provided in paragraphs 4 and 5.
16. DAMAGE BY FIRE; CASUALTY
In the event the Premises are damaged by any casualty which
is covered under an insurance policy required to be maintained by Landlord
pursuant to paragraph
<PAGE>
11, Landlord shall be entitled to the use of all insurance proceeds and shall
repair such damage as soon as reasonably possible and this lease shall
continue in full force and effect.
In the event the Premises are damaged by any casualty not
covered under an insurance policy required to be maintained pursuant to
paragraph 11, Landlord may, at Landlord's option, either (i) repair such
damage, at Landlord's expense, as soon as reasonably possible, in which event
this lease shall continue in full force and effect, or (ii) give written
notice to Tenant within thirty (30) days after the date of the occurrence of
such damages of Landlord's intention to cancel and terminate this lease as of
the date of the occurrence of the damages; provided, however, that if such
damage is caused by an act or omission of Tenant or its agent, servants or
employees, then Tenant shall repair such damage promptly at its sole cost and
expense. In the event Landlord elects to terminate this lease pursuant
hereto, Tenant shall have the right within ten (10) days after receipt of the
required notice to notify Landlord in writing of Tenant's intention to repair
such damage at Tenant's expense, without reimbursement from Landlord, in
which event this lease shall continue in full force and effect and Tenant
shall proceed to make such repairs as soon as reasonably possible. If Tenant
does not give such notice within the ten (10) day period, this lease shall be
cancelled and terminated as of the date of the occurrence of such damage.
Under no circumstances shall Landlord be required to repair any injury or
damage to (by fire or other cause), or to make any restoration or replacement
of, any of Tenant's personal property, trade fixtures or property leased from
third parties, whether or not the same is attached to the Premises.
If the Premises are totally destroyed during the term from
any cause (including any destruction required by any authorized public
authority), whether or not covered by the insurance required under paragraph
11, this lease shall automatically terminate as of the date of such total
destruction; provided, however, that if the Premises can reasonably and
lawfully be repaired or restored within twelve (12) months of the date of
destruction to substantially the condition existing prior to such destruction
and if the proceeds of the insurance payable to the Landlord by reason of
such destruction are sufficient to pay the cost of such repair or
restoration, then the said insurance proceeds shall be so applied, Landlord
shall promptly repair and restore the Premises and this lease shall continue,
without interruption, in full force and effect. If the Premises are totally
destroyed during the last twelve (12) months of the term, Landlord may at
Landlord's option cancel and terminate this lease as of the date of
occurrence of such damage by giving written notice to Tenant of Landlord's
election to do so within thirty (30) days after the occurrence of such damage.
If the Premises are partially or totally destroyed or
damaged and Landlord or Tenant repair them pursuant to this lease, the rent
payable hereunder for the period during which such damage and repair
continues shall be abated only to the extent that Landlord received proceeds
from any policy of rental income insurance. Tenant shall have no claim
against Landlord for any damage, loss or expense suffered by reason of any
such damage, destruction, repair or restoration. The parties waive the
provisions of
<PAGE>
California Civil Code Sections 1932(2) and 1933(4) (which provisions permit
the termination of a lease upon destruction of the leased premises), and
hereby agree that the provisions of this paragraph 16 shall govern in the
event of such destruction.
17. INDEMNIFICATION
Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person
or damage to or destruction of property in or about the Premises or the
Project by or from any cause whatsoever except the failure of Landlord to
perform its obligations under this lease where such failure has persisted for
an unreasonable period of time after notice of such failure. Without limiting
the foregoing, Landlord shall not be liable to Tenant for any injury to or
death of any person or damages to or destruction of property by reason of, or
arising from, any latent defect in the Premises or Project or the act or
negligence of any other tenant of the Project. Tenant shall immediately
notify Landlord of any defect in the Premises or Project.
Except as to injury to persons or damage to property the
principal cause of which is the failure by Landlord to observe any of the
terms and conditions of this lease, Tenant shall hold Landlord harmless from
and indemnify and defend Landlord against any claim, liability, loss, damage
or expense (including attorney fees) arising out of any injury to or death of
any person or damage to or destruction of property occurring in, on or about
the Premises from any cause whatsoever or on account of the use, condition,
occupational safety or occupancy of the Premises. Tenant shall further hold
Landlord harmless from and indemnify and defend Landlord against any claim,
liability, loss, damage or expense (including attorney fees) arising (i) from
Tenant's use of the Premises or from the conduct of its business or from any
activity or work done, permitted or suffered by Tenant or its agents or
employees in or about the Premises or Project, (ii) out of the failure of
Tenant to observe or comply with Tenant's obligation to observe and comply
with laws or other requirements as set forth in paragraph 7, (iii) by reason
of Tenant's use, handling, storage, or disposal of toxic or hazardous
materials or waste, (iv) by reason of any labor or service performed for, or
materials used by or furnished to, Tenant or any contractor engaged by Tenant
with respect to the Premises, or (v) from any other act, neglect, fault or
omission of Tenant or its agents or employees.
The provisions of this paragraph 17 shall survive the
expiration or earlier termination of this lease.
18. ASSIGNMENT AND SUBLETTING
Tenant shall not voluntarily assign, encumber or otherwise
transfer its interest in this lease or in the Premises, or sublease all or
any part of the Premises, or allow any other person or entity to occupy or
use all or any part of the Premises, without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld, and
otherwise complying with the requirements of this paragraph 18. Any
<PAGE>
assignment, encumbrance or sublease without Landlord's consent, shall
constitute a default. The proposed assignee or subtenant is referred to
herein as the "Transferee". Reasonable grounds for denying consent to a
proposed assignment or sublet include, without limitation, any of the
following:
(a) Transferee's character, reputation, credit history,
or business is not consistent with the character or quality of the Project;
(b) Transferee would be a significantly less prestigious
occupant of the Project than Tenant;
(c) Transferee is either a government agency or an
instrumentality of one;
(d) Transferee's intended use of the Premises is
inconsistent with the permitted use specified in this lease or will
materially and adversely affect Landlord's interest;
(e) Transferee's financial condition is or may be
inadequate to support the lease obligations of Transferee under the
assignment or sublease;
(f) The assignment or sublet would cause Landlord to
violate another lease or agreement to which Landlord is a party or would give
another tenant in the Project the right to cancel its lease;
(g) Transferee occupies space in the Project and such
space is not contiguous to the Premises, is negotiating with Landlord to
lease space in the Project, or has negotiated with Landlord during the six
(6) months immediately preceding notice of the proposed assignment or sublet
to Landlord;
(h) Transferee does not intend to occupy the entire
Premises and conduct business there for a substantial portion of the term of
the assignment or sublease; or
(i) The rent charged by Tenant to Transferee during the
term of the assignment or sublet, using a present-value analysis, is less
than ninety-five percent (95%) of the rent then being quoted by Landlord for
comparable space in the Project for a comparable term, using a present-value
analysis.
If Tenant desires to sublet or assign all or any portion of
the Premises, Tenant shall give Landlord written notice ("Transfer Notice")
thereof, specifying the projected commencement date of the proposed sublet or
assignment (which date shall be not less than thirty (30) days or more than
ninety (90) days after the date of Landlord's receipt of such notice), the
portions of the Premises proposed to be sublet or assigned (the "Subject
Space"), a description of any planned alterations or improvements to the
Subject Space, the terms and conditions of the proposed
<PAGE>
assignment or sublease (including the rent to be paid by the Transferee and
any and all other consideration to be given by the Transferee), the name,
address and telephone number of the Transferee, and a detailed calculation of
the Transfer Premium (certified by Tenant's chief financial officer) to be
paid as provided below. Tenant shall further provide Landlord with such other
information concerning the Transferee as requested by Landlord. Landlord
shall have the right to communicate with the Transferee to discuss the terms
of the proposed assignment or sublet, to discuss and negotiate, if Landlord
desires, the terms of a direct lease between Landlord and Transferee, or any
other matter and to enter into a direct lease agreement with Transferee as
provided below and failure of Transferee to meet with Landlord and to
negotiate in good faith the terms of a direct lease with Landlord shall
constitute grounds for Landlord's refusal to consent to the proposed
assignment or sublet. For a period of thirty (30) days after Landlord's
receipt of the Transfer Notice, Landlord shall have the option ("Landlord's
Recapture Right"), exercisable by delivering written notice to Tenant, to
terminate this lease for the Subject Space or for the entire Premises as of
the date specified in Landlord's written notice to Tenant, which date shall
not be less than thirty (30) days nor more than ninety (90) days after the
date of Landlord's written notice to Tenant; provided, however, Landlord's
Recapture Right shall not apply to subleases which (i) are for space located
entirely within the area designated as the "Sublease Recapture Exemption
Space" as shown on Exhibit D attached hereto and (ii) have a term which
expires on or before the last day of the third lease year. If Landlord
exercises its option to terminate this lease as provided in the foregoing
sentence, Landlord may, if it so elects, enter into a new lease for the
Premises or any portion thereof with the Transferee or any other third party
on such terms as Landlord and the Transferee or other third party may agree;
in such event, Tenant shall not be entitled to any portion of the profit, if
any, which Landlord may realize on account of such termination and reletting.
If Landlord exercises its option to terminate this lease with respect to the
Subject Space only (i.e., less than the entire Premises), then Tenant shall
continue to be obligated under this lease as to the remaining space (i.e.,
the Premises less the Subject Space) and basic rent and direct expenses
payable by Tenant under this lease shall be adjusted as follows: (i) the
basic rent amount(s) specified in paragraphs 4(a) and 5(a) of this lease
shall be multiplied by a fraction, the numerator of which is the square feet
of the Premises retained by Tenant after Landlord's recapture of the Subject
Space and the denominator of which is the total square feet of the Premises
before Landlord's recapture; (ii) Tenant's proportionate share of direct
expenses as provided in paragraph 5(b) of this lease shall be reduced to
reflect Tenant's proportionate share based on the square feet of the Premises
retained by Tenant after Landlord's recapture. This lease as so amended shall
continue thereafter in full force and effect. Either party may require
written confirmation of the amendments to this lease necessitated by
Landlord's recapture of the Subject Space. If Landlord recaptures the Subject
Space, Landlord shall, at Landlord's sole expense, construct any partitions
required to segregate the Subject Space from the remaining Premises retained
by Tenant. Tenant shall, however, pay for painting, covering, or otherwise
decorating the surfaces of the partitions facing the remaining Premises
retained by Tenant.
<PAGE>
If Landlord does not elect to terminate this lease as
provided hereinabove in this paragraph 18 and if Landlord consents in writing
to the proposed assignment or sublet, Tenant shall be free to assign or
sublet all or a portion of the Premises subject to the following conditions:
(i) any assignment or sublease shall be on the same terms set forth in the
Transfer Notice given to Landlord; (ii) no assignment or sublease shall be
valid and no assignee or subtenant shall take possession of the Subject Space
until an executed counterpart of such assignment or sublease has been
delivered to Landlord; (iii) no assignee or subtenant shall have a further
right to assign or sublet; (iv) any sums or other consideration payable by
Transferee to Tenant as a result of or in connection with such assignment or
sublet (except rental or other payments received which are attributable to
the amortization over the term of this lease of (a) the cost of leasehold
improvements constructed by Tenant for such assignee or subtenant, excluding
the initial tenant improvements to be constructed in the Premises pursuant to
the terms of this lease, if any, and (b) broker fees paid by Tenant in
connection therewith) whether denominated rentals or otherwise, which exceed,
in the aggregate, the basic rent and direct expenses which Tenant is
obligated to pay Landlord under
<PAGE>
this lease during the term of such assignment or sublease (prorated to
reflect obligations allocable to that portion of the Premises subject to such
sublease), shall be payable to Landlord monthly as additional rent under this
lease without affecting or reducing any other obligation of Tenant hereunder
(such amounts are referred to herein as the "Transfer Premium"); (v) no
assignment or sublet shall release Tenant of Tenant's obligation or alter the
primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder; and (vi) any assignee or
subtenant must expressly agree to assume and perform all of the covenants and
conditions of Tenant under this lease. Tenant shall pay to Landlord promptly
upon demand as additional rent, Landlord's actual attorneys' fees and other
costs incurred for reviewing, processing or documenting any requested
assignment or sublease, whether or not Landlord's consent is granted. Tenant
shall not be entitled to assign this lease or sublease all or any part of the
Premises (and any attempt to do so shall be voidable by Landlord) during any
period in which Tenant is in default under this lease.
If Tenant is a partnership, a withdrawal or change,
voluntary or involuntary or by operation of law, of any general partner or
the dissolution of the partnership shall be deemed an assignment of this
lease subject to all the conditions of this paragraph 18. If Tenant is a
corporation any dissolution, merger, consolidation or other reorganization of
Tenant or the sale or other transfer of a controlling percentage of the
capital stock of Tenant or the sale of more than fifty percent (50%) of the
value of Tenant's assets shall be an assignment of this lease subject to all
the conditions of this paragraph 18. The term "controlling percentage" means
the ownership of, and the right to vote, stock possessing more than 50% of
the total combined voting power of all classes of Tenant's capital stock
issued, outstanding and entitled to vote. This subparagraph of this paragraph
18 shall not apply if Tenant is a corporation the stock of which is traded on
the New York Stock Exchange, the American Stock Exchange or NASDAQ.
The acceptance of rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provision hereof.
Consent to one assignment or sublet shall not be deemed consent to any
subsequent assignment or sublet. In the event of default by any assignee of
Tenant or any successor of Tenant in the performance of any of the terms
hereof, Landlord may proceed directly against Tenant without the necessity of
exhausting remedies against such assignee or successor. Landlord may consent
to subsequent assignments or sublets of this lease or amendments or
modifications to this lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their
consent thereto and such action shall not relieve Tenant of liability under
this lease.
No interest of Tenant in this lease shall be assignable by
operation of law (including, without limitation, the transfer of this lease
by testacy or intestacy). Each of the following acts shall be considered an
involuntary assignment: (i) if Tenant is or becomes bankrupt or insolvent,
makes an assignment for the benefit of creditors or institutes a proceeding
under the Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a
partnership or consists of more than one person or entity, if any partner of
<PAGE>
the partnership or other person or entity is or becomes bankrupt or
insolvent, or makes an assignment for the benefit of creditors; (ii) if a
writ of attachment or execution is levied on this lease; or (iii) if, in any
proceeding or action to which Tenant is a party, a receiver is appointed with
authority to take possession of the Premises. An involuntary assignment shall
constitute a default by Tenant and Landlord shall have the right to elect to
terminate this lease, in which case this lease shall not be treated as an
asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as
security for Tenant's obligations under this lease, all rent or other
consideration from any assignment or subletting of all or a part of the
Premises as permitted by this lease, and Landlord, as assignee and as
attorney-in-fact for Tenant, or a receiver of Tenant appointed on Landlord's
application, may collect such rent or other consideration and apply it toward
Tenant's obligations under this lease and any Transferee agrees to make such
payments directly to Landlord upon Landlord's written request; provided that,
until the occurrence of a default by Tenant, Tenant shall have the right to
collect such rent, subject to promptly forwarding to Landlord any portion
thereof to which Landlord is entitled pursuant to this paragraph 18.
19. DEFAULT
The occurrence of any of the following shall constitute a
default by Tenant: (i) failure of Tenant to pay any rent or other sum payable
hereunder within five (5) days after the date that such payment becomes due;
(ii) abandonment of the Premises (Tenant's failure to occupy and conduct
business in the Premises for fourteen (14) consecutive days and Tenant is
otherwise in default under (i) above shall be deemed an abandonment); (iii)
failure of Tenant to deliver to Landlord any instrument, assurance, financial
statement, subordination agreement or certificate of estoppel required under
this Lease within the time period specified for such performance if the
failure continues for five (5) days after written notice of the failure from
Landlord to Tenant; or (iv) failure of Tenant to perform any other obligation
under this lease if the failure to perform is not cured within fifteen (15)
days after written notice thereof has been given to Tenant, except in the
case of an emergency or dangerous condition, in which case Tenant's time to
perform shall be that time period which is reasonable under the
circumstances, but not more than fifteen (15) days. The notice referred to in
clauses (iii) and (iv) above shall specify the obligations Tenant has failed
to perform. No notice shall be deemed a forfeiture or termination of this
lease unless Landlord so elects in the notice. No notice shall be required in
the event of abandonment or vacation of the Premises.
In addition to the above, the occurrence of any of the
following events shall also constitute a default by Tenant: (i) Tenant fails
to pay its debts as they become due or admits in writing its inability to pay
its debts, or makes a general assignment for the benefit of creditors (for
purposes of determining whether Tenant is not paying its debts as they become
due, a debt shall be deemed overdue upon the earliest to occur of the
following: thirty (30) days from the date a statement therefor has
<PAGE>
been rendered; the date on which any action or proceeding therefor is
commenced; or the date on which a formal notice of default or demand has been
sent); (ii) Tenant fails to furnish to Landlord a schedule of Tenant's aged
accounts payable within ten (10) days after Landlord's written request; (iii)
any financial statements given to Landlord by Tenant, any assignee of Tenant,
subtenant of Tenant, any guarantor of Tenant, or successor in interest of
Tenant (including, without limitation, any schedule of Tenant's aged accounts
payable) are materially false; or (iv) any financial statement or other
financial information furnished by Tenant pursuant to the provisions of this
lease or at the request of Landlord evidences that either Tenant's net worth
or its net assets are at least twenty-five percent (25%) less than the net
worth or net assets shown in either the immediately prior financial statement
or the financial statement of Tenant furnished at the time of execution of
this lease, and Tenant fails to furnish promptly to Landlord, after notice
from Landlord to Tenant, an additional security deposit in cash equivalent to
the aggregate of the basic rent and direct expenses (without regard to any
rent abatement) payable hereunder for the twelve (12) full calendar months
immediately preceding such notice. At any time during the term of this lease
Landlord, at Landlord's option, shall have the right to receive from Tenant,
upon Landlord's request, a current annual balance sheet for Landlord's
review. If the balance sheet shows a negative net worth, Landlord may
terminate this lease by giving Tenant sixty (60) days prior written notice.
In the event of a default by Tenant, then Landlord, in
addition to any other rights and remedies of Landlord at law or in equity,
shall have the right either to terminate Tenant's right to possession of the
Premises (and thereby terminate this lease) or, from time to time and without
termination of this lease to relet the Premises or any part thereof for the
account and in the name of Tenant for such term and on such terms and
conditions as Landlord in its sole discretion may deem advisable, with the
right to make alterations and repairs to the Premises.
Should Landlord elect to keep this lease in full force and
effect, Landlord shall have the right to enforce all of Landlord's rights and
remedies under this lease, including but not limited to the right to recover
and to relet the Premises and such other rights and remedies as Landlord may
have under California Civil Code Section 1951.4, which Section provides that
the landlord may continue the Lease in effect after the tenant's breach and
abandonment and recover rent as it becomes due, when the tenant has the right
to sublet or assign, subject only to reasonable limitations (or successor
Code section) or any other California statute. If Landlord relets the
Premises, then Tenant shall pay to Landlord, as soon as ascertained, the
costs and expenses incurred by Landlord in such reletting and in making
alterations and repairs. Rentals received by Landlord from such reletting
shall be applied (i) to the payment of any indebtedness due hereunder, other
than basic rent and direct expenses, from Tenant to Landlord, (ii) to the
payment of the cost of any repairs necessary to return the Premises to good
condition normal wear and tear excepted, including the cost of alterations
and the cost of storing any of Tenant's property left on the Premises at the
time of reletting, and (iii) to the payment of basic rent or direct expenses
due and unpaid hereunder. The residue, if any, shall be held by Landlord and
applied in payment of future rent or
<PAGE>
damages in the event of termination as the same may become due and payable
hereunder and the balance, if any at the end of the term of this lease, shall
be paid to Tenant. Should the basic rent and direct expenses received from
time to time from such reletting during any month be less than that agreed to
be paid during that month by Tenant hereunder, Tenant shall pay such
deficiency to Landlord. Such deficiency shall be calculated and paid monthly.
No such reletting of the Premises by Landlord shall be construed as election
on its part to terminate this lease unless a written notice of such intention
if given to Tenant or unless the termination hereof is decreed by a court of
competent jurisdiction. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this
lease for such previous breach, provided it has not been cured.
Should Landlord at any time terminate this lease for any
breach, in addition to any other remedy it may have, it shall have the
immediate right of entry and may remove all persons and property from the
Premises and shall have all the rights and remedies of a landlord provided by
California Civil Code Section 1951.2 or any successor code section. Upon such
termination, in addition to all its other rights and remedies, Landlord shall
be entitled to recover from Tenant all damages it may incur by reason of such
breach, including the cost of recovering the Premises and including (i) the
worth at the time of award of the unpaid rent which had been earned at the
time of termination, (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that Tenant proves
could have been reasonably avoided, (iii) the worth at the time of the award
of the amount by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of such rental loss that Tenant proves could
be reasonably avoided, (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under this lease or which in the ordinary course of events would
be likely to result therefrom. The "worth at the time of award" of the
amounts referred to in (i) and (ii) above is computed by allowing interest at
the rate of twelve percent (12%) per annum. The "worth at the time of award"
of the amount referred to in (iii) above shall be computed by discounting
such amount at the discount rate of the federal reserve bank of San Francisco
at the time of award plus one percent (1%). Tenant waives the provisions of
Section 1179 of the California Code of Civil Procedure (which Section allows
Tenant to petition a court of competent jurisdiction for relief against
forfeiture of this lease). Property removed from the Premises may be stored
in a public or private warehouse or elsewhere at the sole cost and expense of
Tenant. In the event that Tenant shall not immediately pay the cost of
storage of such property after the same has been stored for a period of
thirty (30) days or more, Landlord may sell any or all thereof at a public or
private sale in such manner and at such times and places that Landlord, in
its sole discretion, may deem proper, without notice to or demand upon Tenant.
20. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
<PAGE>
Landlord, at any time after Tenant commits a default, may,
but shall not be obligated to, cure the default at Tenant's cost. If Landlord
at any time, by reason of Tenant's default, pays any sum or does any act that
requires the payment of any sum, the sum paid by Landlord shall be due
immediately from Tenant to Landlord and shall bear interest at the rate of
twelve percent (12%) per annum or the maximum rate permitted by law,
whichever is less, from the date the sum is paid by Landlord until Landlord
is reimbursed by Tenant. Amounts due Landlord hereunder shall be additional
rent.
21. EMINENT DOMAIN
If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this lease shall terminate as to any portion of
the Premises so taken or conveyed on the date when title vests in the
condemnor, and Landlord shall be entitled to any and all payments, income,
rent, award or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance. Tenant shall have no claim against
Landlord or otherwise for the value of any unexpired term of this lease.
Notwithstanding the foregoing, Tenant shall be entitled to any compensation
for depreciation to and cost of removal of Tenant's equipment and fixtures
and any compensation for its relocation expenses necessitated by such taking,
but in each case only to the extent the condemning authority makes a separate
award therefor or specifically identifies a portion of the award as being
therefor. Each party waives the provisions of Section 1265.130 of the
California Code of Civil Procedure (which section allows either party to
petition the Superior Court to terminate this lease in the event of a partial
taking of the Premises).
If any action or proceeding is commenced for such taking of
the Premises or any portion thereof or of any other space in the Project, or
if Landlord is advised in writing by any entity or body having the right or
power of condemnation of its intention to condemn the premises or any portion
thereof or of any other space in the Project, and Landlord shall decide to
discontinue the use and operation of the Project or decide to demolish, alter
or rebuild the Project, then Landlord shall have the right to terminate this
lease by giving Tenant written notice thereof within sixty (60) days of the
earlier of the date of Landlord's receipt of such notice of intention to
condemn or the commencement of said action or proceeding. Such termination
shall be effective as of the last day of the calendar month next following
the month in which such notice is given or the date on which title shall vest
in the condemnor, whichever occurs first.
In the event of a partial taking, or conveyance in lieu
thereof, of the Premises and fifty percent (50%) or more of the number of
square feet in the Premises are taken then Tenant may terminate this lease.
Any election by Tenant to so terminate shall be by written notice given to
Landlord within sixty (60) days from the date of such taking or conveyance
and shall be effective on the last day of the calendar month next following
the month in which such notice is given or the date on which title shall vest
in the condemnor, whichever occurs first.
<PAGE>
If a portion of the Premises is taken by power of eminent
domain or conveyance in lieu thereof and neither Landlord nor Tenant
terminates this lease as provided above, then this lease shall continue in
full force and effect as to the part of the Premises not so taken or conveyed
and all payments of rent shall be apportioned as of the date of such taking
or conveyance so that thereafter the amounts to be paid by Tenant shall be in
the ratio that the area of the portion of the Premises not so taken bears to
the total area of the Premises prior to such taking.
22. NOTICE AND COVENANT TO SURRENDER
On the last day of the term or on the effective date of any
earlier termination, Tenant shall surrender to Landlord the Premises in its
condition existing as of the commencement of the term and, except as
otherwise provided by Landlord pursuant to the terms of paragraph 8 of this
lease, all of the improvements and alterations made to the Premises in their
condition existing as of the date of completion of construction and/or
installation (normal wear and tear excepted), with all originally painted
interior walls washed or repainted if marked or damaged, interior vinyl
covered walls cleaned and repaired or replaced if marked or damaged, all
carpets shampooed and cleaned, and all floors cleaned and waxed; all to the
reasonable satisfaction of Landlord. On or prior to the last day of the term
or the effective date of any earlier termination, Tenant shall remove all of
Tenant's personal property and trade fixtures, together with improvements or
alterations that Tenant is obligated to remove pursuant to the provisions of
paragraph 8 of this lease, from the Premises, and all such property not
removed shall be deemed abandoned. In addition, on or prior to the expiration
or earlier termination of this lease, Tenant shall remove, at Tenant's sole
cost and expense, all telephone, other communication, computer and any other
cabling and wiring or any sort installed in the space above the suspended
ceiling of the Premises or anywhere else in the Premises and shall promptly
repair any damage to the suspended ceiling, lights, light fixtures, walls and
any other part of the Premises resulting from such removal.
If the Premises are not surrendered as required in this
paragraph 22, Tenant shall indemnify Landlord against all loss, liability and
expense (including, but not limited to, attorney fees) resulting from the
failure by Tenant in so surrendering the Premises, including, without
limitation, any claims made by any succeeding tenants. It is agreed between
Landlord and Tenant that the provisions of this paragraph 22 shall survive
termination of this lease.
23. TENANT'S QUITCLAIM
At the expiration or earlier termination of this lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10)
days after written demand from Landlord to Tenant, any quitclaim deed or
other document required to remove the cloud or encumbrance created by this
lease from the real property of which the Premises are a part. This
obligation shall survive said expiration or termination.
<PAGE>
24. HOLDING OVER
Any holding over after the expiration or termination of
this lease with the written consent of Landlord shall be construed to be a
tenancy from month-to-month at the monthly rent agreed upon by Landlord and
Tenant, but in no event less than the monthly rent payable under this lease
for the last lease month before the date of such expiration or termination.
All provisions of this lease, except (i) as modified by the preceding
sentence and (ii) those provisions pertaining to the term, expansion rights
and any option to extend, shall apply to the month-to-month tenancy.
If Tenant shall retain possession of the Premises or any
part thereof without Landlord's written consent following the expiration or
sooner termination of this lease for any reason, then Tenant shall pay to
Landlord as rent during the holdover period an amount equal to the greater of
(i) one hundred fifty percent (150%) of the amount of the monthly rent in
effect during the last full lease month prior to the date of such expiration
or termination or (ii) one hundred twenty-five percent (125%) of the fair
market rental (as reasonably determined by Landlord) for the Premises. Tenant
shall also indemnify and hold Landlord harmless from any loss, liability and
expense (including, but not limited to, attorneys fees) resulting from delay
by Tenant in surrendering the Premises, including without limitation any
claims made by any succeeding tenant founded on such delay. Acceptance of
rent by Landlord following expiration or termination shall not constitute a
renewal of this lease, and nothing contained in this paragraph shall waive
Landlord's right of re-entry or any other right. Tenant shall be only a
tenant at sufferance, whether or not Landlord accepts any rent from Tenant,
while Tenant is holding over without Landlord's written consent.
The provisions of this paragraph 24 are in addition to, and
do not affect, Landlord's right of re-entry or other rights hereunder or
provided by law. Nothing in this paragraph 24 shall be construed as implied
consent by Landlord to any holding over by Tenant. Landlord expressly
reserves the right to require Tenant to surrender possession of the Premises
to Landlord as provided in this Lease on expiration or other termination of
this Lease. The provisions of this paragraph 24 shall not be considered to
limit or constitute a waiver of any other rights or remedies of Landlord
provided in this Lease or at law. The provisions of this paragraph 24 shall
survive the expiration or early termination of this lease.
25. SUBORDINATION
In the event Landlord's title or leasehold interest is now
or hereafter encumbered in order to secure a loan to Landlord, Tenant shall,
at the request of Landlord or the lender, execute in writing an agreement
subordinating its rights under this lease to the lien of such encumbrance,
or, if so requested, agreeing that the lien of lender's encumbrance shall be
or remain subject and subordinate to the rights of Tenant under this lease.
Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to
execute, deliver and record any such instrument or instruments for and
<PAGE>
in the name and on behalf of Tenant. Notwithstanding any such subordination,
Tenant's possession under this lease shall not be disturbed if Tenant is not
in default and so long as Tenant shall pay all amounts due hereunder and
otherwise observe and perform all provisions of this lease. In addition, if
in connection with any such loan the lender shall request reasonable
modifications in this lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereof, provided that such
modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
26. CERTIFICATE OF ESTOPPEL
Each party shall, within five (5) calendar days after request
therefor, execute and deliver to the other party, in recordable form, a
certificate stating that the lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications. The
certificate shall also state the amount of the monthly rent, the date to which
monthly rent has been paid in advance, the amount of the security deposit and/or
prepaid monthly rent, and, if the request is made by Landlord, shall include
such other items as Landlord or Landlord's lender may reasonably request.
Failure to deliver such certificate within such time shall constitute a
conclusive acknowledgment by the party failing to deliver the certificate that
the lease is in full force and effect and has not been modified except as may be
represented by the party requesting the certificate. Any such certificate
requested by Landlord may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises or Project. Further, within five (5)
calendar days following written request made from time to time by Landlord,
Tenant shall furnish to Landlord current financial statements of Tenant.
27. SALE BY LANDLORD
In the event the original Landlord hereunder, or any successor
owner of the Project or Premises, shall sell or convey the Project or Premises,
all liabilities and obligations on the part of the original Landlord, or such
successor owner, under this lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner and to look solely to such new
owner for performance of any and all such liabilities and obligations.
28. ATTORNMENT TO LENDER OR THIRD PARTY
In the event the interest of Landlord in the land and
buildings in which the Premises are located (whether such interest of Landlord
is a fee title interest or a leasehold interest) is encumbered by deed of trust,
and such interest is acquired by a lender or any other third party through
judicial foreclosure or by exercise of a power of sale at private trustee's
foreclosure sale, Tenant hereby agrees to release Landlord of any obligation
arising on or after any such foreclosure sale and to attorn to the
<PAGE>
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this lease.
29. DEFAULT BY LANDLORD
Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
If Landlord is in default of this lease, Tenant's sole remedy
shall be to institute suit against Landlord in a court of competent
jurisdiction, and Tenant shall have no right to offset any sums expended by
Tenant as a result of Landlord's default against future rent and other sums due
and payable pursuant to this lease. If Landlord is in default of this lease, and
as a consequence Tenant recovers a money judgment against Landlord, the judgment
shall be satisfied only out of the proceeds of sale received on execution of the
judgment and levy against the right, title and interest of Landlord in the
Project of which the Premises are a part, and out of rent or other income from
such real property receivable by Landlord or out of the consideration received
by Landlord from the sale or other disposition of all or any part of Landlord's
right, title and interest in the Project of which the Premises are a part.
Neither Landlord nor any of the partners comprising the partnership designated
as Landlord shall be personally liable for any deficiency.
30. CONSTRUCTION CHANGES
It is understood that the description of the Premises and the
location of ductwork, plumbing and other facilities therein are subject to such
changes as Landlord or Landlord's architect determines to be desirable in the
course of construction of the Premises and/or the improvements constructed or
being constructed therein, and no such changes or any changes in plans for any
other portions of the Project, shall affect this lease or entitle Tenant to any
reduction of rent hereunder or result in any liability of Landlord to Tenant.
31. MEASUREMENT OF PREMISES
Tenant understands and agrees that any reference to square
footage of the Premises is approximate only and includes all interior partitions
and columns, one-half of exterior walls, and one-half of the partitions
separating the Premises from the rest of the Project. Tenant waives any claim
against Landlord regarding the accuracy of any such measurement and agrees that
there shall not be any adjustment
<PAGE>
in basic rent or direct expenses or other amounts payable hereunder by reason
of inaccuracies in such measurement.
32. ATTORNEY FEES
If either party commences an action against the other party
arising out of or in connection with this lease, the prevailing party shall be
entitled to have and recover from the losing party all expenses of litigation,
including, without limitation, travel expenses, attorney fees, expert witness
fees, trial and appellate court costs, and deposition and transcript expenses.
If either party becomes a party to any litigation concerning this lease or
concerning the Premises or the Project by reason of any act or omission of the
other party or its authorized representatives, the party that causes the other
party to become involved in the litigation shall be liable to the other party
for all expenses of litigation, including, without limitation, travel expenses,
attorney fees, expert witness fees, trial and appellate court costs, and
deposition and transcript expenses.
33. SURRENDER
The voluntary or other surrender of this lease or the Premises
by Tenant, or a mutual cancellation of this lease, shall not work a merger, and
at the option of Landlord shall either terminate all or any existing subleases
or subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.
34. WAIVER
No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent rent
or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the balance
of such payment due. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by Tenant before the expiration of
the term. Only a written notice from Landlord to Tenant shall constitute
acceptance of the surrender of the Premises and accomplish a termination of this
lease. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of this
lease.
35. EASEMENTS; AIRSPACE RIGHTS
Landlord reserves the right to alter the boundaries of the
Project and grant easements and dedicate for public use portions of the Project
without Tenant's consent, provided that no such grant or dedication shall
interfere with Tenant's use of the
<PAGE>
Premises or otherwise cause Tenant to incur cost or expense. From time to
time, and upon Landlord's demand, Tenant shall execute, acknowledge and
deliver to Landlord, in accordance with Landlord's instructions, any and all
documents, instruments, maps or plats necessary to effectuate Tenant's
covenants hereunder.
This lease confers no rights either with regard to the
subsurface of or airspace above the land on which the Project is located or with
regard to airspace above the building of which the Premises are a part. Tenant
agrees that no diminution or shutting off of light or view by a structure which
is or may be erected (whether or not by Landlord) on property adjacent to the
building of which the Premises are a part or to property adjacent thereto, shall
in any way affect this lease, or entitle Tenant to any reduction of rent, or
result in any liability of Landlord to Tenant.
36. RULES AND REGULATIONS
Landlord shall have the right from time to time to promulgate
rules and regulations for the safety, care and cleanliness of the Premises, the
Project and the Common Area, or for the preservation of good order. On delivery
of a copy of such rules and regulations to Tenant, Tenant shall comply with the
rules and regulations, and a violation of any of them shall constitute a default
by Tenant under this lease. If there is a conflict between the rules and
regulations and any of the provisions of this lease, the provisions of this
lease shall prevail. Such rules and regulations may be amended by Landlord from
time to time with or without advance notice.
37. NOTICES
Except for legal process and Notice of Belief of Abandonment
which may be served either as provided by law or as provided herein, all
notices, demands, requests, consents, approvals and other communications
("Notices") which may be given or are required to be given by either party to
the other shall be in writing and shall be deemed given to and received by the
party intended to receive such Notice and deemed sufficiently given for all
purposes as follows:
(a) when personally delivered to the recipient, notice
is effective on delivery;
(b) when mailed first class to the last address of the
recipient known to the party giving notice, notice is effective on delivery;
(c) when mailed by certified mail with return receipt
requested, notice is effective on receipt if delivery is confirmed by a return
receipt; or
(d) when delivered by reputable overnight courier (e.g.
Federal Express, Airborne) or other comparable service with charges prepaid or
charged to the sender's account, notice is effective on delivery if delivery is
confirmed by the courier service.
<PAGE>
Any correctly addressed Notice that is refused, unclaimed, or
undeliverable because of an act or omission of the party to be notified shall be
deemed effective as of the first date that the Notice was refused, unclaimed, or
considered undeliverable by the postal authorities, messenger, or overnight
delivery service.
Prior to the commencement date, all such Notices from Landlord
to Tenant shall be served or addressed to Tenant at 20600 Mariani Avenue,
Cupertino, California 95014. On or after the commencement date all such Notices
from Landlord to Tenant shall be addressed to Tenant at the Premises.
All such Notices by Tenant to Landlord shall be sent to
Landlord at _______________________________________, with a copy to McCandless
Management Corporation at 3945 Freedom Circle, Suite 640, Santa Clara,
California 95054.
Either party may change its address by giving the other party
notice of such change in any manner permitted by this paragraph 37.
38. NAME
Tenant shall not use the name of the Project for any purpose
other than as the address of the business conducted by Tenant in the Premises
without the prior written consent of Landlord.
39. GOVERNING LAW; SEVERABILITY
This lease shall in all respects be governed by and construed
in accordance with the laws of the State of California. If any provision of this
lease shall be held or rendered invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
40. DEFINITIONS
As used in this lease, the following words and phrases shall
have the following meanings:
AUTHORIZED REPRESENTATIVE: any officer, agent, employee or
independent contractor retained or employed by either party, acting within
authority given him by that party.
ENCUMBRANCE: any deed of trust, mortgage or other written
security device or agreement affecting the Premises or the Project that
constitutes security for the payment of a debt or performance of an obligation,
and the note or obligation secured by such deed of trust, mortgage or other
written security device or agreement.
<PAGE>
LEASE MONTH: the period of time determined by reference to the
day of the month in which the term commences and continuing to one day short of
the same numbered day in the next succeeding month; e.g., the tenth day of one
month to and including the ninth day in the next succeeding month.
LEASE YEAR: the period of time determined by reference to the
day of the year in which the term commences and continuing to one day short of
the same day in the next succeeding year; e.g., the tenth day of July of one
year to the ninth day of July of the next succeeding year.
LENDER: the beneficiary, mortgagee or other holder of an
encumbrance, as defined above.
LIEN: a charge imposed on the Premises by someone other
than Landlord, by which the Premises are made security for the performance
of an act. Most of the liens referred to in this lease are mechanic's liens.
MAINTENANCE: repairs, replacement, repainting and cleaning.
MONTHLY RENT: the sum of the monthly payments of basic
rent and direct expenses.
PERSON: one or more human beings, or legal entities or
other artificial persons, including, without limitation, partnerships,
corporations, trusts, estates, associations and any combination of human
being and legal entities.
PROVISION: any term, agreement, covenant, condition,
clause, qualification, restriction, reservation or other stipulation in
the lease that defines or otherwise controls, establishes or limits the
performance required or permitted by either party.
RENT: basic rent, direct expenses, additional rent and
all other amounts payable by Tenant to Landlord required by this lease or
arising by subsequent actions of the parties made pursuant to this lease.
Words used in any gender include other genders. If more
than one individual or entity comprises Tenant, the obligations imposed on
each individual or entity that comprises Tenant under this Lease are and
shall be joint and several. All provisions whether covenants or conditions,
on the part of Tenant shall be deemed to be both covenants and conditions.
The paragraph headings are for convenience of reference only and shall have
no effect upon the construction or interpretation of any provision hereof.
41. TIME
Time is of the essence of this lease and of each and all of
its provisions.
<PAGE>
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
Any amount due from Tenant to Landlord hereunder which is not
paid when due shall bear interest at the rate of ten percent (10%) per annum
from when due until paid, unless otherwise specifically provided herein, but the
payment of such interest shall not excuse or cure any default by Tenant under
this lease. In addition, Tenant acknowledges that late payment by Tenant to
Landlord of basic rent or direct expenses or of any other amount due Landlord
from Tenant, will cause Landlord to incur costs not contemplated by this lease,
the exact amount of such costs being extremely difficult and impractical to fix.
Such costs include, without limitation, processing and accounting charges, and
late charges that may be imposed on Landlord, e.g., by the terms of any
encumbrance and note secured by any encumbrance covering the Premises.
Therefore, if any such payment due from Tenant is not received in full by
Landlord when due, which payments are subject to application by Landlord as
provided in paragraph 4 of this lease, Tenant shall pay to Landlord an
additional sum of five percent (5%) of the entire payment as a late charge. The
parties agree that this late charge represents a fair and reasonably estimate of
the costs that Landlord will incur by reason of late payment by Tenant.
Acceptance of any late charge shall not constitute a waiver of Tenant's default
with respect to the overdue amount, nor prevent Landlord from exercising any of
the other rights and remedies available to Landlord. No notice to Tenant of
failure to pay shall be required prior to the imposition of such interest and/or
late charge, and any notice period provided for in paragraph 19 shall not affect
the imposition of such interest and/or late charge. Any interest and late charge
imposed pursuant to this paragraph shall be and constitute additional rent
payable by Tenant to Landlord.
43. ENTIRE AGREEMENT
This lease, including any exhibits and attachments,
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this lease and the exhibits and attachments may be altered, amended
or revoked only by an instrument in writing signed by both Landlord and Tenant.
Landlord and Tenant agree hereby that all prior or contemporaneous oral
agreements between and among themselves or their agents or representatives
relative to the leasing of the Premises are merged in or revoked by this lease.
44. AUTHORITY
Each individual executing this lease on behalf of Tenant
represents and warrants that (i) he/she is duly authorized to execute and
deliver this lease on behalf of Tenant and: (a) if Tenant is a corporation, such
authorization is in accordance with a duly adopted resolution of the Board of
Directors of said corporation, (b) if Tenant is a
<PAGE>
partnership, such authorization is in accordance with the partnership
agreement now in effect, and (c) if Tenant is a limited liability company,
such authorization is in accordance with the company's governing documents;
and (ii) this lease is binding upon Tenant in accordance with its terms. Upon
Landlord's request, Tenant shall deliver to Landlord within ten (10) days
after such request evidence of the authorization specified above as Landlord
may reasonably request, including, without limitation, in the case where
Tenant is a corporation, a copy of the resolution of the Board of Directors
of Tenant authorizing the execution of this lease and naming the officers
that are authorized to execute this lease on behalf of Tenant, which copy
shall be certified by Tenant's secretary as correct and in full force and
effect.
45. RECORDING
Neither Landlord nor Tenant shall record this lease or a
short form memorandum hereof without the consent of the other.
46. EXHIBITS AND ATTACHMENTS
All exhibits and attachments to this lease are a part hereof
and the terms and provisions thereof are incorporated into this lease by this
reference as though set forth herein in full.
47. REAL ESTATE BROKERS
Each party represents and warrants to the other party that it
has not had dealings in any manner with any real estate broker, finder or other
person with respect to the Premises and the negotiation and execution of this
lease except CRESA Partners ("CRESA", representing Landlord) and MacMillan,
Moore & Buchanan, Inc. ("MMBI", representing Tenant). Except for the commissions
and fees to be paid to CRESA and MMBI as provided in this paragraph, each party
shall indemnify and hold harmless the other party from all damage, loss,
liability and expense (including attorneys' fees and related costs) arising out
of or resulting from any claims for commissions or fees that have been or may be
asserted against the other party by any broker, finder or other person with whom
Tenant or Landlord, respectively, has dealt, or purportedly has dealt, in
connection with the Premises and the negotiation and execution of this lease.
Landlord shall pay broker leasing commissions to CRESA and MMBI in connection
with the Premises and the negotiation and execution of this lease, to the extent
agreed to between Landlord and CRESA. Landlord and Tenant agree that Landlord
shall not be obligated to pay any broker leasing commissions, consulting fees,
finder fees or any other fees or commissions arising out of or relating to any
extended term of this lease or to any expansion or relocation of the Premises at
any time.
48. ENVIRONMENTAL MATTERS
A. TENANT'S COVENANTS REGARDING HAZARDOUS MATERIALS.
<PAGE>
(1) HAZARDOUS MATERIALS HANDLING. Tenant, its
agents, invitees, employees, contractors, sublessees, assigns and/or
successors shall not use, store, dispose, release or otherwise cause to be
present or permit the use, storage, disposal, release or presence of
Hazardous Materials (as defined below) on or about the Premises or Project.
As used herein "Hazardous Materials" shall mean any petroleum or petroleum
by-products, flammable explosives, asbestos, urea formaldehyde, radioactive
materials or waste and any "hazardous substance", "hazardous waste",
"hazardous materials", "toxic substance" or "toxic waste" as those terms are
defined under the provisions of the California Health and Safety Code and/or
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 9601 et seq.), as amended by the Superfund
Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9601 et seq.),
or any other hazardous or toxic substance, material or waste which is or
becomes regulated by any local governmental authority, the State of
California or any agency thereof, or the United States Government or any
agency thereof.
(2) NOTICES. Tenant shall immediately notify
Landlord in writing of: (i) any enforcement, cleanup, removal or other
governmental or regulatory action instituted, completed or threatened
pursuant to any law, regulation or ordinance relating to the industrial
hygiene, environmental protection or the use, analysis, generation,
manufacture, storage, presence, disposal or transportation of any Hazardous
Materials (collectively "Hazardous Materials Laws"); (ii) any claim made or
threatened by any person against Tenant, the Premises, Project or buildings
within the Project relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from or claimed to result from any
Hazardous Materials; and (iii) any reports made to any environmental agency
arising out of or in connection with any Hazardous Materials in, on or
removed from the Premises, Project or buildings within the Project, including
any complaints, notices, warnings, reports or asserted violations in
connection therewith. Tenant shall also supply to Landlord as promptly as
possible, and in any event within five (5) business days after Tenant first
receives or sends the same, with copies of all claims, reports, complaints,
notices, warnings or asserted violations relating in any way to the Premises,
Project or buildings within the Project or Tenant's use thereof. Tenant shall
promptly deliver to Landlord copies of hazardous waste manifests reflecting
the legal and proper disposal of all Hazardous Materials removed from the
Premises.
B. INDEMNIFICATION OF LANDLORD. Tenant shall indemnify, defend
(by counsel reasonably acceptable to Landlord), protect, and hold Landlord, and
each of Landlord's partners, employees, agents, attorneys, successors and
assigns, free and harmless from and against any and all claims, liabilities,
penalties, forfeitures, losses or expenses (including attorneys' fees) for death
of or injury to any person or damage to any property whatsoever (including water
tables and atmosphere), arising from or caused in whole or in part, directly or
indirectly, by (i) the presence in, on, under or about the Premises, Project or
buildings within the Project where such presence or discharge was caused by
Tenant, (ii) Tenant's use, analysis, storage, transportation, disposal, release,
threatened release, discharge or generation of Hazardous Materials to, in, on,
under, about or from the Premises, Project or buildings within the Project, or
<PAGE>
(iii) Tenant's failure to comply with any Hazardous Materials Laws whether
knowingly, unknowingly, intentionally or unintentionally. Tenant's obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary repair, cleanup or
detoxification or decontamination of the Premises, Project or buildings within
the Project, and the preparation and implementation of any closure, remedial
action or other required plans in connection therewith. In addition, Tenant
shall reimburse Landlord for (i) losses in or reductions to rental income
resulting from Tenant's use, storage or disposal of Hazardous Materials, (ii)
all costs of refitting or other alterations to the Premises, Project or
buildings within the Project required as a result of Tenant's use, storage, or
disposal of Hazardous Materials including, without limitation, alterations
required to accommodate an alternate use of the Premises, Project or buildings
within the Project, and (iii) any diminution in the fair market value of the
Premises, Project or buildings within the Project caused by Tenant's use,
storage, or disposal of Hazardous Materials. For purposes of this paragraph 48,
any acts or omissions of Tenant, or by employees, agents, assignees, contractors
or subcontractors of Tenant or others acting for or on behalf of Tenant (whether
or not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Tenant.
C. SURVIVAL. The provisions of this paragraph 48
shall survive the expiration or earlier termination of the term of this lease.
49. SIGNAGE
Tenant shall not, without obtaining the prior written consent of
Landlord, install or attach any sign or advertising material on any part of
the outside of the Premises, or on any part of the inside of the Premises
which is visible from the outside of the Premises, or in the halls, lobbies,
windows or elevators of the building in which the Premises are located or on
or about any other portion of the Common Area or Project. Subject to the
terms of this paragraph 49, Tenant shall have the right to use approximately
the lower one-half of the existing monument sign for the building. If
Landlord consents to the installation of any sign or other advertising
material, the location, size, design, color and other physical aspects
thereof shall be subject to Landlord's prior written approval and shall be in
accordance with any sign program applicable to the Project. In addition to
any other requirements of this paragraph 49, the installation of any sign or
other advertising material by or for Tenant must comply with all applicable
laws, statutes, requirements, rules, ordinances and any C.C. & R.'s or other
similar requirements. With respect to any permitted sign installed by or for
Tenant, Tenant shall maintain such sign or other advertising material in good
condition and repair and shall remove such sign or other advertising material
on the expiration or earlier termination of the term of this lease. The cost
of any permitted sign or advertising material and all costs associated with
the installation, maintenance and removal thereof shall be paid for solely by
Tenant. If Tenant fails to properly maintain or remove any permitted sign or
other advertising material, Landlord may do so at Tenant's expense. Any cost
incurred by Landlord in connection with such maintenance or removal shall be
deemed additional rent and shall be paid by Tenant to Landlord
<PAGE>
within ten (10) days following notice from Landlord. Landlord may remove any
unpermitted sign or advertising material without notice to Tenant and the
cost of such removal shall be additional rent and shall be paid by Tenant
within ten (10) days following notice from Landlord. Landlord shall not be
liable to Tenant for any damage, loss or expense resulting from Landlord's
removal of any sign or advertising material in accordance with this paragraph
49. The provisions of this paragraph 49 shall survive the expiration or
earlier termination of this lease.
50. SUBMISSION OF LEASE
The submission of this lease to Tenant for examination or
signature by Tenant is not an offer to lease the Premises to Tenant nor an
agreement by Landlord to reserve the Premises for Tenant. Landlord will not be
bound to Tenant until this lease has been duly executed and delivered by both
Landlord and Tenant.
51. TENANT IMPROVEMENTS
Improvements to the Premises shall be constructed and
installed in accordance with the plans and specifications, and other terms and
conditions set forth in Exhibit C to this lease, the contents of which are
incorporated herein and made a part hereof by this reference. The improvements
shall be constructed and installed at the expense of Landlord and/or Tenant as
set forth in Exhibit C to this lease and in each case shall be performed in a
diligent and workmanlike manner.
52. ADDITIONAL RENT
All costs, charges, fees, penalties, interest and any other
payments (including Tenant's reimbursement to Landlord of costs incurred by
Landlord) which Tenant is required to make to Landlord pursuant to the terms and
conditions of this lease and any amendments to this lease shall be and
constitute additional rent payable by Tenant to Landlord when due as specified
in this lease and any amendments to this lease.
53. [INTENTIONALLY OMITTED]
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered
this lease on the date first above written.
<PAGE>
LANDLORD: TENANT:
SYMANTEC CORPORATION, AUDIOHIGHWAY.COM,
a Delaware corporation a California corporation
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title: PRESIDENT
Date:_________________________ Date:_________________________
By:___________________________
Name:_________________________
Title: SECRETARY
Date:_________________________
<PAGE>
WORK LETTER AGREEMENT
EXISTING SPACE - ALLOWANCE
CONSTRUCTION EXHIBIT C
THIS WORK LETTER AGREEMENT (hereinafter "Exhibit C") is attached to and
forms a part of that certain lease ("Lease") by and between SYMANTEC
CORPORATION, a Delaware corporation ("Landlord"), and AUDIOHIGHWAY.COM, a
California corporation ("Tenant"), pursuant to which Landlord leases to Tenant
those certain premises located at 20300 Steven Creek Boulevard, Suite 100,
Cupertino, California and consisting of approximately twenty-six thousand nine
hundred sixty-seven (26,967) square feet ("Premises"). All capitalized terms
used herein shall have the meaning ascribed to them in the Lease unless
otherwise defined herein. The Premises shall be improved in accordance with the
following:
1. EXISTING IMPROVEMENTS:
Tenant accepts the Premises in their existing condition and
the improvements constructed therein (the "Existing Improvements"), and Tenant
hereby approves the same as installed, subject only to construction of the
Tenant Improvements specified herein and such changes as may subsequently be
agreed upon by Landlord and Tenant.
2. TENANT IMPROVEMENTS:
As used herein, "Tenant Improvements" shall include those
items and specifications shown on the Final Construction Documents prepared in
accordance with paragraph 3 below, including those specifications (as
appropriate) set forth and described in Exhibit C-1, attached hereto, exclusive
of Existing Improvements. Landlord shall construct Tenant Improvements in
accordance with the Final Construction Documents and the provisions of this
Exhibit C. Unless otherwise specifically agreed to by Landlord in writing, the
installation, wiring, maintenance and removal of furniture partition systems,
telephone and other communication systems, data cabling, alarm and/or security
systems and any other systems not specifically set forth in the Final
Construction Documents and all cost and expense associated therewith, shall be
the sole responsibility of Tenant. In connection with the construction and
installation of the Tenant Improvements, Landlord and Landlord's general
<PAGE>
contractor shall have no obligation to move any of Tenant's property located in
or about the Premises including, but not limited to, furniture, inventory and
trade fixtures, at the time of such construction and installation. If at the
time of construction and installation of the Tenant Improvements Tenant has
property located in or about the Premises that inhibits or prevents in any way
the construction and installation of the Tenant Improvements, Tenant shall
immediately, upon receipt of notification thereof from Landlord or Landlord's
general contractor, at Tenant's sole cost and expense, move such property to
another location within the Premises or, upon receipt of Landlord's prior
approval, to another location within the Project designated by Landlord in
Landlord's sole discretion; Tenant's failure to immediately move such property
upon receipt of notification thereof from Landlord or Landlord's general
contractor shall be deemed a Tenant caused delay subject to the provisions of
paragraph 8 of this Exhibit C. If at the time of construction and installation
of the Tenant Improvements Tenant has property located in or about the Premises,
Landlord and Landlord's general contractor shall incur no liability to Tenant or
any other party in the event such property is damaged, destroyed or stolen
during the construction and installation of the Tenant Improvements.
3. TENANT IMPROVEMENT DESIGN SCHEDULE:
The plans and specifications for the Tenant Improvements shall
be completed in accordance with the following:
(a) Tenant shall approve preliminary floor plan layouts
("Preliminary Floor Plans") prepared by Landlord by __________, 1999. The
Preliminary Floor Plans shall show all walls, doors, and other Tenant
Improvements desired by Tenant in sufficient detail for Landlord's architect
to prepare architectural construction drawings and related documents
("Architectural Construction Documents").
(b) Between ____________, 1999 and ____________, 1999, Landlord's
architect and Tenant's representative shall meet as needed to review and
complete the final details related to the Preliminary Floor Plans, so that on
___________, 1999 the Architectural Construction Documents are subject only
to minor changes.
(c) No later than _______________, 1999, Tenant shall have made the
decisions required and supplied to Landlord the information necessary for
Landlord's architect to complete the Architectural Construction Documents in
enough detail for Landlord's general contractor to bid the work, select
subcontractors and to proceed toward the design of electrical, mechanical and
any other requirements not included on the Architectural Construction
Documents. Upon Landlord's general contractor's selection of subcontractors,
Landlord's general contractor and subcontractors shall prepare design
specifications outlining in reasonable detail electrical, mechanical and any
other requirements not included on the Architectural Construction Documents
("Electrical and Mechanical Drawings").
<PAGE>
(d) Upon completion of the Architectural Construction
Documents, Tenant shall approve the same subject to changes, deletions or
additions as provided for in paragraphs 6 and 7 of this Exhibit C.
(e) Upon completion of the Electrical and Mechanical Drawings,
Landlord or Landlord's general contractor shall submit the Architectural
Construction Documents and Electrical and Mechanical Drawings (collectively the
"City Ready Plans") to the City to obtain a building permit.
(f) Tenant shall have decided upon carpet selection and all
other color and material specifications by ________________, 1999.
(g) As used herein, "Final Construction Documents" shall
include the City Ready Plans, as approved by the City, and any subsequent
additions, deletions or changes to the Tenant Improvements permitted or required
pursuant to paragraphs 6 and 7 of this Exhibit C.
4. TENANT IMPROVEMENT COST ESTIMATES:
Within fourteen (14) days of completion of the Electrical and
Mechanical Drawings, Landlord shall prepare and deliver to Tenant an improvement
cost budget ("Improvement Cost Budget") setting forth the Total Cost of Tenant
Improvements (as defined in paragraph 5(b) below). Within three (3) days after
Tenant's receipt of the Improvement Cost Budget, Tenant shall, in writing,
approve or disapprove the Improvement Cost Budget. If Tenant does not deliver to
Landlord its written approval or disapproval within the three (3) day period,
Tenant will be deemed to have approved the Improvement Cost Budget. If Tenant
disapproves the Improvement Cost Budget, Landlord and Tenant shall, within three
(3) days of Tenant's disapproval, attempt to agree on mutually acceptable
modifications to the Improvement Cost Budget. If Tenant disapproves of the
Improvement Cost Budget and Landlord and Tenant are unable, within the three (3)
day period, to agree on mutually acceptable changes to the Improvement Cost
Budget, or if Tenant approves of the Improvement Cost Budget but does not
deliver to Landlord, within three (3) days of its approval, signed copies of the
Improvement Cost Budget and Architectural Construction Documents, then Landlord
may terminate the Lease upon written notice to Tenant. The Improvement Cost
Budget shall be subject to adjustment for increases in costs resulting from
changes to the Tenant Improvements requested or required pursuant to paragraphs
6 and 7 below. Landlord shall not be obligated to commence construction of the
Tenant Improvements until the following has occurred: (i) the Architectural
Construction Documents and the Improvement Cost Budget have been agreed to by
Landlord and Tenant; (ii) Tenant has indicated its approval of the Architectural
Construction Documents and the Improvement Cost Budget by signing copies
thereof; and (iii) Landlord has given written authorization to proceed with
construction to Landlord's general contractor based on the agreed Architectural
Construction Documents and the Improvement Cost Budget.
<PAGE>
5. TENANT IMPROVEMENT ALLOWANCE:
(a) Landlord agrees to grant to Tenant a tenant improvement
allowance of up to $134,835 ("Allowance") to be applied toward the "Total
Cost of Tenant Improvements" (as defined in paragraph 5(b) below) to be
installed in accordance with this Exhibit C.
(b) As used herein, "Total Cost of Tenant Improvements" shall mean
all costs to construct and install the Tenant Improvements, including,
without limitation, (i) all demolition costs incurred in connection with
preparing the Premises for the installation of the Tenant Improvements and
the actual costs incurred for labor, materials and contractors' fees; (ii)
the cost of overtime or special expenditures required to obtain and install
the Tenant Improvements by the proposed commencement date; (iii) all costs
related to change orders; (iv) all costs related to changes required or
requested by governmental authority; (v) permit fees and other fees not
previously paid by Landlord as part of shell costs; (vi) the cost of
consultants and engineers; (vii) an amount equal to the actual cost of
supervision, administration and on-site facilities and equipment necessary to
perform the work; (viii) an amount equal to ____% of the sum of items (i)
through (vii) above as and for the general contractor's overhead and profit;
and (ix) the cost of architects hired by Landlord.
(c) In the event that the Improvement Cost Budget exceeds the
Allowance, the amount by which the Improvement Cost Budget exceeds the
Allowance shall be referred to herein as the "Excess Cost". Tenant shall pay
fifty percent (50%) of such Excess Cost to Landlord within five (5) days of
Tenant's approval of the Improvement Cost Budget and the remaining fifty
percent (50%) of the Excess Cost within five (5) days of when Landlord
notifies Tenant that the Tenant Improvements are fifty percent (50%)
completed. Tenant's failure to make any payment of the Excess Cost when due,
or to make any payment with respect to change orders as set forth in
paragraph 6 of this Exhibit C, shall be deemed a default under the Lease and
the amount so delinquent shall be deemed additional rent and Landlord may
exercise all rights and remedies set forth in the Lease; and in addition,
Landlord may delay construction until such payment is made and such delay
shall be deemed a Tenant caused delay subject to the provisions of paragraph
8 of this Exhibit C.
(d) In the event Tenant causes delays, or requests changes which
cause delays in construction of more than ninety (90) calendar days, then
Landlord shall not be obligated to grant to Tenant the Allowance, or any
balance remaining unused therein. In such case, Landlord shall thereafter
have no obligation to construct any Tenant Improvements for Tenant.
Furthermore, the cessation of Landlord's obligation to construct the Tenant
Improvements as permitted herein shall not affect Tenant's obligation to
commence payments of basic rent and direct expenses or any other payments due
Landlord under the Lease. Tenant shall be entitled to no rent
<PAGE>
reduction or credit at any time in the event that the Allowance or any
portion thereof remains unused for any reason whatsoever.
(e) Upon completion of the Tenant Improvements, Landlord shall
reconcile the actual Total Cost of the Tenant Improvements to the Improvement
Cost Budget and Landlord shall refund to Tenant any Excess Cost paid by
Tenant to Landlord (as specified in paragraph 5(c) above) that was not
actually incurred.
6. CHANGES BY TENANT:
Tenant may request changes, deletions or additions to the Tenant
Improvements; provided, however, that the effectiveness of any such requested
change, deletion or addition shall be subject to written approval by an
authorized representative of Landlord and to obtaining any required
governmental permits or other approvals. If any such change, deletion or
addition increases the Improvement Cost Budget above the Allowance, Tenant
shall immediately pay to Landlord the full amount of such increase in excess
of the Allowance. In no event shall work on any change, deletion or addition
requested pursuant to this paragraph 6 commence prior to (i) Landlord and
Tenant approving, in writing, such change, deletion or addition, and (ii)
Landlord's receipt from Tenant of payment of the full amount of the increase
in the Improvement Cost Budget in excess of the Allowance.
7. CHANGES BY AUTHORITY:
Tenant agrees that if any change, deletion or addition to any of
the improvements proposed to be constructed or installed is required by any
governmental authority in connection with obtaining any governmental permit
or approval, or otherwise, then such change, deletion or addition shall
promptly be made and the Improvement Cost Budget shall be adjusted to reflect
any increase in cost resulting from such required change. To the extent any
change, deletion or addition required by any governmental authority in
connection with obtaining any governmental permit or approval increases the
Improvement Cost Budget above the Allowance, Tenant shall pay to Landlord
such increase above the Allowance in accordance with the provisions of
paragraph 5(c) of this Exhibit C. Failure to obtain any required governmental
approval or permit for the Tenant Improvements desired by Tenant shall in no
way be cause for Tenant to terminate the Lease or any amendment to the Lease.
8. TENANT CAUSED DELAYS:
If substantial completion of the Tenant Improvements is delayed
due in any respect to Tenant's acts or omissions, or the acts or omissions of
Tenant's employees, contractors or agents, including, without limitation,
Tenant's failure to meet the schedule set forth in paragraph 3 of this
Exhibit C, or due to construction delays related to any changes required by
Tenant, or due to any other failure by Tenant to perform its obligations
under this Exhibit C or otherwise under the Lease, then any such
<PAGE>
delays shall be deemed "Tenant caused delays" for all purposes, including,
without limitation, determining (i) the date of substantial completion of the
Tenant Improvements (as provided in paragraph 9 below) and (ii) the
commencement date of the Lease as specified in paragraph 2(b) of the Lease.
9. SUBSTANTIAL COMPLETION:
The term "substantial completion" with respect to the Tenant
Improvements shall mean the Tenant Improvements have been constructed in
substantial conformity with the Final Construction Documents (subject to
Punch List items as specified in Paragraph 10 below); provided, however, if
substantial completion of the Tenant Improvements is prevented or delayed by
Tenant in any way, including without limitation, the Tenant caused delays
described in Paragraph 8 above, then the Tenant Improvements shall be deemed
substantially complete as of the date that the Tenant Improvements would have
been substantially completed but for such Tenant caused delay.
10. PUNCH LIST:
Within ten (10) business days after commencement of the term,
Tenant shall deliver to Landlord a list of items ("Punch List") that Tenant
believes Landlord should complete or correct in order for the Premises to be
acceptable. Landlord shall commence to complete or correct the items as soon
as possible, except those items that Landlord contends are not justified. If
Tenant does not deliver the Punch List to Landlord within the ten (10) day
period, Tenant shall be deemed to have accepted the Premises and approved the
construction. Nothing in this paragraph 10 shall delay the commencement of
the term or Tenant's obligation to pay rent or to make other payments due
Landlord under the Lease.
11. TENANT'S DEFAULT:
Notwithstanding any provision to the contrary contained herein, if
an event of default as described in the Lease has occurred, including,
without limitation, Tenant's failure to perform its obligations under this
Exhibit C, then (i) in addition to all other rights and remedies granted to
Landlord pursuant to the Lease, Landlord shall have the right to withhold
payment of all or any portion of the Allowance and Landlord may cause
construction of the Tenant Improvements to cease (in which case, Tenant shall
be responsible for any delay in the substantial completion of the Premises
caused by such work stoppage and such delays shall be deemed Tenant caused
delays), and (ii) all other obligations of Landlord under the terms of this
Exhibit C shall be forgiven until such time as such default is cured pursuant
to the terms of the Lease. Nothing contained herein is intended, nor shall it
be construed, to abridge, waive or adversely affect any right or remedy of
Landlord under the Lease in the event of a default by Tenant, including,
without limitation, any defaults related to Tenant's failure to perform its
obligations under this Exhibit C.
<PAGE>
12. ATTACHMENTS:
All references in the Lease to Exhibit C shall be deemed to also
include Exhibit C-1 and C-_____.
<PAGE>
EXHIBIT 10.2
SUBLEASE
This Sublease ("Sublease") is made this 1st day of October, 1999 by and
between Audiohighway.com, a California corporation ("Sublandlord") and Be Here
Corporation, a California corporation ("Subtenant").
RECITALS
A. Sublandlord, as Tenant, is leasing from Symantec Corporation,
a Delaware corporation, ("Landlord") those certain premises located at 20300
Stevens Creek Blvd., Suite 100, Cupertino, California ("Premises") pursuant to
that certain lease dated June 14, 1999 ("Master Lease"). Subtenant acknowledges
having received and reviewed a copy of the Master Lease.
B. Sublandlord desires to lease to Subtenant and Subtenant
desires to lease from Sublandlord a portion of the Premises known as Suite 100B
(Refer to Exhibit B) consisting of approximately 4,968 rentable square feet (the
"Sublease Premises" as shown on Exhibit A attached hereto, on the terms and
conditions set forth in this Sublease.
NOW, THEREFORE, the parties hereto agree as follows:
1. PREMISES
Sublandlord leases to Subtenant and Subtenant hires from
Sublandlord the Premises, together with the appurtenances thereto.
2. INCORPORATION OF MASTER LEASE
This Sublease is subject to all of the terms and conditions of
the Master Lease and Subtenant hereby accepts, assumes and agrees to perform all
the obligations of Sublandlord as Tenant under the Master Lease and all of the
terms and conditions of this Sublease (with each reference therein to Landlord
and Tenant to be deemed to refer to Sublandlord and Subtenant, respectively),
excepting only paragraphs: 4. (applies except for total sums), 5. (applies
except for total sums), 15. (applies except Subtenant to be allocated 19 parking
spaces), and 51. Subtenant shall not commit or permit to be committed on the
Sublease Premises any act or omission which shall violate any term or condition
of the Master Lease. In the event of the termination for any reason of
Sublandlord's interest as Tenant under the Master Lease, then this Sublease
shall terminate therewith without any liability of Sublandlord to Subtenant;
except that if this Sublease terminates as a result of a default of one of the
parties hereto, whether under this Sublease, the Master Lease, or both, the
defaulting party shall be liable to the non-defaulting party for all damages
suffered by the non-defaulting party resulting from such termination.
<PAGE>
3. TERM
The term of this Sublease shall be for a period of two (2)
years commencing on November 1, 1999, and ending on October 31, 2001. In the
event Sublandlord is unable to deliver possession of the Sublease Premises at
the commencement of the term, Sublandlord shall not be liable for any damage
caused thereby, nor shall this Sublease be void or voidable nor shall the term
hereof be extended by such delay; provided, however, that Subtenant shall not be
liable for rent until such time as Sublandlord offers to deliver possession of
the Sublease Premises to Subtenant.
4. USE
Subtenant shall use the Sublease Premises for general office
and for no other purpose.
5. RENTAL
(a) Subtenant shall pay to Sublandlord as rent for the
Sublease Premises, in advance, on the first day of each calendar month of the
term of this Sublease, without deduction, offset, prior written notice or
demand; in lawful money of the United States, the sums defined below.
<TABLE>
<CAPTION>
Rental Schedule:
Months Monthly Rent Rate/RSF/Month
------ ------------ --------------
<S> <C> <C>
01 - 12 $14,655.60 NNN $2.95 NNN
13 - 24 $15,241.82 NNN $3.07 NNN
</TABLE>
If the commencement and/or termination date is not the first day of the month, a
prorated monthly installment shall be paid at the then current rate for the
fractional month during which the Sublease commences and/or terminates.
(b) Sublandlord acknowledges receipt from Subtenant, on
the execution hereof, of the sum of eighteen thousand two hundred thirty two and
56/100 dollars ($18,232.56) to be applied against rent and expenses (refer to
Paragraph 5 of the Master Lease) for the first full month of the term.
(c) Concurrently with Subtenant's execution of this
Sublease, Subtenant shall deposit with Sublandlord the sum of thirty seven
thousand fifty one and 34/100 dollars ($37,051.34) as a non-interest bearing
security deposit for Subtenant's performance under this Sublease. Delinquent
rent payments may be deducted from the Security Deposit. In the event Subtenant
has performed all of the terms and conditions of this Sublease throughout the
term, the amount paid as security deposit shall be returned to Subtenant upon
Subtenant vacating the Premises, after first deducting any sums owing to
Sublandlord.
6. SURRENDER AT END OF TERM
Subtenant agrees to surrender the Sublease Premises on
expiration or earlier termination of the term hereof, in good condition and
repair, reasonable wear and tear expected.
<PAGE>
7. LANDLORD'S WRITTEN CONSENT
This Sublease is conditioned upon and effective only upon
obtaining the written consent of Landlord.
8. NOTICES
All notices and demands of any kind required to be given by
Sublandlord or Subtenant hereunder shall be in writing and effective twenty-four
(24) hours after depositing same in the United States mail, postage prepaid, and
addressed to Sublandlord or Subtenant, as the case may be, at the address set
forth below their respective signature or at such other address as they may
designate from time to time.
9. INSURANCE
Insurance requirements pertaining to Sublandlord as Tenant
under paragraph 11 of the Master Lease shall also apply to Subtenant.
10. SIGNAGE
Subtenant will reasonably cooperate with Sublandlord in
obtaining signage rights from the Master Lessor. Subtenant will not be able to
utilize the monument sign for the Building.
SUBLANDLORD: SUBTENANT:
Audiohighway.com Be Here Corporation
a California corporation a California Corporation
By: /s/ Nathan Schulhot By: /s/ Edward C. Driscoll, Jr.
------------------------------- ---------------------------------
Name: Nathan Schulhot By: EDWARD C. DRISCOLL, JR.
----------------------------- ---------------------------------
Title: President By: President
---------------------------- ---------------------------------
Date: 10/20/99 Date: 10-6-99
----------------------------- -------------------------------
By: By:
------------------------------- ---------------------------------
Name: Name:
----------------------------- -------------------------------
Title: Secretary Title: Secretary
---------------------------- ------------------------------
Date: Date:
----------------------------- -------------------------------
<PAGE>
CONSENT OF MASTER LANDLORD:
Master Landlord hereby consents to all terms of this Sublease.
MASTER LANDLORD:
Symantec Corporation
a Delaware corporation
By: /s/ John B. Sorci, Jr.
-----------------------------------------------
Name: John B. Sorci, Jr.
---------------------------------------------
Title: V.P. Worldwide Logistics & Facilities
--------------------------------------------
Date: Oct 28, 1999
---------------------------------------------
<PAGE>
EXHIBIT 10.3
LANDLORD'S CONSENT TO SUBLEASE
THIS CONSENT ("Consent") is given by Symantec Corporation, ("Landlord")
to that certain Sublease dated October 1, 1999, (the "Sublease") by and between
AUDIOHIGHWAY.COM, a California corporation ("Sublandlord") and BE HERE
CORPORATION, a California corporation ("Subtenant"), subject to the following
terms and conditions:
1. All capitalized terms not otherwise defined herein shall have
the meaning ascribed to them in the Sublease.
2. Landlord is not a party to the Sublease and has no obligations
or duties to Subtenant or Sublandlord under the Sublease and any provisions
therein purporting to obligate and/or bind Landlord or limit Landlord's rights
under the Master Lease in any way are deemed null and void. Notwithstanding any
provision to the contrary in the Sublease, Subtenant shall have no greater
rights than Sublandlord has as Tenant under the Master Lease.
3. This Consent shall only apply to this Sublease and shall not
be deemed to be a consent to any other or further sublease or a waiver of any of
the provisions of the Master Lease.
4. By consenting to the Sublease, Landlord waives none of its
rights against the Sublandlord as Tenant under the Master Lease. The Sublease is
and shall remain at all times subject to and subordinate in all respects to the
Lease.
5. This Consent shall not modify or amend or be deemed to modify
or amend the Lease in any way, or to impose on Landlord any obligation to
provide notice to, or obtain consent from, Subtenant with respect to amendments,
defaults, waivers or any other matters pertaining to the Master Lease or to the
Premises covered by the Master Lease. Any waiver by Landlord of its rights shall
be made only in writing and signed by Landlord.
6. Upon the expiration or earlier termination of the Master
Lease, the Sublease shall automatically and without notice or demand, terminate
and Subtenant agrees promptly to surrender the Sublease Premises to Landlord
upon such termination without compensation from Landlord.
7. This Consent shall not be effective until receipt by Landlord
of a counterpart or counterparts of this Consent duly executed by Sublandlord
and Subtenant, each acknowledging its agreement to the terms and conditions
specified in this Consent.
<PAGE>
LANDLORD:
SYMANTEC CORPORATION
a Delaware corporation
By: /s/ John B. Sorci, Jr.
--------------------------------------
John B. Sorci, Jr.
Vice President, Worldwide
Logistics & Facilities
Date: Oct 28, 1999
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGE THAT IT HAS READ AND UNDERSTANDS THE
TERMS AND CONDITIONS SPECIFIED IN THE FOREGOING CONSENT AND AGREES TO ALL SUCH
TERMS AND CONDITIONS.
SUBLANDLORD: SUBTENANT:
AUDIOHIGHWAY.COM BE HERE CORPORATION
a California corporation a California corporation
By: /s/ [Illegible] By: /S/ John L.W. Furlan
---------------------------------- ------------------------------
Name: Name: John L.W. Furlan
-------------------------------- ----------------------------
Title: President Title: VP, Engineering
------------------------------- ---------------------------
Date: Date: October 21, 1999
-------------------------------- ----------------------------
<PAGE>
EXHIBIT 10.8
audiohighway.com
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
1. PURPOSE. This Plan is intended to attract and retain highly
qualified individuals for positions of substantial responsibility, provide
additional incentives to Employees and Consultants of the Company and its
Subsidiaries, and promote the success of the Company's business.
2. DEFINED TERMS. The meanings of defined terms (generally,
capitalized terms) in this Plan are provided in Section 22 ("Glossary").
3. STOCK SUBJECT TO PLAN. Subject to Section 14, a maximum aggregate
of 1,800,000 Shares may be issued under this Plan. The Shares may be
authorized, but unissued, or reacquired. If an Option expires or becomes
unexercisable for any reason, any unpurchased Optioned Shares shall be
available for future issuance under this Plan. Upon exercise of an Option,
Shares retained because other Shares are tendered in payment of the exercise
price or to satisfy any withholding tax obligations due to the exercise do
not reduce the number of Shares authorized for issuance.
4. ADMINISTRATION.
(a) IN GENERAL. This Plan shall be administered by the Board or a
committee appointed by the Board. Once appointed, a committee shall serve
until otherwise directed by the Board. From time to time, the Board may
increase the size of the committee and appoint additional members, remove
members (with or without cause) and appoint new members in their stead, fill
vacancies however caused, and terminate the committee and thereafter directly
administer this Plan.
(b) OFFICERS AND DIRECTORS. The Board may provide for administration
of this Plan with respect to Employees who are also officers or directors of
the Company by a Committee constituted so as to permit this Plan to comply as
a discretionary plan with Rule 16b-3 promulgated under the Exchange Act or
any successor thereto. A Committee appointed under this Section 4(b) may be
separate from any Committee appointed to administer this Plan with respect to
Employees who are neither officers nor directors.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of this
Plan and in the case of a Committee, the specific duties delegated by the
Board, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to grant Options to such Consultants and Employees as
it selects from time to time;
<PAGE>
(iii) to determine the terms and conditions of each Option
granted, including without limitation whether an Option is granted as
an ISO or a NSO;
(iv) to approve forms of agreement for use under this Plan;
(v) to determine whether and under what circumstances to
offer to buy out an Option for cash or Shares under Section 13;
(vi) to modify grants of Options to participants who are
foreign nationals or employed outside of the United States in order to
recognize differences in local law, tax policies, or customs.
(vii) to reduce the exercise price of any Option to the
then-current Fair Market Value if the Fair Market Value of the
Optioned Stock has declined since the date the Option was granted;
(viii) to construe and interpret the terms of this Plan and
Options granted pursuant to this Plan.
(d) ADMINISTRATOR'S DECISIONS BINDING. All decisions,
determinations, and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of Options.
5. ELIGIBILITY.
(a) NSOs/ISOs. Nonstatutory Stock Options may be granted to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option may, if
he or she is otherwise eligible, be granted additional Options.
(b) LIMIT ON NUMBER OF SHARES.
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 1,000,000 Shares, adjusted as
described in Section 14.
(ii) If an Option is canceled in the fiscal year of the
Company in which it was granted (other than in connection with a
transaction described in Section 14), the canceled Option will be
counted against the limit set forth in subsection (i). For this
purpose, if the exercise price of an Option is reduced, the
transaction will be treated as a cancellation of the Option and the
grant of a new Option.
6. TERM OF OPTION. The term of each Option shall be determined by the
Administrator at the time of grant but shall not exceed ten years. In the case
of an ISO granted to an Optionee who, at the time of grant, owns stock
representing more than ten percent of the voting power of
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all classes of stock of the Company or any Parent or Subsidiary, the Option
term shall not exceed five years.
7. DATE OF GRANT. Unless otherwise determined by the Administrator,
the date of grant of an Option shall be the date on which the Administrator
completes the actions necessary to grant the Option. Notice of the grant
shall be given to the Optionee within a reasonable time after the date of the
grant.
8. EXERCISE PRICE AND FORM OF CONSIDERATION.
(a) The per-Share exercise price of an Option shall be determined by
the Administrator at the time of grant, but:
(i) In the case of an ISO:
(A) granted to an Employee who, at the time of the grant,
owns stock representing more than ten percent of the
voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per-Share exercise price
shall be at least 110% of the Fair Market Value on the
date of grant; or
(B) granted to any other Employee, the per-Share exercise
price shall be at least the Fair Market Value on the
date of grant.
(ii) In the case of a NSO granted to any person, the
per-Share exercise price shall be no less than 85% of the Fair
Market Value on the date of grant.
(b) FORM OF PAYMENT. Payment for Shares upon exercise of an Option
shall be made in any lawful consideration approved by the Administrator and
may, without limitation, consist of (1) cash, (2) check, (3) promissory note,
(4) other Shares that have a total Fair Market Value on the date of payment
equal to the aggregate exercise price of the Shares as to which Option is
exercised, (5) delivery by a broker or brokerage firm approved by the
Administrator of a properly executed exercise notice together with payment of
the exercise price and such other documentation as the Administrator shall
require, or (6) any combination of the foregoing.
9. EXERCISE.
(a) VESTING. Each Option shall be exercisable at such times and
under such conditions as determined by the Administrator at the time of
grant, and as are otherwise permissible under the terms of this Plan,
including without limitation performance criteria with respect to the Company
and/or the Optionee.
(b) MANNER OF EXERCISE; RIGHTS AS A SHAREHOLDER. Unless otherwise
allowed by the Administrator, an Option shall be exercised by delivery of
written notice of exercise (in a form
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approved by the Administrator) to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option accompanied by (i)
full payment for the number of whole Shares with respect to which the Option
is exercised, and (ii) payment (or provision for payment) of withholding
taxes pursuant to Subsection (f), below ("Notice"). The Optionee shall be
treated as a shareholder of the Company with respect to the purchased Shares
upon receipt of the Notice . An Option may not be exercised for a fraction of
a Share.
(c) OPTIONEE REPRESENTATIONS. If Shares purchasable pursuant to the
exercise of an Option have not been registered under the Securities Act of
1933, as amended, at the time the Option is exercised, the Optionee shall, if
required by the Administrator, as a condition to exercise of all or any
portion of the Option, deliver to the Company an investment representation
statement in a form approved by the Administrator.
(d) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. If an
Optionee's Continuous Service terminates the Optionee (or the Optionee's
estate or heirs, if termination of Continuous Service is due to death or the
Optionee dies during the post-termination exercise period of the Option) may
exercise the Option, (i) only within such period of time as is determined by
the Administrator (but no later than the expiration date determined by the
Administrator at the time of grant) and the Option shall terminate at the end
of that period, and (ii) unless otherwise determined by the Administrator,
only to the extent that the Optionee was entitled to exercise it at the date
of termination. Unless otherwise determined by the Administrator, the limits
applicable under clause (i) shall be: (A) 12 months if termination is due to
total and permanent disability, (B) six months if termination is due to death
or disability that is not total and permanent, and (C) three months if
termination is for other reasons.
(e) TAX WITHHOLDING. The Company's obligation to deliver Shares upon
exercise of an Option is subject to payment (or provision for payment
satisfactory to the Administrator) by the Optionee of all federal, state, and
local income and employment taxes that the Administrator determines in its
discretion to be due as a result of the exercise of the Option or sale of the
Shares. The Administrator may allow the Optionee to elect at the time of
exercise of an Option to have withheld, from the Shares otherwise to be
delivered upon the exercise, Shares with an aggregate Fair Market Value equal
to a percentage (not more than 100%) designated by the Optionee of the
withholding taxes due upon exercise.
10. NON-EMPLOYEE DIRECTOR OPTION GRANTS.
(a) INITIAL GRANTS. On the date of his or her first attendance at a
duly called meeting of the Board, each non-Employee Director elected or
appointed to the Board for the first time after October 21, 1999 office
shall, automatically be granted a NSO to purchase 75,000 Shares. Each
non-Employee Director in office on October 21, 1999 is granted on that date a
NSO to purchase 75,000 Shares.
(b) ANNUAL GRANTS. On the date of his or her first attendance at a
duly called meeting of the Board during a calendar year, each non-Employee
Director shall automatically be granted a NSO to purchase 10,000 Shares;
PROVIDED, HOWEVER, a non-Employee Director shall not receive a
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grant under this Section 10(b) in the same calendar year in which he or she
receives a grant under Section 10(a).
(c) TERMS AND CONDITIONS. The terms and conditions of each Option
granted pursuant to this Section 10 shall be as follows:
(i) The term of the Option shall be ten years from the date of
grant;
(ii) The exercise price per Share shall be 100% of Fair Market
Value on the date of grant;
(iii) The Option shall be fully exercisable as of the date of
grant;
(iv) Except as provided below, the Option shall terminate on
the date on which the Optionee's service as a Director terminates,
PROVIDED, HOWEVER, that if such service terminates as a result of
disability or death, the Optionee (or his or her estate or
beneficiary) may exercise the NSO within 12 months following the
date of termination (but in no event after expiration of the option
term); and
(v) The other terms and conditions of the Option shall be
consistent with the provisions of this Plan.
11. RULE 16b-3. Except to the extent determined by the
Administrator, Options granted to persons subject to Section 16(b) of the
Exchange Act shall comply with Rule 16b-3 and shall contain such terms as may
be required or desirable to qualify Plan transactions for the maximum
exemption from Section 16 of the Exchange Act.
12. NON-TRANSFERABILITY OF OPTIONS. Options may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised or purchased during the lifetime of the Optionee, only by the
Optionee.
13. BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based
on terms and conditions that the Administrator establishes and communicates
to the Optionee at the time the offer is made.
14. CHANGES IN CAPITALIZATION OR CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Optioned Stock and the
number of Shares that have been authorized for issuance under this Plan but
as to which no Options have then been granted or that have been returned to
this Plan upon cancellation or expiration of an Option, as well as the price
per share of Optioned Stock, shall be proportionately adjusted for any change
in the number of issued Shares resulting from a stock split, reverse stock
split, stock dividend, combination or
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reclassification of the Common Stock, or any other change in the number of
issued Shares effected without receipt of consideration by the Company (not
counting Shares issued upon conversion of convertible securities of the
Company as "effected without receipt of consideration"). Such adjustment
shall be made by the Board and shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no consequent adjustment shall be made with respect
to, the number or price of Shares subject to this Plan.
(b) DISSOLUTION OR LIQUIDATION. If the Board approves a proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee at least 15 days before the proposed action. To the extent not
previously exercised, each Option shall then terminate immediately before
consummation of the proposed action.
(c) MERGER OR ASSET SALE. If the Company merges with or into another
corporation, or sells all or substantially all of its assets, and if the
successor corporation or its Parent has not, by the 15th day before the
effective time of the merger or sale (the Effective Time"), agreed to assume
each outstanding Option, or to substitute an equivalent option, at the
Effective Time, then: (i) each outstanding Option shall be fully exercisable
as to all of its Optioned Shares until the Effective Time, (ii) the
Administrator shall promptly so notify the Optionees, and (iii) each Option
shall terminate at the Effective Time.
(d) CHANGE IN CONTROL. Unless the Administrator, in its discretion,
determines otherwise no less than 14 days before a Change in Control occurs,
all Options shall become fully exercisable beginning ten days before the
Change in Control. Notwithstanding the previous sentence, the Administrator
may provide at the time of grant of an Option that the Option shall become
fully exercisable upon, or a stated period before, a Change in Control even
if the Administrator makes an inconsistent determination pursuant to this
Section 14(d).
(e) CERTAIN DISTRIBUTIONS. If the Company makes a distribution to
its shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration, the Administrator may, in its discretion, appropriately adjust
the exercise price of each outstanding Option to reflect the distribution.
15. AMENDMENTS. The Board may at any time amend, alter, suspend, or
discontinue this Plan, but no such action shall impair the rights of any
Optionee under any then-outstanding Option without his or her prior written
consent.
16. SECURITIES REGULATION REQUIREMENTS.
(a) COMPLIANCE WITH RULE; BUY-OUT OFFER. In general, Shares shall
not be issued pursuant to the exercise of an Option unless the exercise of
the Option and issuance of the Shares comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, the rules and regulations promulgated thereunder, the
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requirements of any stock exchange upon which the Shares may then be listed,
and the requirements of any regulatory body having jurisdiction. If when the
Company receives notice of exercise of an Option, the Administrator believes
in its discretion that the period before Shares may be issued will exceed 21
days, the Administrator shall (unless it determines that such an offer is
itself prevented by the rules described in the preceding sentence) make an
offer pursuant to Section 13 to buy out the portion of the Option
corresponding to the number of Shares whose issuance is thus prevented. The
buy-out offer shall be valid for no less than 21 days.
(b) OPTIONEE INVESTMENT REPRESENTATION. As a condition to the
exercise of an Option, the Company may require the person exercising the
Option to represent and warrant that the Shares are being purchased only for
investment and without any present intention to sell or distribute the Shares
if, in the opinion of counsel for the Company, such a representation is
required by law.
17. WRITTEN OPTION AGREEMENTS. Options shall be evidenced by written
agreements in a form the Administrator approves from time to time. The
written agreement shall designate the Option as either an Incentive Stock
Option or a Nonstatutory Stock Option. Delay in executing a written agreement
shall not affect the date of grant of an Option; however, an Option may not
be exercised until a written agreement has been executed by the Company and
the Optionee.
18. SHAREHOLDER APPROVAL. This Plan is subject to approval by the
shareholders of the Company within 12 months after the Board adopts this
Plan. Shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and the rules of any stock
exchange upon which the Common Stock is listed.
19. INFORMATION TO OPTIONEES. The Company shall provide to each
Optionee copies of financial statements at least annually, at the same time
and in the same form as it furnishes such information to its shareholders.
The Company shall not be required to provide such statements to key employees
whose duties assure their access to equivalent information.
20. TERM OF PLAN. This Plan shall become effective upon the earlier
to occur of adoption by the Board of Directors or approval by the
shareholders of the Company as described in Section 18. It shall continue in
effect for a term of ten years unless sooner terminated under Section 15.
21. NO RIGHT TO EMPLOYMENT. This Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with such
Optionee's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
22. DEFINITIONS., The following definitions apply for purposes of
this Plan:
(a) "ADMINISTRATOR" means the Board or a Committee appointed under
Section 4.
(b) "BOARD" means the Board of Directors of the Company.
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(c) "CHANGE IN CONTROL" means a change in ownership or control of
the Company by either:
(i) the direct or indirect acquisition by any person or related
group of persons of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than 50% of the
total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the
Company's shareholders that the Board does not recommend that the
shareholders accept, or
(ii) a change in composition of the Board over a period of 36
consecutive months such that a majority of the Board ceases, by
reason of one or more contested elections for Board membership, to
be composed of individuals who either (A) have been Board members
continuously since the beginning of that period or (B) have been
elected or nominated for election as Board members during that
period by at least a majority of the Board members described in
clause (A) who were in office when the Board approved the election
or nomination.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means audiohighway.com, a California corporation.
(g) "CONSULTANT" means any person, other than an Employee, who is
engaged by the Company or any Parent or Subsidiary to perform consulting or
advisory services.
(h) "CONTINUOUS SERVICE" means that an Optionee's employment or
consulting relationship with the Company or a Parent or Subsidiary has not
been interrupted or terminated. Continuous Service is not interrupted by any
(i) leave of absence approved by the Company, (ii) transfer between locations
of the Company or between the Company, a Parent, a Subsidiary, or any
successor, or (iii) change in status from Employee to Consultant or
Consultant to Employee.
(i) "DIRECTOR" means any member of the Board in his or her capacity
as such.
(j) "EMPLOYEE" means any person employed by the Company or any
Parent or Subsidiary of the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is quoted on an established stock
exchange or national market system, including without limitation the
National Association of
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Securities Dealers, Inc. Automated Quotation ("NASDAQ") National
Market System, Fair Market Value shall be the closing sales price
(or the closing bid, if no sales are reported) as quoted on that
exchange or system for the day of the determination, as reported in
THE WALL STREET JOURNAL or an equivalent source, or if the
determination date is not a trading day, then on the most recent
preceding trading day;
(ii) If the Common Stock is quoted on NASDAQ (but not on
the National Market System) or regularly quoted by a recognized
securities dealer but selling prices are not reported, Fair Market
Value shall be the mean between the high bid and low asked prices
for the Common Stock on the day of the determination, or on the most
recent preceding trading day if the determination date is not a
trading day; or
(iii) In the absence of an established market for the
Common Stock, Fair Market Value shall be determined by the
Administrator.
(m) "INCENTIVE STOCK OPTION" or "ISO" means an Option intended to
qualify as an "incentive stock option" within the meaning of Section 422 of
the Code.
(n) "NONSTATUTORY STOCK OPTION" or "NSO" means an Option not
intended to qualify as an ISO.
(o) "OPTION" means a stock option granted pursuant to this Plan.
(p) "OPTIONED SHARES" means the Shares subject to an Option.
(q) "OPTIONEE" means an Employee, Consultant, or Director who
receives an Option.
(r) "PARENT" means a "parent corporation," present or future, as
defined in Section 424(e) of the Code, or any successor provision.
(s) "PLAN" means this audiohighway.com 1996 Stock Option Plan.
(t) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(u) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 14.
(v) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
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EXHIBIT 10.9
CONTENT DISTRIBUTION AGREEMENT
THIS CONTENT DISTRIBUTION AGREEMENT is between DOW JONES & COMPANY, INC., a
Delaware corporation ("Dow Jones") and the undersigned corporation, partnership
or other legal entity ("Distributor").
Distributor owns and operates the electronic service defined in Exhibit A (the
"Distributor Service"). Distributor wants to obtain from Dow Jones the right to
receive the content defined in Exhibit B (the "Dow Jones Information") via the
delivery methods defined in Exhibit C (the "Delivery Methods") and provide
subscribers to the Distributor Service access to the Dow Jones Information, all
on the terms and conditions set forth below.
1. GRANT OF RIGHTS; RESTRICTIONS.
(a) ACCESS TO DOW JONES INFORMATION. Dow Jones hereby grants to
Distributor, subject to the terms and conditions contained in this Agreement, a
limited, non-exclusive, nontransferable right to: (i) receive via the Delivery
Methods the Dow Jones Information; (ii) store the Dow Jones Information only for
the calendar week in which it is published in accordance with Exhibit A on one
host computer owned and operated by Distributor located within the United States
(the "Distributor Host Computer"); and (iii) distribute the Dow Jones
Information solely to "Distributor Subscribers" (as defined in Section 1(b)(i)),
solely by means of the Distributor Service and solely by means of the
distribution methods defined in Exhibit A (the "Authorized Distribution
Methods"). No provision of this Agreement shall be deemed to restrict or limit
Dow Jones' right to market, sell, distribute, display or otherwise provide
access to the Dow Jones Information directly or indirectly anywhere in the
world, or enter into contracts, grant licenses or make arrangements with any
other party to market, sell, distribute, display or otherwise provide access to
the Dow Jones Information anywhere in the world. Distributor shall not
sublicense or otherwise transfer or assign any right granted in Section 1(a) to
any other person or entity.
(b) DISTRIBUTOR SUBSCRIBERS.
(i) A "Distributor Subscriber" shall mean an individual:
(A) whose principal residence is in the territory defined in Exhibit A
("Territory"); and (B) who has become legally bound by a contract with
Distributor which contains at a minimum the terms and conditions set forth in
Exhibit D regarding access to the Dow Jones Information (the "Distributor
Subscriber Agreement"); and (C) who has access via the Distributor Service to
any portion of the Dow Jones Information. Distributor shall not permit any
corporation, partnership or other type of legal entity, other than an
individual, to become a Distributor Subscriber and receive access to any Dow
Jones Information, without Dow Jones' prior written consent. Distributor shall
not amend any term in the Distributor Subscriber Agreement that relates to the
Dow Jones Information without Dow Jones' prior consent. In the event of any
conflict between the Distributor Subscriber Agreement and this Agreement, the
term in this Agreement shall control.
(ii) Distributor shall distribute Dow Jones Information
only to Distributor Subscribers who pay a fee for access to the Dow Jones
Information through the Distributor Service. Distributor shall not post the Dow
Jones Information in any "public" or "free" area, or area accessible without a
password, on the World Wide Web or through any other distribution method, except
as expressly set forth otherwise on Exhibit A.
<PAGE>
(c) ADDITIONAL LICENSE RESTRICTIONS.
(i) Distributor shall not distribute the Dow Jones
Information to any third party other than a Distributor Subscriber or distribute
the Dow Jones Information through any means other than through the Distributor
Service and the Authorized Distribution Methods. Distributor shall not make the
Dow Jones Information available through third parties by incorporating or
"bundling" the Distributor Service as one information source or service of many
available through third-party front-end software or a third-party electronic
information service or Internet site. Distributor shall not permit Distributor
Subscribers to access the Dow Jones Information via any interactive online or
electronic information service other than the Distributor Service. Distributor
shall not actively engage in or authorize making any of the Dow Jones
Information available: (a) as part of a "co-branded" or "private label" web
site, web service, or Internet access service, or as part of a "channel" through
a software or Internet service, or similar arrangements or relationships that
offer or provide access to Dow Jones Information from or through other web
sites, web services, or Internet access services; or (b) as part of the
Distributor Service when "framed" and displayed as part of another web site or
web service.
(ii) Distributor shall not allow the Dow Jones Information
to be indexed by a web search engine that is not operated as part of the
Distributor Service.
(iii) Distributor shall not grant any site or enterprise
licenses to receive access to Dow Jones Information, without Dow Jones' prior
written consent.
(iv) All rights not expressly granted to Distributor
herein shall be retained by Dow Jones.
2. DELIVERY OF DOW JONES INFORMATION.
(a) DELIVERY AND INSTALLATION. Distributor shall acquire, install,
operate and maintain at its expense all communications lines, equipment,
software, services and related technology necessary to receive the Dow Jones
Information via the Delivery Methods. Distributor also shall be responsible for,
and shall pay for, any development work, software or hardware relating to the
setup and integration of the Dow Jones Information as part of the Distributor
Service.
(b) LIMITATIONS ON USE. Except as specifically provided herein,
Distributor shall not use, store, manipulate, distribute or otherwise make
available, and shall use reasonable commercial efforts to cause each third party
who obtains access to Dow Jones Information (including, without limitation, any
Distributor Subscriber) not to use, store, manipulate, distribute or otherwise
make available, any Dow Jones Information without the prior written consent of
Dow Jones. Except for the process of converting the Text Information (defined in
Exhibit B) into audio format as described in the exhibits attached to this
Agreement, Distributor shall not, and shall use reasonable commercial efforts
not to permit any other party to, edit, alter or otherwise change in any manner
the content, format or presentation of the Dow Jones Information, including,
without limitation, all copyright and proprietary rights notices.
(c) SERVICE PRESENTATION. Distributor shall insure that all Dow
Jones Information available through the Distributor Service is identified as
content from Dow Jones, including, without limitation, prominently displaying on
the Distributor Service the Dow Jones-branded logos provided to Distributor by
Dow Jones. Dow Jones shall have the right to approve the final presentation of
the Dow Jones Information in the Distributor Service prior to the date the Dow
Jones Information is first made commercially available in the Distributor
Service (the "Commercial Availability Date"), and shall have
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the right to require reasonable changes in the presentation of the Dow Jones
Information from time to time during the term of this Agreement.
(d) QUALITY OF TRANSMISSIONS. Distributor shall use its best
efforts to ensure that conversion of Text Information into audio format and each
transmission of Dow Jones Information (i) is of high quality, (ii) contains an
accurate and complete copy of the Dow Jones Information, and (iii) is free from
errors or defects.
3. PROPRIETARY RIGHTS.
(a) OWNERSHIP; COPYRIGHT. Distributor acknowledges and agrees that
all ownership and proprietary rights (including, without limitation, the
copyrights) to the Dow Jones Information are and shall remain the sole and
exclusive property of Dow Jones or its licensors.
(b) TRADEMARKS. Distributor acknowledges and agrees that Dow Jones
or its licensors are the sole owners of the trademarks and service marks
("Marks") used in connection with the Dow Jones Information and that nothing
contained in this Agreement grants Distributor any right to use any Dow Jones
Mark, logo or trade name, except as expressly provided in this Agreement.
(c) INFRINGEMENT. Distributor shall promptly advise Dow Jones of
any possible infringement of which Distributor becomes aware of any of Dow
Jones' Marks, copyrights, trade secrets or other proprietary rights, or any use
of the Dow Jones Information in violation of this Agreement.
4. ADVERTISING AND PROMOTION.
(a) ADVERTISING. Distributor shall not include (whether in visual,
audio or other format) or display third party advertising or promotional
materials with the Dow Jones Information or any Dow Jones Mark, logo or trade
name. This shall mean, among other things, that no audio advertisements will be
heard before, during or after the Dow Jones Information is played and that no
banners or video advertisements will be played by the video portion of any
player while the Dow Jones Information is being played.
(b) PROMOTIONAL MATERIALS. Distributor shall not make, publish or
distribute or cooperate with any third party in making, publishing or
distributing any public announcements, press releases, advertising, marketing,
promotional or other materials (whether in print, electronically or otherwise)
("Materials") that use Dow Jones' name, logos, or Marks with regard to the
execution or performance of this Agreement, without the prior written approval
of Dow Jones. If Dow Jones has not notified Distributor of its disapproval
within 10 days after Distributor delivers samples of a particular item of
Material, such Material shall be deemed approved. Any breach by Distributor of
this Section shall be deemed an incurable default under this Agreement and in
the event of such breach, Dow Jones may immediately terminate this Agreement
upon notice to Distributor.
5. PAYMENTS.
(a) CALCULATION OF PAYMENTS. Beginning on the earlier of (i) the
Commercial Availability Date or (ii) 30 days after the Effective Date,
Distributor shall pay to Dow Jones the payments ("Payments") defined in Exhibit
E at the times set forth in Exhibit E.
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<PAGE>
(b) PAYMENT. Within thirty (30) days after the end of each
calendar month during the term of this Agreement, Distributor shall deliver to
Dow Jones a check in an amount equal to the Payment for such period, and a
report setting forth sufficient information for Dow Jones to determine how the
Payment was calculated, a breakdown of the number of Distributor Subscribers
whose principal residence is outside the U.S. and Canada, and any other
information agreed upon by both parties.
(c) TAXES. Distributor shall pay any taxes, fees and similar
governmental charges related to the execution or performance of this Agreement,
other than applicable income taxes imposed on Dow Jones related to its receipt
of Payments.
(d) MAINTENANCE AND INSPECTION OF RECORDS. Distributor shall
maintain complete and accurate books and records, in accordance with generally
accepted accounting practices, of all matters related to its compliance with its
obligations hereunder ("Records"). Dow Jones shall have the right itself, or
through its authorized representatives, upon at least 30 days' prior written
notice to inspect the Records of Distributor during normal business hours no
more than twice per year; PROVIDED, HOWEVER, if such inspection reveals an
underpayment to Dow Jones of more than 4%, the cost of such inspection shall be
paid by Distributor. Dow Jones will keep confidential all information gained
from such inspection, and use it solely for the purpose of verifying compliance
with the terms hereof.
(e) CURRENCY. All amounts are stated in U.S. Dollars and shall be
paid in U.S. currency.
6. INDEMNIFICATION.
(a) BY DOW JONES. Dow Jones shall indemnify and hold harmless
Distributor against all liabilities, costs and expenses (including reasonable
attorneys' fees) incurred by Distributor that arise out of any claim asserted by
a third party that involves, relates to or concerns Dow Jones Information
(except for claims for which Dow Jones is entitled to indemnification under
Section 6(b), in which case Dow Jones shall have no indemnification obligations
with respect to such claim); provided that Distributor, upon receipt of notice
of a claim that could result in Dow Jones indemnifying Distributor pursuant to
this subsection, gives prompt written notice to Dow Jones of the existence of
such claim and permits Dow Jones, if it so requests, either to conduct the
defense of such claim or to participate with Distributor in the defense thereof
and in any settlement negotiations relating thereto; PROVIDED, HOWEVER, that Dow
Jones shall not be required to pay any settlement amount that it has not
approved in advance.
(b) BY DISTRIBUTOR. Distributor shall indemnify and hold harmless
Dow Jones against all liabilities, costs and expenses (including reasonable
attorneys' fees) incurred by Dow Jones that arise out of any claim asserted by a
third party that involves, relates to or concerns (i) the marketing, sale, or
promotion by Distributor of the Distributor Service, (ii) any use by Distributor
of any Dow Jones Information in violation of this Agreement; or (iii) any claim
alleging that the Distributor Service infringes any patent, trade secret,
copyright or other intellectual property rights of any third party; provided
that Dow Jones, upon receipt of notice of a claim that could result in
Distributor indemnifying Dow Jones pursuant to this subsection, gives prompt
written notice to Distributor of the existence of such claim and permits
Distributor, if it so requests, either to conduct the defense of such claim or
to participate with Dow Jones in the defense thereof and in any settlement
negotiations relating thereto; PROVIDED, HOWEVER, that Distributor shall not be
required to pay any settlement amount that it has not approved in advance.
(c) DISCLAIMER. DOW JONES PROVIDES THE DOW JONES INFORMATION "AS
IS", WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES. DOW JONES DOES NOT WARRANT
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THE ACCURACY, TIMELINESS, COMPLETENESS, ADEQUACY, MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OF THE DOW JONES INFORMATION, AND DOW JONES SHALL NOT BE
LIABLE TO DISTRIBUTOR OR TO ANY THIRD PARTY WITH RESPECT TO ANY ACTUAL OR
ALLEGED INACCURACY, UNTIMELINESS, INCOMPLETENESS, INADEQUACY, UNMERCHANTABILITY
OR UNFITNESS. DISTRIBUTOR SHALL NOT MAKE ANY STATEMENT RESPECTING THE DOW JONES
INFORMATION THAT IS CONTRADICTORY TO OR INCONSISTENT WITH THE FOREGOING
STATEMENTS.
7. TERM AND TERMINATION.
(a) TERM. The term of this Agreement shall commence on the
Effective Date (defined on last page of this Agreement) and shall terminate on
the first anniversary of the Effective Date. Unless either party delivers to the
other written notice of nonrenewal at least 60 days prior to the end of the
then-current term or renewal term, this Agreement shall automatically be
extended for additional one year terms.
(b) TERMINATION FOR CONVENIENCE. Either party may terminate this
Agreement for any or no reason by delivering 90 days notice to the other party.
(c) UNCURED BREACH. If either party shall breach any provision
contained in this Agreement (other than a breach of Sections 4(b) or 8), and
such breach is not cured within 30 days after receiving written notice of such
breach from the other party, the party giving such notice may then deliver a
second written notice to the breaching party, terminating this Agreement, in
which event this Agreement, and the licenses granted hereunder, shall terminate
on the date specified in such second notice.
(d) CESSATION OF SERVICE. If Dow Jones discontinues publishing or
commercial distribution of the Dow Jones Information, then either party may
cancel this Agreement upon thirty (30) days' prior written notice to the other
party.
(e) INSOLVENCY. In the event that either party shall be adjudged
insolvent or bankrupt, or upon the institution of any proceedings by it seeking
relief, reorganization or arrangement under any laws relating to insolvency, or
if an involuntary petition in bankruptcy is filed against such party and said
petition is not discharged within 60 days after such filing, or upon any
assignment for the benefit of its creditors, or upon the appointment of a
receiver, liquidator or trustee of any of its assets, or upon the liquidation,
dissolution or winding up of its business (an "Event of Bankruptcy"), then the
party affected by any such Event of Bankruptcy shall immediately give notice
thereof to the other party, and the other party at its option may terminate this
Agreement, and the licenses granted hereunder, upon written notice.
(f) CHANGE IN CONTROL. If there is a direct or indirect change in
the effective voting control of Distributor, or if Distributor merges into or is
acquired by a third party, or if Distributor sells or transfers the Distributor
Service or all or substantially all of the assets of the business unit
containing the Distributor Service to a third party (a "Change in Control"),
then Distributor shall give prompt written notice thereof to Dow Jones, and Dow
Jones at its option may, within 30 days after receipt of such notice, terminate
this Agreement immediately by delivering written notice. Distributor may notify
Dow Jones in writing of any proposed Change in Control prior to its proposed
effectiveness, and Dow Jones shall, within 30 days after receipt of such notice
(or if no timely notice is given, at any time after Dow Jones learns of such
Change in Control), notify Distributor whether Dow Jones would exercise its
right to terminate this Agreement if such proposed Change in Control were
consummated.
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(g) EFFECT OF TERMINATION. Upon the expiration or termination of
this Agreement for any reason, Distributor shall (i) immediately inhibit all
access to the Dow Jones Information through the Distributor Service, (ii) delete
any Dow Jones Information then stored on the Distributor Host Computer, (iii)
cease advertising and promoting the availability of the Dow Jones Information
via the Distributor Service and (iv) discontinue all uses of Dow Jones' trade
names or Marks. In addition, upon expiration or termination of this Agreement,
each party, at its expense, shall promptly return to the other all copies of the
other party's Confidential Information.
8. CONFIDENTIAL INFORMATION. Distributor and Dow Jones understand and
agree that in the performance of this Agreement each party may have access to
private or confidential information of the other party, including, but not
limited to, trade secrets, marketing and business plans and technical
information, which is designated as confidential by the disclosing party in
writing, whether by letter or by the use of a proprietary stamp or legend, prior
to or at the time it is disclosed to the other party ("Confidential
Information"). Both parties agree that the terms of this Agreement, including
without limitation its financial terms such as the Payments and the information
contained in reports, shall be deemed Confidential Information owned by the
other party. Distributor acknowledges and agrees that the technical and
functional specifications and the code and design of the Composite Feed and all
tools and utilities supplied by Dow Jones to Distributor are Confidential
Information of Dow Jones. In addition, information that is orally disclosed to
the other party shall constitute Confidential Information if within 10 days
after such disclosure the disclosing party delivers to the receiving party a
written document describing such Confidential Information and referencing the
place and date of such oral disclosure and the names of the employees of the
party to whom such disclosure was made. Each party agrees that: (i) all
Confidential Information shall remain the exclusive property of the owner; (ii)
it shall maintain, and shall use prudent methods to cause its employees and
agents to maintain, the confidentiality and secrecy of the Confidential
Information; (iii) it shall not, and shall use prudent methods to ensure that
its employees and agents do not, copy, publish, disclose to others or use (other
than pursuant to the terms hereof) the Confidential Information; and (iv) it
shall return or destroy all copies of Confidential Information upon request of
the other party. Notwithstanding the foregoing, Confidential Information shall
not include any information to the extent it (i) is or becomes a part of the
public domain through no act or omission on the part of the receiving party,
(ii) is disclosed to third parties by the disclosing party without restriction
on such third parties, (iii) is in the receiving party's possession, without
actual or constructive knowledge of an obligation of confidentiality with
respect thereto, at or prior to the time of disclosure under this Agreement,
(iv) is disclosed to the receiving party by a third party having no obligation
of confidentiality with respect thereto, (v) is independently developed by the
receiving party without reference to the disclosing party's Confidential
Information or (vi) is released from confidential treatment by written consent
of the disclosing party.
9. MISCELLANEOUS.
(a) NOTICES. All notices shall be in writing, and delivered by
certified mail, return receipt requested, overnight courier service, or by
facsimile with confirmation to the address set forth on the signature page, or
other address stipulated in writing by a party. Notice shall be deemed delivered
and received on the date it is actually received.
(b) AMENDMENT, ASSIGNMENT. This Agreement may not be amended
except in a writing executed by authorized representatives of Distributor and
Dow Jones. Any such purported assignment without such prior written consent
shall be void. Distributor shall not assign this Agreement, or sublicense,
assign or delegate any right or duty hereunder, without the prior written
consent of Dow
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Jones. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns.
(c) SURVIVAL OF CERTAIN PROVISIONS. The rights and obligations in
Sections 3(a), 3(b), 3(c), 4(b), 5(b), 5(c), 5(d), 5(e), 6, 7(g), 8 and 9 shall
survive termination or expiration of this Agreement for any reason.
(d) CONSEQUENTIAL DAMAGES. Except for amounts payable pursuant to
Section 6 or resulting from a breach of Section 8, neither party shall be liable
to the other for any damages other than direct damages, including but not
limited to consequential, indirect, special, exemplary, or punitive damages, or
any lost revenues or lost profits, even if advised of the possibility of such
damages.
(e) ENTIRE AGREEMENT. This Agreement contains the final and entire
agreement of the parties on the subject matter herein and supersedes all
previous and contemporaneous verbal or written negotiations or agreements on the
subject matter herein.
(f) WAIVER. The failure of either party at any time to require
performance by the other party of any provision hereof shall not affect the full
right to require such performance at any time thereafter, nor shall the waiver
by either party of a breach of any provision hereof be taken or held to be a
waiver of any succeeding breach of such provision or as a waiver of the
provision itself.
(g) SEPARABILITY. If any provision of this Agreement or its
application in a particular circumstance is held to be invalid or unenforceable
to any extent, the remainder of the Agreement, or the application of such
provision in other circumstances, shall not be affected thereby, and each
provision shall be valid and enforced to the fullest extent permitted by law.
(h) GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, United States,
applicable to contracts wholly made and wholly performed in the State of New
York, United States. This Agreement will not be governed by the United Nations
Convention on Contracts for the International Sale of Goods.
7
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IN WITNESS WHEREOF, duly authorized representatives of both parties
hereto have executed this Agreement as of May 14, 1999 ("Effective Date"):
AUDIOHIGHWAY.COM DOW JONES & COMPANY, INC.
By: /s/ Grant Jasmin By: /s/ Jessica Perry
--------------------------------- -------------------------------
Name: Grant Jasmin Name: Jessica Perry
Title: Chief Operating Officer Title: Director, Distribution
Date: May 14, 1999 Date: May 14, 1999
Address for Notices:
20600 Mariani Ave. U.S. Highway 1 at Ridge Road
Cupertino, CA 95014 South Brunswick, NJ 08852
Fax: 408.255.5591 Attn.: Director,
Internet Distribution,
Dow Jones Interactive Publishing
Fax: 609.520.4072
With a copy to the same street with a copy to the same street
address, but address, but
Attn.: Legal Department Attn.: Legal Department
Fax: 408.255.5301 Fax: 609.520.4021
8
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EXHIBIT A
DESCRIPTION OF THE DISTRIBUTOR SERVICE;
AUTHORIZED DISTRIBUTION METHODS; TERRITORY
DESCRIPTION OF SERVICE:
The Distributor Service, which is owned and operated by Distributor, provides
users ("Users") who access Distributor's public web site at
(www.audiohighway.com) with the ability to download various audio programs,
including books in audio format, radio shows, music, and other text information
that has been recorded in an audio format. Downloading is done via the
Distributor's web site. The audio files are managed by the Audio Wiz software or
by other client applications such as Media Player, which are free to Users
("Download Software"). Users can then listen to the programming when and where
they like, via either a portable listening device, or directly from their
computers with a compatible sound card and speakers attached to their computer.
Content available through the Distributor Service will be distributed in either
.wav, Microsoft Media Player, MP3, Real Audio or ADPCM format. The devices that
Users can use to access such content include the Distributor's proprietary
mobile device, the Diamond Multimedia Rio player, Creative Lab's Nomad Products
and certain audio-enabled Windows CE devices.
Distributor Subscriber will only make the Dow Jones Information available to a
subset of such Users who are Distributor Subscribers and who have paid a fee to
access the Dow Jones Information.
AUTHORIZED DISTRIBUTION METHODS:
Distributor shall distribute the Dow Jones Information only to Distributor
Subscribers who have the Download Software, and who have paid a subscription fee
to access the Dow Jones Information. Distributor may make the Dow Jones
Information available in either daily or monthly packages and not in any other
packages (e.g., weekly or yearly). Distributor may make the Text Information and
Audio Information available either as a package or as separate levels of
service, so long as Distributor Subscribers are always charged a fee for the Dow
Jones Information.
TERRITORY:
Distributor will only market the availability of the Dow Jones Information to
Users residing in North America.
ARCHIVING: During each calendar week during the term of this Agreement,
Distributor shall be permitted to make available to Distributor Subscriber an
archive of the Dow Jones Information published during the immediately preceding
seven days. Distributor shall owe monthly licensing fees on use of archived Dow
Jones Information to the same extent that it owes licensing fees on current Dow
Jones Information.
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EXHIBIT B
DESCRIPTION OF THE DOW JONES INFORMATION
The Dow Jones Information is comprised of the Audio Information and the Text
Information.
AUDIO INFORMATION
THE WALL STREET JOURNAL TODAY REPORT ("WSJ Today"): Dow Jones' radio group,
using its editorial discretion, will produce an audio summary that is
approximately 15-20 minutes in length covering the major stories and columns
from The Wall Street Journal. The program will be available via ISDN line, or
other format mutually acceptable to both parties, approximately 12:00 p.m.
eastern time each day The Wall Street Journal is published.
TEXT INFORMATION
The Distributor shall be permitted to record in an audio format the "What's News
- - Business and Finance and World View" column, as it appears in the print
edition of The Wall Street Journal on page A1 each day The Wall Street Journal
is published. Text Information shall include only the information found on page
A1, and shall not include the full stories related to each item in the What's
News column. A sample of the Text Information is attached in Exhibit B-1.
The Text Information shall be available to Distributor upon publication in The
Wall Street Journal, which is typically around 2:00 a.m. eastern time, each day
The Wall Street Journal is published.
The Text Information shall be deemed Confidential Information of Dow Jones until
6 a.m. Eastern time of the day it is published at which point it may be
distributed in accordance with this Agreement.
The Text Information shall be delivered to Distributor via e-mail in a text
file, in a format acceptable to both parties. The Text Information shall be sent
in two deliveries each day, one for "Business and Finance", using The Wall
Street Journal publishing code J/BZF as the identifier, and one for "World
Wide", using The Wall Street Journal publishing code J/WLD as the identifier.
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EXHIBIT B-1
What's News--
* * *
BUSINESS AND FINANCE
BOND PRICES FELL to their lowest level since August amid fears of higher
interest rates and worries that Japanese investors are preparing to pull some
money back home. A weak auction of two year Treasury notes was a catalyst. The
30-year bond declined 1 3/32, while its yield rose to 5.505%. The Dow Jones
industrials fell 144.75 points, or 1.52%, to 9399.67, and the Nasdaq composite
declined 1.56%.
GREENSPAN TOOK a swipe at overpaid corporate executives and warned
against raising the minimum wage.
(Articles on Pages C1 and A2)
* * *
GUN-INDUSTRY REPRESENTATIVES and a leading lawyer representing New
Orleans in its suit against the industry have held at least one preliminary
discussion aimed at arranging a possible settlement of handgun litigation.
(Article on Page A3)
* * *
THREE SPORT-UTILITY VEHICLES flipped in crash tests by traffic-safety
regulators, the first time the government reported such results. The findings
raise the chances of tougher rules.
(Article on Page A3)
* * *
AT&T'S ROBERT ANNUNZIATA, president of the business-services group, is
quitting to be CEO of Global Crossing, a two-year-old firm, in a rare defection
from the chairman's executive team.
(Article on Page A3)
* * *
GLAXO'S RELENZA, a much-anticipated drug to fight the flu, failed to
clear an FDA advisory panel, and its American depositary receipts fell.
(Article on Page A4)
* * *
AMAZON.COM HAS BOUGHT 40% of Drugstore.com, in an aggressive expansion
of its Internet shopping lineup, and may make more such investments in other
online merchants.
(Article on Page B1)
* * *
WORLD-WIDE
THE SENATE BACKED A MILITARY RAISE; THE HOUSE SPEAKER SEEKS BUDGET
FLEXIBILITY.
The Senate voted 91-8 to boost pay 4.8% for active-duty
personnel Jan. 1, with further raises later. That's more than Clinton
sought. Hastert signaled he may want to exceed spending caps at the core of
the 1997 balanced-budget deal. That would be controversial, but may help
the GOP spend more on defense and education and define itself as something
other than the impeachment party. (Articles on Pages A2 and A20)
AN AID PACKAGE OF MORE THAN $1 BILLION FOR CENTRAL AMERICA AND
JORDAN POSES A TEST FOR CLINTON AND CONGRESS AS THEY TRY TO MOVE BEYOND THE
IMPEACHMENT BATTLE.
* * *
SERB MEDIA EXULTED over what Belgrade clearly feels is a victory over
Western pressure for international peacekeepers to enforce a Kosovo deal. NATO
worries Serbia plans a big offensive against ethnic Albanians after Tuesday's
suspension of peace talks, which eased a threat of airstrikes.
* * *
THE INDEPENDENT COUNSEL LAW IS FLAWED and should be allowed to expire
in June, former Attorney General Griffin Bell and former GOP Senate leader
Howard Baker told a Senate panel. Baker favors letting the law expire, then
revising it after passions inflamed by the Starr inquiry have cooled.
* * *
WASHINGTON'S NORTH KOREA POLICY is under review. Former Defense
Secretary Perry is expected to tell Clinton tomorrow that the current cautious
engagement is a failure, and that Pyongyang should be offered a choice between
incentives to improve ties or isolation by the U.S. (Article on Page A12)
* * *
THE SUPREME COURT CLEARED the way for deportation of Palestinians
accused of backing terrorism. Justices, 5-4, barred foreigners unlawfully in the
U.S. from court reviews of claims of selective law enforcement. The ruling hurts
aliens' free-speech rights, the Palestinians' attorney said.
* * *
A CENSUS PLAN FOR 2000 WAS ATTACKED by congressional Republicans, who
warned the bureau is setting itself up for lawsuits by insisting on partial use
of statistical sampling. The bureau, following a recent Supreme Court ruling,
wants to use sampling for purposes other than apportionment.
* * *
PHILIP MORRIS WILL CLOSE one of its three U.S. cigarette-manufacturing
plants, eliminating 1,400 jobs and resulting in a $200 million pretax charge
against earnings in the first half.
(Article on Page A6)
* * *
GATEWAY IS BUYING A STAKE in an online computer-products retailer and
is jointly launching a site to sell software, peripherals and accessories.
(Article on Page B7)
* * *
A SENIOR MICROSOFT executive defended the business practices of his
company, saying it allows computer makers broad flexibility to add rivals'
software to machines with Windows.
(Article on Page B7)
* * *
BAAN MAY LAY OFF more employees as part of an effort to slash internal
costs and return to profitability, according to a recent internal memo.
(Article on Page B7)
* * *
SCHWAB'S ONLINE-TRADING SITE went down for the third time in two
months, in a 90-minute outage, as the company was trying to upgrade its systems.
(Article on Page C1)
* * *
OLIVETTI FILED A NEW $58 billion takeover offer for Telecom Italia,
but left unchanged the basic financial details first announced over the weekend.
(Article on Page A10)
* * *
SHORT INTEREST DECLINED 3.02% to 1.81 billion shares in the latest
month on the Nasdaq Stock Market.
(Article on Page C25)
* * *
MARKETS-
STOCKS: Volume 764,392,510 shares. Dow Jones industrials 9399.67, off
144.75; transportation 3249.60, up 27.89; utilities 297.44, up 1.17.
BONDS: Lehman Brothers Treasury index 8359.22, off 71.52.
COMMODITIES: Oil (April) $12.63 a barrel, up 15 cents. Dow Jones-AIG
futures index 74.901, off 0.407; DJ spot index 111.92, off 0.58.
DOLLAR: 121.79 yen, up 0.87; 0.9091 euro, up 0.0007; 1.7780 marks, up
0.0013.
AN AVALANCHE STRUCK the Austrian town of Valzur, just seven miles from
where a snowslide buried dozens in Galtuer Tuesday. The two-day death toll in
the Tyrol rose to 18, and 20 remain missing at the two sites. Closed roads are
hampering rescue efforts.
* * *
U.S. JETS ATTACKED air-defense sites near Baghdad, at the edge of the
southern "no-fly" zone. Iraq says the planes were outside the zone, and
civilians died. Clinton said Baghdad appears to be aiming for the "symbolic
victory" of shooting down a U.S. jet.
* * *
THREE IRANIAN KURDS DIED fighting police during a protest over Turkey's
capture of rebel leader Abdullah Ocalan. In Berlin, a funeral for three Kurds
killed last week drew 8,500. Turkey again denied attorneys access to Ocalan.
(Related article on Page A12)
* * *
GENETICALLY MODIFIED PRODUCTS won't be regulated by an international
treaty after the U.S. and five other nations managed to scuttle the proposal at
talks in Colombia. Washington said it was opposed to additional burdens on
global agricultural trade.
* * *
A CHINESE AIRLINER CRASHED on approach to Wenzhou, 250 miles south of
Shanghai, killing all 61 aboard. The China Southwest Airlines Tupolev 154 was on
a flight in clear weather from the southwest city of Chengdu. Officials offered
no clues as to the cause.
* * *
CHINA "STRONGLY RESENTS" a U.S. decision to bar the $450 million sale
of a Hughes Electronics satellite to Beijing, the foreign minister said. China
dismissed as groundless U.S. suspicions that the deal was intended to enhance
army communications.
* * *
SPACING BABIES 2 1/2 YEARS APART is ideal, according to a study by the
Centers for Disease Control and Prevention. Longer or shorter intervals were
found to increase the risk of underweight or premature babies.
* * *
IRELAND CHARGED ITS FIRST SUSPECT in the Aug. 15 bombing that killed 29
in Omagh, Northern Ireland. He is accused of conspiracy and belonging to an IRA
splinter group. Others have also been detained in the case.
* * *
CLINTON AIDE PAUL BEGAIA ANNOUNCED HE IS quitting to teach at
Georgetown. Begaia has served since Clinton's 1992 election campaign. A White
House exodus was predicted after the end of impeachment proceedings.
<PAGE>
EXHIBIT E
For the right to distribute Dow Jones Information to Distributor Subscribers,
Distributor will pay to Dow Jones monthly licensing fees ("Monthly Fees") equal
to the greater of 1, 2 and 3:
1. A monthly minimum based on the following schedule:
a. Months 1-6 following the Effective Date: $10,000 per month
b. Months 7+ following the Effective Date: $12,500 per month
2. The total of the following Per Distributor Subscriber Fees for such
month:
a. Daily Subscriptions: With respect to those Distributor
Subscribers who pay for a daily subscription to the Audio Information or the
Text Information, (1) $.30 each day for each level of service, where the Audio
Information and Text Information are sold as separate levels of service and (2)
$.50 each day if the Audio Information and the Text Information are bundled
together.
b. Monthly Subscriptions. With respect to those Distributor
Subscribers who pay for a monthly subscription to the Audio Information or the
Text Information, (1) $2.00 each month for each level of service, where the
Audio Information and Text Information are sold as separate levels of service
and (2) $3.00 each month if the Audio Information and the Text Information are
bundled together.
3. The total Percentage-Based Fees for such month:
a. Separate Services. With respect to those Distributor
Subscribers who access the Audio Information and Text Information as separate
levels of service, then 50% of any fees collected from Distributor Subscribers
in connection with such Dow Jones Information.
b. Bundled Services. With respect to those Distributor
Subscribers who access the Audio Information and the Text Information as part of
a bundle containing content from other information providers, then Distributor
shall pay to Dow Jones an amount calculated as follows:
Royalties = (1/2 * Fees) + Number of Information Providers;
where Royalties means the amount payable by Distributor to Dow Jones in respect
of such bundled access; Fees are all the fees charged by Distributor to
Distributor Subscribers for such access and the Number of Information Providers
are the number information providers whose content are included in the bundle.
All amounts in this Exhibit are in U.S. Dollars.
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EXHIBIT 10.10
AUDIO FILE PRODUCTION SERVICES AGREEMENT
This Agreement is entered into as of July 28, 1999 by and between
audiohighway.com, a California corporation ("AH"), and Audio Concepts a New York
general partnership ("AC").
WHEREAS, AH hosts and operates a website currently located on the
Internet at (www.audiohighway.com) (the "AH Website"), through which AH encodes
certain third-party content for delivery over the Internet and distributes such
content to Internet users receiving Internet service from various Internet
service providers; and,
WHEREAS, AH has entered into an agreement with Dow Jones that permits
AH to make available the "What's News-Business and Finance and World View," from
page A-1 of the print edition of the Wall Street Journal, on the AH website in a
streaming audio format; and,
WHEREAS, AC has the capability to produce audio recordings from written
text and convert those recordings into specified digital formats; and,
WHEREAS, AH is interested in retaining AC to perform such services in
connection with AH's agreement with Dow Jones;
NOW THEREFORE the parties agree as follows:
1. SERVICES
AC will provide to AH the following Services:
a. TEXT FILES: Pursuant to the agreement between AH and Dow
Jones, every Monday through Friday Dow Jones will transmit text file versions of
the "What's News-Business and Finance and World View" from page A-1 of the print
edition of the Wall Street Journal (the "Text Files") to three electronic
mailbox addresses designated by AC.
b. TIMING: AC shall maintain a full production staff to retrieve
and download the Text Files between the hours of 2:00 a.m. and 3:00 a.m. Eastern
Standard Time ("EST"). If the Text Files have not arrived in the electronic
mailboxes by 3:00 a.m. EST, through no fault of AC, AC shall retain its full
production staff for as long as is necessary to retrieve and download the text
files when they arrive. If AC is required to maintain its production staff
beyond 4:00 a.m. EST, AC shall be entitled to Overtime, as defined in Section
2.c. of this Agreement.
c. PRODUCTION: On each day that AC retrieves and downloads Text
Files (Monday through Friday) AC shall produce an audio recording of the Text
Files and shall convert such recording to a computer-ready digital format (the
"Audio Files"), specified by AH. Once conversion of an audio recording into an
Audio File is complete, AC shall transmit such Audio Files (by way of FTP,
electronic mail, or other method specified by AH) to a computer server specified
by AH (AH shall provide AC with verification, by way of a method to be specified
by
<PAGE>
AH, that the Audio Files were received intact and free of errors and / or
viruses and considered delivered by AC).
d. DELIVERY: AC shall transmit the Audio to a computer server
specified by AH by no later than 3:00 a.m. EST, or as soon thereafter as
practicable.
e. EQUIPMENT: AC shall provide all necessary equipment to
retrieve and download the Text Files, to produce the audio recordings of the
Text Files, to convert the audio recordings into Audio files, and to transmit
the Audio Files to the server designated by AH (AH shall provide AC with the
technical specifications necessary for AC to perform its obligations under this
Agreement, including without limitation the information required to transmit the
Audio Files to the server designated by AH).
2. PAYMENT FOR SERVICES
AH shall pay AC as specified below:
a. SETUP FEE: The one-time setup fee shall be $10,000. This fee
is due and payable upon execution of this Agreement.
b. PRODUCTION: The weekly production fee shall be $8,000 per
month. This fee is to be paid on a monthly basis and is to be received by AC a
minimum of one week prior to the start of each production month.
c. OVERTIME: If AC is required to maintain its production staff
beyond 4:00 a.m. EST, solely due to arrival of Text Files later than 3:00 a. m.,
AC shall be entitled to Overtime. Overtime shall be $400 for each additional
hour beyond 4:00 a.m. EST required to complete the retrieval and download of the
Text Files. Such Overtime charges shall be invoiced by AC to AH on a monthly
basis and AH shall pay such invoices within thirty (30) days after receipt of
invoice. AC shall send invoices under this Agreement to:
AudioHighway.com
20600 Mariani Avenue
Cupertino, CA 95014
Attn: Grant Jasmin
Facsimile: (408) 255-5591
3. INDEPENDENT CONTRACTORS
a. AC is retained by AH only for the purposes set forth in this
Agreement. The parties intend that the relationship of AC and its personnel to
AH during the term of this Agreement shall be that of independent contractors.
Nothing in this Agreement shall be deemed to create a partnership, agency, joint
venture, franchise relationship, or employer/employee relationship between AH
and AC. AC acknowledges that it is an independent contractor, is not
2
<PAGE>
an agent or employee of AH, is not entitled to any employment rights or
benefits, and is not authorized to act on behalf of AH. All persons AC furnishes
to provide Services to AH shall be the employees or subcontractors of AC and
shall be neither the employees nor agents of AH. AC shall have exclusive control
over its personnel and over the labor and employee relations, and policies
relating to wages, hours, working conditions or other conditions of its
personnel. AC shall have the exclusive right to hire, transfer, suspend, lay
off, recall, promote, assign, discipline, discharge and adjust grievances with
its personnel. Notwithstanding the foregoing, AH may at any time require AC to
remove from any AH related activity, any personnel objectionable to AH.
b. AC will be solely responsible for all salaries and other
compensation of its personnel who provide Services to AH. AC will be solely
responsible for making all deductions and withholdings from its employee's
salaries and other compensation, and for the payment of all contributions, taxes
and assessments.
4. TERM
The initial term of this Agreement shall be for the balance of the term
of AH's agreement with Dow Jones, and shall thereafter be automatically renewed
for successive terms of one calendar year each if AH renews its agreement with
Dow Jones, and unless earlier terminated as hereinafter provided or unless
either party gives the other written notice of non-renewal at least 30-days
prior to the end of the initial term or any renewal term.
5. CONFIDENTIALITY; OWNERSHIP OF WORK PRODUCT
a. AH "Confidential Information" shall mean all information,
whether in written, verbal, graphic, electronic or any other form, which is
disclosed to or observed by AC in the course of its performance of Services
hereunder. Confidential Information shall include, without limitation, customer
names, customer information, business plans, software, hardware or system
designs, specifications, manufacturing processes, documentation, code, and
protocols.
b. AC will treat the terms of this Agreement as AH Confidential
Information.
c. AC shall (i) use AH Confidential Information only in
connection with AC's performance of its obligations under this Agreement, and
(ii) will not disclose AH Confidential Information except to its employees,
agents, and contractors who have first agreed to be bound by the terms and
conditions of this Section and who have a need to know such Confidential
Information in connection with the performance of AC's obligations under this
Agreement. If requested by AH, AC's employees, agents and contractors who are
assigned to work on a AH project shall execute a document satisfactory to AH
acknowledging and agreeing to be bound by the terms of this Section 5. In any
case, AC shall be responsible and liable for any unauthorized disclosure,
publication or dissemination by any of AC's employees, agents or contractors of
any AH Confidential Information.
3
<PAGE>
d. All AH Confidential Information and Files in AC's possession
or under its custody or control shall be immediately turned over to AH upon the
termination of this Agreement.
e. All Audio Files, computer programs and other ideas and
materials developed, invented or discovered by AC, its employees, agents and
contractors, either solely or in collaboration with others, which result from or
are suggested by any work AC may do for AH (hereinafter collectively referred to
as the "Developments") shall be considered as a work made for hire for AH, and
will be the sole property of AH. AC agrees to assign to AH its entire right and
interest in any such Development, and will execute any documents in connection
therewith that AH may reasonably request. AC agrees to enter into agreements
with all of its employees, agents and contractors necessary to establish AH's
sole ownership in the Developments, and AC agrees to provide AH with copies of
such agreements as executed.
6. WARRANTIES
AC represents and warrants that, in its performance under this
Agreement:
a. All Services shall be performed in a workmanlike manner and on
time under the terms of this Agreement, and all work product, deliverables, and
materials created hereunder shall be in accordance with the highest industry
standards according to the applicable description and requirements for such
Services as set forth in this Agreement.
b. AC shall comply with all applicable Federal, state and local
laws, rules, regulations and orders in its performance under this Agreement.
AC's performance under this Agreement will not violate or in any way infringe
upon the rights of third parties, including proprietary information and
non-disclosure rights, or trademark, copyright, patent, or other intellectual
property rights;
c. AC is the lawful owner or licensee of all computer programs,
software, and other intellectual property used in its performance under this
Agreement; such computer programs, software, and other intellectual property
have been lawfully developed or acquired by AC and AC has the right to permit AH
access to or use of such Computer programs, software, and other intellectual
property as required by this Agreement without violating any rights of any third
party, and there currently is no actual or threatened suit by any third party
based on an alleged violation of such right by AC;
d. AC has in place an effective disaster recovery plan consisting
of one or more alternate sites to which it is capable of immediately shifting
its operations under this Agreement so as to minimize disruption to its ability
to satisfy its obligations under this Agreement.
e. Each Audio File AC creates as part of the Services provided
hereunder shall precisely and accurately represent the contents of the Text File
from which it was created. Specifically, AC warrants and represents that, in
producing the Audio Files, it shall pronounce correctly all words in the Text
Files that are contained in the Webster III Dictionary, Web Geo,
4
<PAGE>
and Web Bio reference works (the "Reference Works"). AH shall provide AC, upon
AC's reasonable request, with a phonetic spelling of any word in the Text Files
that AC demonstrates is not contained in one of the Reference Works. If AH is
unable to provide AC with a phonetic spelling, AC shall make an educated guess
as to the word's correct pronunciation.
f. All computer programs, software, intellectual property and
Services provided hereunder are year 2000 compliant, so that when a date after
January 1, 2000 is either processed, entered into, or is intended to be
generated as a result of the operation of any such software, such software shall
not (a) fail or produce incorrect date results, or (b) cause any other programs
to fail or generate errors.
g. AC is a duly organized corporation in good standing and its
assets are free and clear of any encumbrances.
h. AC has the authority to enter into this Agreement and to
perform the Services and that upon execution of this Agreement, this Agreement
shall be a valid, binding obligation of AC, enforceable in accordance with its
terms.
7. INDEMNIFICATION
AC shall, at its own expense, defend, indemnify and hold AH and its
directors, officers, employees and agents from and against any and all claims,
demands, suits, or causes of action (hereinafter "Claims") which result or are
claimed to result in whole or in part from any act or omission of AC or its
employees, agents or contractors, or which are based upon or make the contention
that any of the materials supplied by AC to AH or used by AH in the manner
recommended by AC, in whole or in part, constitute infringement of any
trademark, trade secret, statutory copyright, patent, common law right, title or
slogan, unless the infringing material was furnished to AC by AH, or which
result from the alleged or actual violation by AC of any applicable law, statute
or regulation, or which are based upon a failure of Services to conform to the
Warranties in this Agreement. Notwithstanding the foregoing, AC shall not be
liable for damage to third parties to the extent caused solely by the active and
gross negligence of AH. The obligations of AC under this section shall be
independent of any other obligation of AC hereunder.
8. NO LIENS
No mechanics' lien, notice, claim or action thereon shall be filed by
AC, or any person or entity acting through AC, for services under this
Agreement. Where applicable, AC shall, upon request of AH, deliver to AH,
contemporaneously with any payment, recordable partial waivers of lien for any
partial payments, and recordable final waiver of lien for the final payment.
9. TERMINATION.
a. Either party may terminate this entire Agreement prior to its
expiration date, with or without good cause shown, without penalty and without
liability for damages as a result of
5
<PAGE>
such termination, upon 60 days written notice to the other. In the case of AC's
gross negligence or non-performance, AH may terminate this Agreement immediately
upon written notice to AC.
b. If this agreement between AH and Dow Jones is cancelled at any
time during the Term of this Agreement, and such cancellation is not
attributable to conduct on the part of AC, this Agreement shall be cancelled
automatically as of the same date.
c. Upon termination of Services then in process, AH shall only be
liable for payment of fees earned as a result of Services actually performed
under this Agreement prior to the date of termination.
10. ADVERTISING
AC agrees that it will not use the names, service marks and/or
trademarks of AH or any of its affiliated companies, or reveal the existence of
this Agreement or its terms and conditions in any manner without the express
prior written consent of AH.
11. GENERAL
a. This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and assigns; provided, however, no
assignment by either party shall be of any force except with the prior written
consent of the other party.
b. The rights and duties of the parties will be governed by the
local law of the State of California, excluding any choice-of-law rules that
would require the application of the laws of any other jurisdiction.
c. All notices required or permitted to be given by one party to
the other under this Agreement shall be deemed given (i) when delivered
personally on a business day, (ii) five days after deposit in the U.S. mail,
certified or registered, postage prepaid, (iii) the business day when delivered
if delivered by a nationally recognized courier, or (iv) the business day upon
which facsimile transmission is complete before 4 p.m., provided that such
transmission is followed by notice under one of methods "(i)" through "(iii)"
above. Notice by either party to the other shall be given at the respective
addresses set forth below or to such other address as the party to receive the
notice has designated by notice to the other party:
If to AH AudioHighway.com
20600 Mariani Avenue
Cupertino, CA 95014
Attn: Grant Jasmin
Facsimile: (408) 255-5591
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If to AC: Audio Concepts
67 Wall Street, Suite 2411
New York, NY 10005
Attn: Eric Wood
Facsimile (212) 943-2300
d. If any term or provision is held invalid or unenforceable in
any respect, such invalid and unenforceable term or provision shall be amended
automatically to provide its nearest enforceable economically equivalent term or
provision. The invalidity or unenforceability of any particular term or
provision of this Agreement shall not affect the other terms or provisions
hereof, which shall continue in full force and effect.
e. SIGNATURES. This Agreement may be executed in counterparts,
which together shall constitute one and the same agreement. Each party may rely
on a facsimile signature on this Agreement, and each party shall, if the other
party so requests, provide an originally signed copy of this Agreement to the
other party.
f. The failure of either party to insist, in any one or more
instances, upon the performance of any of the terms, covenants, or conditions of
this Agreement or to exercise any right hereunder, shall not be construed as a
waiver or relinquishment of the future performance of any rights, and the
obligations of the party with respect to such future performance shall continue
in full force and effect.
g. This Agreement constitutes the complete, final and exclusive
statement of the terms of the agreement among the parties pertaining to the
subject matter hereof and supersede all prior agreements, understandings,
negotiations and discussions of the parties. No modification or rescission of
this Agreement shall be binding unless executed in writing by the party to be
bound thereby.
IN WITNESS WHEREOF, AC and AH have caused this Agreement to be executed
by persons duly authorized as of the date of first above stated.
AudioHighway.com. Audio Concepts
By: /s/ [ILLEGIBLE] By: /s/ Eric Wood
------------------------------ ----------------------------
Title: President Title: President
--------------------------- -------------------------
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EXHIBIT 10.11
Page 1
AEC ONE STOP GROUP, INC.
DATABASE LICENSE AND
CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
1. PARTIES: This Database License and Consumer Direct Fulfillment Services
Agreement is being entered into as of this ___ day of November , 1999, by
and between AEC One Stop Group, Inc., a Delaware corporation, with its
principal offices located at 4250 Coral Ridge Drive, Coral Springs, Florida
33065, hereafter referred to as ("AEC"), and AudioHighway.Com, a California
Corporation, with its principal place of business located at 20600 Mariani
Avenue, Cupertino, CA 95014, as an Interactive Retailer (as an "on-line"
store or otherwise similarly), hereafter referred to as ("COMPANY" or
"your" or "you").
2. SERVICES: AEC will (i) supply COMPANY with use of AEC's All-Music Guide and
AEC's All-Movie Guide in electronic form (the "Databases"), (ii) supply
COMPANY with updating and general service with regard thereto, (iii)
perform as the wholesale provider (i.e., fulfillment) of the musical
recordings and related products which COMPANY sells via its Interactive
Retailing to its customers and (iv) fulfill consignment product orders by
shipping directly to such customers (the "Products"). Particulars of such
services and performance standards are set forth in General Terms &
Conditions Agreement attached.
3. EXCLUSIVITY: In using the Database, you agree to use such Database
exclusively in connection with your Interactive Retailing (i.e., not to use
competitive services for your internet retailing business, except as set
forth below) and to use AEC's audio fulfillment services exclusively in
connection with your internet retail sales of audio products sold to you by
AEC as provided herein (i.e., subject to product availability and the other
terms set forth in the Terms and Conditions attached hereto. COMPANY's
agreement to use such Database exclusively, however, shall be subject to
the following conditions:
(i) COMPANY may temporarily use the services of an alternative audio
content provider to satisfy its distribution needs in the event that
that the audio product at issue is on backorder exceeding five days or
is otherwise "commercially unavailable" as defined in paragraph
2.2.1.2.
(ii) Nothing in paragraph 3 or this Agreement shall prohibit COMPANY
from entering into direct business relationships with labels,
producers, or other entities, whether the business relationship
involves the sale of audio content directly to COMPANY or otherwise.
AEC shall be the primary supplier for video, DVD and Game product.
Notwithstanding the foregoing, if you determine in good faith that your
Interactive Retailing services will be materially enhanced by using a third
party database ("Other Database"), you agree that you shall:
a. In no way co-mingle the AEC Database fields and data elements
with the Other Database(s) or elements thereof; and
b. In all respects identify and brand the AEC Database elements in
strict compliance with the requirements of this agreement.
4. TERM: This Agreement will terminate three years from date hereof, unless
extended or earlier terminated by consent of the parties or pursuant to the
General Terms & Conditions attached hereto, e.g., if AEC fails to meet
adequate Performance Standards (as defined therein) or your sales levels
for any three month period (after a start-up period) average less than
$25,000 a month. Term may be extended an additional two (2) years, for a
total of five (5) years, by agreement of the Parties. Initial term and
extensions and renewals shall be referred to as the Term of this Agreement.
5. FEES:
(i) FULFILLMENT SALES - NO SPECIAL FEE: Sales shall be fulfilled at AEC's
standard "one-stop" prices "to the trade", as they exist generally
from time to time. Initial pricings are as provided in the General
Terms & Conditions attached hereto (see particularly Exhibit 1
thereto) and subsequent prices shall be generally noticed to the trade
and you by AEC.
CONFIDENTIAL
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Page 2
(ii) DATABASE USE: the Database License Fee ("License Fee") shall be based
on your aggregate site fulfillment sales, and shall be equal to:
- (1.0%) of monthly sales; against a monthly guaranteed
minimum amount of $4,000.
(iii)SET-UP FEES: The one-time set-up fee for order processing shall be
waived.
(iv) AEC and COMPANY agree to, in good faith, discuss one stop prices to
the trade and to adjust COMPANY'S prices relative to COMPANY'S sales
volumes.
In each case, set-up fees are payable concurrent with the execution hereof.
6. SALES: As used herein, and in the General Terms and Conditions, "Sales"
shall mean sales of product by AEC to COMPANY, and shall exclude (unless
expressly stated otherwise) sales of Consignment Products (as defined in
the General Terms and Conditions).
7. GENERAL TERMS AND CONDITIONS: Shipping and return policies and procedures,
credit card processing procedures, electronic interfacing protocols,
representations and warranties, choice of law provisions, etc., are all as
contained in the General Terms & Conditions attached, and such terms and
conditions are an integral part of this Agreement.
8. AEC authorizes the following Electronic Commerce Web Site for the use of
the AEC DATABASE(S).
(i) Web Site Domain Name
--------------------------------------
(ii) Web Site Platform (NT/Unix)
--------------------------------------
(iii)Web Internet Provider
--------------------------------------
(iv) Internal I.P. Address
--------------------------------------
(v) Estimated beta test date
--------------------------------------
(vi) Estimated Launch date
--------------------------------------
PLEASE EXECUTE THIS AGREEMENT BELOW, AND RETURN THE COUNTERSIGNED
AGREEMENT(S) (TOGETHER WITH YOUR CHECK FOR THE START-UP FEES) TO AEC.
Agreed:
<TABLE>
<S><C>
Company Name: AUDIOHIGHWAY.COM AEC ONE STOP GROUP, INC.
Name: Nathan Schulhof Name:
----------------------------------- -----------------------------------
Individual signing (Please print) Individual signing (Please print)
Signature: Signature:
----------------------------------- -----------------------------------
Title: President & CEO Title
----------------------------------- -----------------------------------
</TABLE>
CONFIDENTIAL
<PAGE>
Page 3
GENERAL TERMS & CONDITIONS
FOR THE DATABASE LICENSE AND
CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
1. BACKGROUND.
1.1 COMPANY (as identified in the cover sheet hereto) is engaged in the
business of selling prerecorded audio products in all formats and related
products, by offering to individual consumers ("Customers") an interactive
retail purchasing service on an Internet web site or via any other substantially
equivalent electronic mechanism or mechanisms (i.e. an "On-Line Store");
1.2 COMPANY desires that AEC provide the database and fulfillment services
required to fulfill orders received from Customers;
1.3 AEC compiles (a) a general interest music guide containing, among
other things, lists of artists, albums, ratings, reviews and other information,
which is published under the trade name "All-Music Guide," and (b) a general
interest movie guide containing, among other things, lists of film stars, motion
pictures, ratings, reviews and other information, using the "AMG" and "MATRIX"
logos and marks. In addition, AEC compiles a database which provides information
regarding the availability and pricing of record products (the "AEC Inventory
File"). The AEC Inventory File, the All-Music Guide, and the All-Movie Guide, as
published in electronic form, shall be referred to collectively herein as either
the "DATABASES;"
1.4 AEC is in the business of wholesaling and fulfilling orders for audio
and video products.
2. AEC SERVICES: DATABASE, FULFILLMENT AND CONSIGNMENT.
2.1 DATABASE SERVICES.
2.1.1 GENERAL LICENSE. AEC hereby grants to COMPANY a non-exclusive
license, without the right of sublicense, to use each of the latest versions and
releases of the DATABASES, along with the DATABASE programs and data contained
therein, including all future revisions, enhancements and updates of the
DATABASES in accordance with the terms of this Agreement, and COMPANY agrees to
use the licensed DATABASES solely for the purposes of marketing and selling
products secured from AEC (via the fulfillment services provided for herein) and
sold via COMPANY's On-Line Store.
2.1.2 SPECIFIC SERVICES:
2.1.2.1 AEC shall provide COMPANY with the DATABASES, and
with updates of the DATABASES not less frequently than monthly so as to make the
information contained in the DATABASES current and complete to the same extent
as the versions of the DATABASES which are current at the time the Agreement is
executed, which versions have been reviewed by COMPANY, except that with respect
to the AEC Availability File, AEC shall be updated daily or weekly, as mutually
agreed by AEC and COMPANY. AEC shall deliver to COMPANY pursuant to this
Agreement, one (1) copy of the current DATABASES no later than fourteen (14)
days (unless otherwise agreed upon by both parties) after the execution of the
Agreement, and thereafter AEC shall deliver to COMPANY one (1) updated copy of
updates of the DATABASES no later than the fifth day of each month (unless
otherwise agreed upon by both parties) in a format to be mutually agreed upon.
Delivery shall be by FTP pick-up, at a designated site for COMPANY's site,
unless otherwise agreed by the parties. Any expenses for any other method of
delivery shall be borne by COMPANY.
2.1.2.2 AEC shall provide appropriate maintenance and
support for the DATABASES to COMPANY personnel.
2.1.3 TITLE, DELIVERY AND COPIES.
2.1.3.1 COMPANY acknowledges and agrees that the DATABASES
and all revisions, modifications and enhancements thereof provided by AEC to
COMPANY under this Agreement are the exclusive and proprietary information of
AEC. Title and full ownership rights thereto, including but not limited to
copyright, trade secret, trademark, trade name and other intellectual and
proprietary rights, are reserved to, and shall remain with and be the valuable
property of AEC. COMPANY acknowledges the valuable, proprietary nature of the
DATABASES, including all revisions, modifications and enhancements thereof, and
agrees not to sell , disclose, reproduce, or otherwise use the DATABASE in a
manner which is unlawful or which is not consistent with the express terms of
this Agreement and not to contest in any way whatsoever the propriety status of
the DATABASES or AEC's subsisting
CONFIDENTIAL
<PAGE>
Page 4
copyrights therein. COMPANY will not remove any proprietary or confidential
legends or markings which AEC has placed upon or within the DATABASES. AEC
agrees that any customer identifying information provided by COMPANY shall
remain the property of COMPANY and shall not be disseminated by AEC to any third
parties without COMPANY's express written authorization.
2.1.3.2 COMPANY acknowledges that AEC may, at any time or
times during the term of this Agreement, substitute a new version of the
DATABASES for the version of the DATABASES originally provided hereunder; in
which case the license granted COMPANY shall cease with respect to the replaced
version of the DATABASES, and COMPANY shall purge all copies of the replaced
version from COMPANY's computer system and from any other computer storage
device or medium as to which COMPANY has or should have control consistent with
this license.
2.2 FULFILLMENT SERVICES.
AEC shall supply to Customers the Products offered over COMPANY's
On-Line Store and ordered by the Customers (unless "Commercially Unavailable" as
provided below); and in connection therewith AEC shall perform the fulfillment,
technical, and professional services described below.
2.2.1 AEC FULFILLMENT SERVICES DEFINED.
2.2.1.1 INTERNET FULFILLMENT SITE. - AEC will interface
with COMPANY's Internet fulfillment site (or equivalent) in one of the following
methods, as mutually agreed:
(i) Standard EDI file transmission to
and from COMPANY and AEC. Orders will be sent to AEC at mutually agreed
pre-determined intervals. Orders may be transmitted via the Internet (FTP) , X.
12, an AEC bulletin board or another mutually agreed method.
(ii) Advanced on-line connectivity in
order to query or commit for Customers in real time fulfillment. AEC will
provide an API Library and/or code to implement the connection between Unix to
Unix or NT to Unix systems. Custom programming on COMPANY's web site to
interface with AEC is the primary responsibility of COMPANY.
(iii) AEC will provide COMPANY with access to
an AEC web site location to query and maintain order status and return
authorizations directly from the AEC fulfillment computer system.
2.2.1.2 PROCESSING ORDERS; SHIPPING PRODUCT. AEC shall,
upon AEC's receipt of a Verified Order (as hereinafter defined), (i) process
such order and (ii) arrange to have the Ordered Product (as hereinafter defined)
shipped to the Customer. All orders will be quality controlled through advanced
sorting and UPC verification methods. AEC will have no obligation to accept
orders for or to ship any item of Product which is Commercially Unavailable (as
hereinafter defined).
"Commercially Unavailable": A particular item is Commercially Unavailable
if, at the time the order for such item is received by AEC or during the process
of such order being fulfilled, such item is not in the inventory of AEC (at
AEC's sole commercial discretion) and (a) is no longer manufactured; (b) is not
reasonably available to AEC from the company that releases such product; or (c)
has been deleted from the catalog of the company that releases such items. To
the extent such a product is Commercially Unavailable and COMPANY can assist in
AEC achieving availability, and AEC requests such assistance, COMPANY shall use
its good faith efforts to so assist.
"Ordered Product" shall mean the units of product ordered by a Customer
with a Verified Order.
"Verified Order" means an order that provides all of the information
specified in AEC technical documents and which has been authorized by AEC's or
Company's credit card contractor to be debited from the consumer's account.
Technical requirements include, but are not limited to, valid account, address,
credit card information and product related information. The AEC credit card or
Company credit card verification validates the consumer's payment capability.
2.2.1.3 SPECIAL HANDLING. AEC, at no charge, will insert
one (1) promotional item on behalf of COMPANY with each shipment subject to the
understanding that all AEC costs reasonably associated with the inserts shall be
borne by COMPANY. Finally, all special handling considerations shall be reviewed
during formal operations meetings and it is understood that AEC and COMPANY
shall negotiate, in good faith, as to the cost, if any, which will be charged
for such special handling. AEC reserves the right to reject any insert for any
reason unless insert has been approved by AEC in advance.
2.2.1.4 ACCOUNT REPRESENTATIVES. AEC will make available
account representatives who will be responsible for using reasonable efforts to
meet all customer service, product sales, and technological needs.
2.2.1.5 TWO-WAY INTERACTION. AEC will communicate
interactively (batch or on-line) with COMPANY in an agreed method to provide
electronic updates on orders shipped, including shipping methods, tracking
numbers, fill, invoice totals, and all pertinent data reasonably requested by
COMPANY.
CONFIDENTIAL
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Page 5
2.2.1.6 RETAILER PACKAGING IDENTIFICATION. AEC shall be an
invisible fulfillment arm. AEC will produce custom invoices, shipping labels and
packaging consistent with AEC technologies and capabilities that will accompany
an order to identify the product/order as from COMPANY.
2.2.1.7 CREDIT CARD PROCESSING. CREDIT CARD PROCESSING.
Customer's credit card orders shall be processed in one of the following manners
(check one):
X COMPANY shall, using its own merchant account
----
number, process all credit card orders without any credit card processing
assistance from AEC. All costs related thereto shall be borne by COMPANY. Each
Consumer Direct Fulfillment (CDF) order received by AEC from COMPANY will be
processed for shipment by AEC, and AEC assumes no role in the consumer level
verification, and settlement of individual consumer credit cards.
Using COMPANY's merchant account number, AEC
----
shall perform all credit card processing functions at no additional cost to
COMPANY above fees charged by third parties (e.g., the merchant bank, credit
card clearinghouse and online cyber processing center); there shall be no
processing charge paid to AEC by COMPANY for handling this process.
2.2.2 PERFORMANCE STANDARDS FOR AEC.
2.2.2.1 FILL STANDARDS - AEC represents that each fill
percentage during any two calender month period shall be 90% on commercially
available audio product if ordered via AEC's on-line real time communication and
commitment system and 80% if ordered via batch communication (excluding,
however, cut-outs, commercially unavailable product, imports and selected
product not available from vendors).
2.2.2.2 SHIPPING STANDARDS - 95% of all product orders
(unless "Commercially Unavailable" as provided in above) shall be shipped from
an AEC facility within cut-off times to be reasonably mutually determined from
time to time consistent with Section 2.2.3 below.
2.2.3 Shipping & Return Procedures.
2.2.3.1 SHIPPING. Daily cut-off times should be reasonably
mutually determined from time to time, but, currently, same day service can be
offered until 1:00 PM EST. Current methods of shipment include: United States
Postal Service and United Parcel Service. AEC shall offer to COMPANY the full
range of shipping options to Customers of COMPANY at no additional cost above
fees normally charged by the shipping carriers.
COMPANY acknowledges that the shipping rates charged to AEC
by its shipping carrier represent leveraged pricing at rates significantly below
published rates. COMPANY agrees that such shipping rates constitute Confidential
Information of AEC under this Agreement, subject to the provisions of Section 4
hereof.
2.2.3.2 RETURNS. COMPANY shall assume and pay for all
shipping and other costs incurred in the return, refused and undeliverable, or
exchange of Ordered Product. Notwithstanding the foregoing, AEC shall be
responsible for all Ordered Product either incorrectly shipped to a Customer or
damaged while in transit to the Customer, but only if such Ordered Product was
shipped via an insured and traceable carrier. In such cases, AEC shall assume
and pay for all shipping and other costs incurred in the return or exchange of
Ordered Product and will ensure that COMPANY incurs no product cost for the
involved transaction.
2.2.4 PRICES, COSTS, FEES.
2.2.4.1 FULFILLMENT PRICES. AEC shall initially price
Products at the standard one-stop published prices (the "Fulfillment Prices"),
which may be increased or decreased from time to time (e.g., when the
manufacturers of Product change their list prices to AEC). The Fulfillment
Prices as of the date of this Agreement are set forth in Exhibit 1 hereto. The
lower of the two prices reflected on such Exhibit I for Product sold hereunder
is the amount to be retained by or paid to AEC hereunder for such sales.
2.2.4.2 SHIPPING COSTS; CREDIT CARD PROCESSING. In
addition to the Fulfillment Prices, COMPANY shall pay the costs of credit card
processingAEC's actual costs of the corrugated shipping box, and shipping costs
required to ship the Products to the Customer.
2.2.4.3 Company shall pay AEC actual packaging costs,
currently at approximately $0.20 (twenty cents) per ORDER, provided that AEC
shall be entitled to raise the amount to match AEC's verifiable increased costs
for packaging materials, if any, if such costs should increase during the term
of this Agreement.
2.3 CONSIGNMENT PRODUCTS/SERVICES.
CONFIDENTIAL
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Page 6
2.3.1 SERVICES. AEC shall receive, warehouse and manage COMPANY'S
inventory of all such other products ("Consignment Products") as may be offered
for sale on the On-Line Store from time to time (e.g. t-shirts, hats,
sweatshirts and other merchandise) and shall fulfill all orders thereof on
COMPANY'S behalf and in accordance with the terms of Exhibit III hereto.
2.3.2 OWNERSHIP OF CONSIGNMENT PRODUCT. As between AEC and
COMPANY, all Consignment Product inventory shall remain the property of COMPANY
at all times. AEC agrees that while such Consignment Product is in its
possession it shall safeguard such inventory in the same manner that it
safeguards items in its own inventory
3. COMPANY RESPONSIBILITIES.
COMPANY shall cooperate with AEC as required by this Agreement and shall
perform the responsibilities described in this Agreement, including
particularly, but without limitation, those more specifically described below:
3.1 TECHNICAL COOPERATION. COMPANY shall cooperate with AEC to develop the
technical linkages between COMPANY's Internet fulfillment site and the
DATABASES. If COMPANY requires the technical assistance and resources of AEC's
information technology experts beyond a "reasonable amount" (as reasonably
determined by AEC), then all such excess hours shall be charged at the then
current rates of AEC's affiliated information technology consulting services
group. Such rates at January 1, 1999 were $110 per hour.
3.2 FEEDBACK WITH CUSTOMERS.
3.2.1 COMPANY shall respond promptly and professionally to
Customers' questions regarding the procedure for ordering Products and any other
questions regarding their orders. In communicating with AEC in connection with
Customer's inquiries, COMPANY shall use e-mail or other on-line connectivity to
AEC whenever reasonably possible.
3.2.2 COMPANY will provide a feedback area on the Service where
users can notify COMPANY of corrections, additions, errors, and other comments
about the Databases and to forward those comments to the All-Music Guide Staff.
3.3 FAULTY INFORMATION. COMPANY shall reimburse AEC for all shipping and
other costs incurred with respect to the processing of an order if COMPANY
caused information, other than the correct order information (as provided by a
customer), to be provided to AEC.
3.4 MINIMUM SALES. COMPANY guarantees that Customers shall purchase a
minimum of $25,000 in net purchases per month during the Term beginning with the
first calendar month commencing after the ninetieth day (i.e., start-up period)
of the Term. The failure of Customers in any month, beginning with such first
month, to make such monthly minimum purchase may be deemed (at AEC's option) a
material failure by COMPANY to perform its obligations hereunder.
3.5 PAYMENT, REPORTS AND AUDITS.
3.5.1 AEC's EDI Status File system provides electronic notification
and invoicing information to COMPANY. Should COMPANY require hard copies of
invoices, AEC shall provide COMPANY the first 50 invoices each month at no cost,
thereafter copies shall be charged to COMPANY at a rate of $.50 each.
3.5.2 AEC shall invoice COMPANY for its CDF fulfillment services
(included the costs related thereto and as provided herein) twice each month for
the preceding invoiced period. The Consignment Product Handling Fee (set forth
on Ex. III) shall be separately itemized on each invoice. COMPANY shall pay each
invoice within fifteen (15) days of receipt thereof.
3.5.3 COMPANY shall provide AEC, within thirty (30) days after each
calendar month, a summary sales report detailing COMPANY's Net Sales of products
pursuant hereto during each calendar month, which report shall be a basis, inter
alia, for the calculation of COMPANY's monthly sales (and the License Fee
derived therefrom).
3.5.4 CREDIT LIMIT/LATE PAYMENT. COMPANY is granted an initial
credit amount of $100,000. AEC shall monitor the credit limit amount and may
increase the credit limit as COMPANY's purchases with AEC increase; provided,
however, AEC may make requested adjustments to the stated credit limit if, and
only if, COMPANY's payment history and credit worthiness are satisfactory to
AEC, as determined by AEC in its sole discretion. Nonetheless, any payments not
received by AEC when due shall, at AEC's election, carry finance charges as
follows: AEC will compute interest on the unpaid balance at the lower of either
one and one half (1-1/2%) percent per month, which is an annual rate of eighteen
(18%) percent, or at the highest rate permitted by applicable law.
3.5.5 All payments and reports shall be sent to AEC at the
following address: AEC One Stop Group, Inc., 4250 Coral Ridge Drive, Coral
Springs, Florida 33065, Attention: Accounts Receivable - CDF.
CONFIDENTIAL
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Page 7
3.5.6 (a) AEC, shall have the right to inspect the books
and records of COMPANY wherever the same may be, insofar as said books and
records pertain to the royalties payable to AEC hereunder. Such examination
shall take place during normal business hours, at COMPANY's place of business,
upon reasonable notice to COMPANY, at AEC's sole cost and expense, and not more
than once per calendar year. Any such inspection must be undertaken within two
years after the end of the calendar year being inspected.
(b) COMPANY shall have the right to inspect the books
and records of AEC wherever the same may be, insofar as said books and records
pertain to the sales of Products or Consignment Products. Such examination shall
take place during normal business hours, at AEC's place of business, upon
reasonable notice to AEC, at COMPANY's sole cost and expense, and not more than
once per calendar year. Any such inspection must be undertaken within two years
after the end of the calendar year being inspected.
3.6 CONSIGNMENT PRODUCTS.COMPANY agrees to comply with the terms of
Exhibit III hereto with respect to COMPANY's Consignment Products (including,
but without limitation, providing appropriate descriptions of the Consignment
Product, insuring such product, etc.)
4. CONFIDENTIALITY AND PROPRIETARY RIGHTS.
4.1 During and following the term hereof, each party to this Agreement
expressly undertakes to retain in confidence, and to require and cause its
subsidiaries and affiliates and its and their respective employees, contractors
and agents to retain in confidence, all information and know-how transmitted to
such party (the Receiving Party) (i) which the disclosing party hereunder (the
Disclosing Party) has identified in writing as being proprietary and/or
confidential or (ii) which the Receiving Party reasonably should know, based
upon the nature of the information being disclosed, ought to be treated as
confidential (collectively "Confidential Information"). The Receiving Party will
make no use of such Confidential Information except as expressly authorized
under this Agreement. Either party may, however, disclose Confidential
Information if required by law, provided such Party shall give the other
reasonable notice prior to such disclosure and shall comply with any applicable
protective order or equivalent. Under no circumstances shall a Disclosing Party
be entitled to terminate this Agreement for an alleged unauthorized use or
disclosure by the Receiving Party of Confidential Information which was not
marked as "confidential" or "proprietary" unless such disclosure was made in bad
faith (in which case the Disclosing Party may terminate this Agreement to the
extent permitted under Section 7 herein).
4.2 Without limiting the generality of Section 4.1, the parties agree that
the following information disclosed by one party to the other shall be deemed
Confidential Information: the capabilities, technical descriptions and source
code relating to either party's released or unreleased software or hardware
products or services; the marketing or promotion plans of any product or service
of either party; either party's business policies or practices; and information
received from others that either party is obligated to treat as confidential.
4.3 Without limiting the foregoing, COMPANY agrees that the DATABASES and
all information contained therein and/or provided by AEC hereunder, including
but not limited to database layouts, schema, algorithms and linking and other
program features, are and shall be treated as the Confidential Information.
COMPANY agrees not to copy, disclose or otherwise make available the DATABASES,
in any form, to any person for any purpose other than as necessary to permit
COMPANY's use of the DATABASES as authorized herein. Any copies or reproductions
of the Confidential Information shall bear the "AMG" logo and any other patent,
copyright, trademark or proprietary notices contained in the original or as
reasonably required by AEC. COMPANY shall take all reasonable steps to safeguard
the DATABASES against unauthorized disclosure. COMPANY also agrees not to use
such Confidential Information except as authorized under this Agreement, and, in
particular, without limiting the foregoing, shall not use such information to
develop a product that would be competitive with the DATABASES. AEC agrees not
to copy, disclose, or otherwise make available COMPANY's customer identifying
information to any third parties without COMPANY's express written authorization
for any improper or unauthorized purpose.
4.4 Both parties acknowledge that unauthorized disclosure or use of
Confidential Information could cause irreparable harm and significant injury
which may be difficult to ascertain. Accordingly, both parties agree that the
aggrieved party will have the right to seek and obtain injunctive relief from
breaches of this Section 4, in addition to any other rights and remedies it may
have. Both parties agree that each has and shall retain ownership rights to its
own Confidential Information, and that upon expiration or termination of this
Agreement each party shall return and shall not retain the Confidential
Information of the other party.
4.5 Notwithstanding anything in this Section 4 to the contrary,
Confidential Information shall not be construed to mean any information which
the Receiving Party can show: (i) is, or subsequently becomes, publicly
available other than as a result of the Receiving Party's breach of any
obligation owed to the Disclosing Party or a third party; (ii) became known to
the Receiving Party prior to the Disclosing Party's disclosure of such
information to the Receiving Party, (iii) became known to the Receiving Party
from a source other than the Disclosing Party other than as a result of such
source's breach of an obligation of confidentiality owed to the Disclosing
Party, (iv) is independently developed by the Receiving Party, or (v) has been
authorized for disclosure by the Disclosing Party.
4.6 The provisions of this Section 4 shall survive termination or
expiration of this Agreement.
CONFIDENTIAL
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5. WARRANTIES AND REPRESENTATIONS.
5.1 BY AEC.
5.1.1 GENERALLY. AEC warrants and represents for the benefit of
COMPANY as follows: (i) the AEC services will be rendered in accordance with all
requirements identified in this Agreement; (ii) AEC has all rights, licenses and
authorizations required to enter into and perform this Agreement, and the
performance by AEC of its obligations pursuant to this Agreement will not
violate any United States federal, state or municipal laws, rules, regulations
or ordinances or the provisions of any agreement to which AEC is a party or by
which AEC is bound; (iii) any reports to be delivered to COMPANY hereunder will
be complete and accurate to the best of AEC's knowledge; (iv) AEC has all the
necessary rights to wholesale its Inventory to COMPANY and to fill orders for
its Inventory on behalf of COMPANY.
5.1.2 DATABASES. AEC represents and warrants that AEC (and its
affiliates) is the rightful owner and/or licensor of the DATABASES, including
the copyrights, trademarks, trade names or other property rights contained
therein and being licensed herein by AEC.
Notwithstanding the foregoing, AEC does not warrant that it
owns any rights to the digitized or electronic images (e.g., album cover
graphics, portraits, etc) ("Images") required for COMPANY to use such Images for
any application. It shall be COMPANY's sole responsibility to identify and
solicit any necessary approvals for its use of the Images. AEC and its
affiliate, MATRIX, shall not be liable for any indirect, special, incidental,
exemplary, consequential or other loss or damages arising out of or caused by
the licensing, delivery, installation or operation of the Images.
5.2 BY COMPANY. COMPANY warrants and represents for the benefit of AEC as
follows: (i) COMPANY Responsibilities and promises herein will be rendered in
accordance with all requirements identified in this Agreement; (ii) COMPANY has
all rights, licenses and authorizations required to enter into and perform this
Agreement, and the performance by COMPANY of its obligations pursuant to this
Agreement will not violate any United States federal, state or municipal laws,
rules, regulations or ordinances or the provisions of any agreement to which
COMPANY is a party or by which COMPANY is bound; (iii) all orders for Products
conveyed to AEC shall, to the best of COMPANY's knowledge, be accurately
conveyed to AECincluding, as to each order, all information in the form provided
by any Customer; (iv) COMPANY has the all necessary rights to sell Products to
Customers; and (v) COMPANY has all necessary rights to sell the Consignment
Products to Customers and to grant to AEC the right to fill orders for such
products. Without limiting any of the terms of this Agreement, COMPANY expressly
agrees that it will not, during the terms of this Agreement, or at any time
thereafter, use the DATABASES to create similar databases, either for COMPANY's
own use or for the use of any third party.
5.3 SURVIVAL. The representations and warranties contained in this Section
5 are continuous in nature and shall be deemed first given upon the execution of
the Agreement and shall survive termination or expiration of this Agreement.
6. INDEMNIFICATION.
6.1 BY AEC. AEC shall indemnify, hold harmless and defend COMPANY and all
of COMPANY's employees, officers, directors and agents from and against any and
all claims, damages, losses, liabilities, suits, actions, demands, proceedings
(whether legal or administrative) and expenses (including but not limited to
reasonable attorneys' fees incurred, with or without suit, in arbitration or
mediation, on appeal or in a bankruptcy or similar proceeding) (collectively,
"Claims") threatened, asserted or filed by a third party against any of the
aforesaid persons or entities to the extent that such third party Claims arise
out of or relate to (i) the breach of any material warranty, representation or
agreement made by AEC in this Agreement; or (ii) any grossly negligent or
tortious act, willful misconduct or willful omission by AEC; provided, however,
the foregoing indemnity obligation shall be binding if, and only to the extent
that, the Claim at issue does not arise out of or relate to a matter in respect
of which AEC is entitled to indemnification under Section 6.2 below.. and
provided, further, that AEC shall not be liable for any errors, omissions or
inaccuracies in the DATABASES, or the updates thereof unless caused by AEC's
gross negligence or willful neglect. Furthermore, AEC shall not be liable for
any delays or interruptions in the delivery, transmission or distribution of the
DATABASES or the updates by reason of unavoidable equipment failure,
communication circuit failure, power failure, Acts of God, government
intervention, fire, flood, or other Acts beyond AEC's reasonable control. Any
COMPANY modification of the DATABASES or any failure by COMPANY to implement any
enhancements, improvements, or updates to the DATABASES as supplied by AEC shall
void the indemnity under Section 6.1 of this Agreement
6.2 BY COMPANY. COMPANY shall indemnify, hold harmless and defend AEC and
all employees, officers, directors and agents of AEC from and against any and
all subpoenas served, Claims threatened, asserted or filed by a third party
against any of the aforesaid persons or entities to the extent that such third
party Claims arise out of or relate to: (i) the breach of any material warranty,
representation or agreement made by COMPANY in this Agreement; or (ii) any
grossly negligent or tortious act, willful misconduct or willful omission by
COMPANY. The foregoing indemnity obligation shall be binding if, and only to the
extent that, the Claim at issue does not arise out of or relate to a matter in
respect of which COMPANY is entitled to indemnification under Section 6.1 above.
CONFIDENTIAL
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Page 9
6.3 MANNER OF EXERCISE. Any person or entity that is entitled to be
indemnified pursuant to this Section 6 ("Indemnified Party") must give prompt
notice to the indemnifying party (the "Indemnifying Party") in writing of the
occurrence of the Claim for which indemnity is requested and, at the option of
the Indemnifying Party, the Indemnifying Party may assume the handling,
settlement and defense of such Claim, in which event the Indemnified Party will
cooperate in all reasonable respects with the Indemnifying Party at the
Indemnifying Party's expense. The Indemnifying Party shall reimburse the
Indemnified Party on demand for any payment made by the Indemnified Party in
respect of any Claim to which the foregoing indemnity relates which either (i)
has resulted in an adverse judgment against the Indemnified Party or (ii) has
been settled with the written consent of the Indemnifying Party, which it may
withhold for any reason.
7. DEFAULT AND TERMINATION.
7.1 DEFAULT. In the event of a default (a "Default"), the non-defaulting
party shall have the right to terminate this Agreement by giving notice to the
other party under this Agreement and of its election to terminate this
Agreement, after the non-defaulting party becomes aware of such Default. Each of
the following is a Default:
(i) The failure of either party to materially
perform any of such party's obligations contained in this Agreement, which
failure has not been cured within ten (10) days, in the case of a breach in any
payment obligation hereunder, or thirty (30) days, in the case of a breach in
any other kind of obligation hereunder, after the non-breaching party provides
notice to the breaching party describing the breach(s) in reasonable detail. The
failure of AEC to meet any of its Performance Standards contained in Section
2.2.2 above (which Performance Standard has been measured and averaged over a
calendar month) shall not be deemed material unless AEC shall fail to meet such
Performance Standard by a margin greater than ten percentage points (10%) in any
month.
(ii) Notwithstanding anything to the contrary
in Section 7. 1 (i) , the failure of AEC to meet any of its Performance
Standards (which Performance Standard has been measured and averaged over a
calendar month) shall not be deemed material during any "Surge Month" (as
hereinafter defined) , except as provided in this Section 7.1(ii). A "Surge
Month" shall be deemed to have occurred when the average daily order volume for
any calendar month (measured by the number of discrete orders placed, not the
total number of Products ordered) (the "Average Daily Order Volume") exceeds the
average of the previous two (2) calendar months Average Daily Order Volume by at
least sixty percent (60%). If in any Surge Month AEC shall fail to meet any of
its Performance Standards by a margin greater than ten percentage points (10 %),
then AEC shall be in Default.
(ii) The occurrence of any of the following:
(a) any party admits in writing its inability to pay its debts generally or
makes a general assignment for the benefit of creditors; (b) any affirmative act
of insolvency by any party filing by any party of any petition or action under
any bankruptcy, reorganization, insolvency, arrangement, liquidation,
dissolution or moratorium law, or any other similar law or laws for the benefit
of, or relating to, debtors; (c) the filing, by any third party, against any
party of any petition or action of the type described in clause (b) above, which
has not been either controverted by such party within fifteen (15) days after
its receipt of the service of process dating to such filing, or stayed or
dismissed within thirty (30) days after the time of such receipt; (d) the
subjection of a material part of any party's property to any levy, seizure,
assignment or sale for or by any creditor, third party or governmental agency,
provided that such levy, seizure, assignment or sale has not been stayed,
discharged or reversed within thirty (30) days after the date of issuance of the
order or decree which authorized the same; or (e) the issuance of an injunction
enjoining either party from performing any of its material obligations
hereunder, which injunction has not been stayed, discharged or reversed within
thirty (30) days after the date of issuance of the order or decree which
authorized the same.
7.2 EFFECT OF DEFAULT. If there is a Default, this Agreement shall
terminate and the parties shall have all rights and remedies provided in this
Agreement upon termination in addition to those rights and remedies it may have
under law or equity, subject to Section 8 hereof.
7.3 EFFECT OF TERMINATION. Upon the expiration or termination of this
Agreement for any reason whatsoever the license granted to COMPANY hereunder
shall immediately terminate and all rights of the COMPANY with respect to the
AMG Databases shall immediately cease. COMPANY shall purge all copies of the AMG
Databases from COMPANY'S computer system and from any other computer storage
device or medium on which COMPANY has placed the AMG DATABASES and an officer of
COMPANY shall certify in writing to AEC to such cessation and destruction.
8. LIMITATION OF LIABILITY.
NEITHER OF THE PARTIES HERETO SHALL HAVE ANY LIABILITY TO THE OTHER PARTY
HERETO OR TO ANY THIRD PARTY FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL, EXEMPLARY
OR INCIDENTAL DAMAGES ARISING UNDER THE TERMS OF THIS AGREEMENT, EVEN IF ADVISED
IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES. The foregoing shall not be
interpreted to limit any party's right to be fully indemnified to the extent
provided under Section 6 for damages claimed by a third party. COMPANY
acknowledges that nothing in this Agreement shall be deemed to establish a
contractual or other legally recognizable relationship between AEC and a
Customer, it being agreed that the services provided hereunder are for COMPANY's
CONFIDENTIAL
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benefit and as agent for COMPANY. COMPANY shall be responsible for ensuring
compliance with all laws and regulations governing the sale and distribution of
Product as described herein.
9. FORCE MAJEURE.
Except for obligations under Section 4 (Confidentiality) and obligations of
payment, the executory obligations of the parties hereunder shall be excused to
the extent, but only to the extent, delayed or prevented by Acts of God,
including, without limitation, earthquake, storm, flood, fire, explosion, power
failure, civil insurrection, or any other cause beyond the reasonable control of
the affected party hereto and which such party could not by reasonable diligence
have avoided (collectively, "Force Majeure"), provided that written notice of
such Force Majeure is given by the affected party to the other within twenty
(20) days of such party's becoming affected by the Force Majeure. Furthermore,
in the event such notice is timely given, no failure or delay by either party in
the performance of any of its obligations (other than Confidentiality
obligations) as a result of a Force Majeure shall give rise to any liability to
the other party for any loss, injury, delay, or other casualty suffered or
incurred by such other party due to such Force Majeure. The party directly
affected by a Force Majeure shall use all reasonable efforts to minimize the
effects of the same. At the election of the party not directly affected by a
Force Majeure, a period of time equal to the duration of any suspension of
performance by the other party as a result of a Force Majeure shall be added to
the end of the then current term of this Agreement, and such term shall be
accordingly extended.
10. TRADEMARKS/COPYRIGHT NOTICES.
10.1 COMPANY agrees that AEC shall be entitled to include one of its
All-Music Guide trademarks and/or service marks with an associated design or
logo (individually and collectively, the "AEC Marks") on the presentation of
AEC's DATABASE information (e.g., page view, discography listing, biography,
album review, album track listing, etc.) within the On-Line Store during the
Term. Such presentations shall be determined by AEC in its sole discretion, but
subject to COMPANY's prior written approval, which approval shall not be
unreasonably withheld or delayed.
Without limiting the foregoing, it is understood by both parties, that best
positioning of the AEC Marks within the On-Line Store is best determined by AEC,
and COMPANY agrees that the common goal with respect to AEC's Marks displayed on
the On-Line Store is to inform the viewer that the data viewed has been provided
by AEC The acceptable forms of markings for the DATABASE information, as well as
the copyright notices that must appear with the presentation of the DATABASE
information, are set forth on Exhibit II- Trademark Specifications and Copyright
Notices.
During the term of the Agreement, COMPANY grants AEC a limited,
nonexclusive license to use the COMPANY Marks in promotional materials, provided
that both parties have mutually approved of such materials in writing, which
approval shall not be unreasonably withheld or delayed. Such license shall be
deemed withdrawn at the termination, for any reason, of this Agreement. Nothing
contained in this Agreement shall be construed as an assignment or grant to AEC
of any right, title or interest in or to COMPANY Marks other than such
promotional use, and in the carrying out of AEC obligations hereunder. All
rights relating to the COMPANY Marks are expressly being reserved by COMPANY,
except for the limited license granted above to AEC, and all good will
associated with COMPANY Marks inures to the benefit of COMPANY.
10.2 The COMPANY acknowledges that AEC is the sole owner of all right,
title and interest in the AEC Marks but not the COMPANY Marks. Nothing contained
in this Agreement shall be construed as an assignment or grant to COMPANY of any
right, title or interest in or to the AEC Marks. All rights relating thereto are
expressly being reserved by AEC, except for the limited licenses granted to
COMPANY above, and all good will associated with the AEC Marks inures to the
benefit of AEC.
10.3 For the avoidance of doubt, nothing contained in the foregoing
provisions of this Section 10 shall be construed to supersede the requirements
that COMPANY reproduce and display such logos and any copyright notices as
relate to the DATABASES. During the term of the Agreement, parties agree that
the MATRIX and/or AMG logos shall appear prominently in all promotional
materials prepared by either party, whether or not the AEC Marks or the Company
Marks appear.
11. GENERAL.
11.1 Each party acknowledges that it has read this Agreement, understands
it, and agrees to be bound by its terms. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements, negotiations, understandings, representations,
statements and writings among the parties relating thereto with regard to the
subject matter hereof. No modification, alteration, waiver or change in any of
the terms of this Agreement shall be valid or binding upon the parties hereto
unless made in writing and duly executed by both of the parties hereto.
11.2 This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Florida and the United States of America, without
regard to the principles of conflicts of law. The parties hereby consent to and
submit to the sole jurisdiction of a competent court located in the State of
Florida. Such court shall be the sole and exclusive venue for resolution of any
disputes or
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disagreements between the parties relating to this Agreement or the transactions
contemplated hereby or otherwise arising hereunder or with respect to any breach
of the terms and provisions hereof.
11.3 Should any part of this Agreement be held unenforceable or in conflict
with the applicable laws or regulations of any jurisdiction, the invalid or
unenforceable part or provision shall be replaced with a provision which
accomplishes, to the extent possible, the original business purpose of such part
or provision in a valid and enforceable manner, and the remainder of this
Agreement shall remain binding upon the parties.
11.4 Each of the parties hereby covenants and represents to the other that
neither the execution and delivery of this Agreement nor the performance of the
transactions contemplated hereby will cause a breach under, or violate
provisions of, any other agreement to which it is a party or by which its assets
are or may be bound. This Agreement and all obligations and rights herein shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
11.5 This Agreement is not intended to create any relationship other than
AEC as an independent contractor performing services covered by this Agreement,
and COMPANY as the party contracting with AEC for those services. No party is a
partner or a legal representative of the other for any purpose whatsoever. No
party is authorized to make any contract, agreement or warranty on behalf of any
other party. Under no circumstance shall one party's employees be construed to
be employees of any other party.
11.6 All notices given to the parties hereunder and all statements and
payments hereunder shall be addressed to the parties at the address set forth
below or at such other address as shall be designated by the parties in writing
from time to time:
If to COMPANY: To Name and Address Indicated on Cover Page hereto
If to AEC: with a copy to:
AEC One Stop Group, Inc. Alliance Entertainment Corp.
4250 Coral Ridge Drive 4250 Coral Ridge Drive
Coral Springs, Florida 33065 Coral Springs, Florida 33065
Attn: ____________________ Attn: General Counsel
All notices shall be in writing and shall be personally delivered, or served by
certified mail, return receipt requested, or by overnight mail service such as
Federal Express, all charges pre-paid. Except as otherwise provided herein, such
notices shall be deemed given three days after mailing or delivery to an
overnight mail service, all charges prepaid, except that notices of change of
address shall be effective only after actual receipt thereof. The failure of the
recipient to accept or receive notice given by certified mail, return receipt
requested, postage pre-paid, does not affect the validity of the notice.
11.7. The terms and provisions of this Agreement that by their sense and
context are intended to survive the performance of such term or provision or of
this Agreement shall so survive the completion of performance and termination of
this Agreement, including without limitation the provisions of Sections 4, 5 and
6 hereof.
11.8. Waiver by either party of a default or breach or a succession of
defaults or breaches, or any failure by either party to enforce any rights
hereunder, shall not be deemed to constitute a waiver of any subsequent default
or breach with respect to the same or any other provision hereof, and shall not
deprive such party of any right to terminate this Agreement arising by reason of
any subsequent default or breach.
11.9. The captions used in this Agreement are for convenience of reference
only and are not to affect the construction hereof or be taken into
consideration in the interpretation hereof.
11.10. This Agreement may be executed in one or more counterparts each of
which shall be deemed an original but all of which taken together shall be
deemed one and the same instrument.
END OF GENERAL TERMS & CONDITIONS
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Agreed:
<TABLE>
<S> <C> <C>
Company Name: AUDIOHIGHWAY.COM AEC ONE STOP GROUP, INC.
Name: Nathan Schulhof Name:
----------------------------------------- ------------------------------------
Individual signing (Please print) Individual signing (Please print)
Signature: Signature:
----------------------------------------- ------------------------------------
Title: President & CEO Title
----------------------------------------- ------------------------------------
</TABLE>
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EXHIBIT I
FULFILLMENT PRICES
AEC ONE STOP GROUP
ONE STOP MAJOR LABEL AND MAJOR INDEPENDENT PRICE LIST
I. AUDIO:
<TABLE>
<CAPTION>
BMG WEA EMD
<S> <C> <C>
CD 2% CS 2% CD 2% CS 2% CD 2% CS 2%
17.98 13.09 12.83 10.98 7.50 7.35 17.98 13.09 12.83 10.98 7.50 7.35 17.98 13.09 12.83 10.98 7.50 7.35
16.98 12.09 11.85 9.98 6.75 6.62 16.98 12.09 11.85 9.98 6.75 6.62 16.98 12.09 11.85 9.98 6.75 6.62
15.98 11.35 11.12 7.98 5.35 5.24 15.98 11.35 11.12 7.98 5.35 5.24 15.98 11.35 11.12 7.98 5.35 5.24
13.98 10.59 10.38 6.98 4.69 4.60 13.98 10.59 10.38 6.98 4.25 4.17 13.98 10.59 10.38 6.98 4.69 4.60
11.98 8.85 8.67 5.98 4.25 4.17 11.98 9.09 8.91 11.98 9.09 8.91 5.98 4.25 4.17
CLASSICAL - BMG CLASSICAL - WEA UNIVERSAL
CD 2% CD 2% CD 2% CS 2%
17.98 13.09 12.83 17.98 13.35 13.08 17.98 13.09 12.83 10.98 7.50 7.35
16.98 12.09 11.85 16.98 12.09 11.85 16.98 12.09 11.85 9.98 6.75 6.62
15.98 11.35 11.12 15.98 11.35 11.12 15.98 11.35 11.12 7.98 5.35 5.24
9.98 8.09 7.93 9.98 8.09 7.93 13.98 10.59 10.38 6.98 4.69 4.60
12.98 9.09 8.91 5.98 4.25 4.17
11.98 7.99 7.83
PGD SONY INDEPENDENT PRICING
CD 2% CS 2% CD 2% CS 2% CD 2% CS 2%
17.98 13.09 12.83 10.98 7.50 7.35 17.98 13.09 12.83 10.98 7.50 7.35 17.98 13.09 12.83 13.98 10.49 10.28
16.98 12.09 11.85 9.98 6.75 6.62 16.98 12.09 11.85 9.98 6.75 6.62 16.98 12.09 11.85 12.98 9.99 9.79
15.98 11.35 11.12 7.98 5.35 5.24 15.98 11.35 11.12 7.98 5.35 5.24 15.98 11.35 11.12 11.98 8.99 8.81
13.98 10.59 10.38 6.98 4.69 4.60 13.98 10.59 10.38 6.98 4.69 4.60 14.98 11.09 10.87 9.98 6.99 6.85
11.98 8.85 8.67 5.98 4.25 4.17 11.98 9.09 8.91 5.98 2.99 2.93
CLASSICAL - PGD CLASSICAL - SONY
CD 2% CD 2%
15.98 11.35 11.12 16.98 12.09 11.85
9.98 8.09 7.93 15.98 11.35 11.12
7.98 5.35 5.24 10.98 9.09 8.91
9.98 8.09 7.93
</TABLE>
N.B. If products are not on lists above, and not in AEC's regular inventory
holdings, pricing shall be based on cost to AEC and mark-up consistent with
creation of above price list, and general market pricing.
II. VIDEO AND DVD
All VHS and DVD product shall be priced at actual manufacturer cost (as
published by the manufacturer) plus a twelve percent (12%) AEC markup.
CONFIDENTIAL
<PAGE>
Page 14
III. VOLUME DISCOUNTS
The following discounts shall apply to sales within the indicated
ranges:
<TABLE>
<CAPTION>
ANNUAL SALES DISCOUNT
<S> <C>
$1,000,001 - $7,500,000 .25%
$7,500,001 - $15,000,000 .5%
$15,000,001 - $25,000,000 .75%
$25,000,001 and up 1.0%
</TABLE>
For example, for annual sales of $8,000,000, the discount shall apply
as follows: the first $1,000,000 in sales shall not be discounted. A discount of
.25% shall apply to the next $6,500,000 in sales. The remaining $500,000 in
sales shall be discounted by .5%.
The discount shall be calculated by AEC within 90 days after each year
during the term hereof. The discount shall be applied as a credit against
COMPANY's purchases in the ensuing year.
CONFIDENTIAL
<PAGE>
Page 15
EXHIBIT II
TRADEMARK SPECIFICATIONS AND COPYRIGHT NOTICES
ALL MUSIC GUIDE:
The following DATABASE information will be marked with the following
All Music Guide logo and branding: Artist Biographies, Essays, and Album Reviews
will be marked "AMG Biography" and "AMG Review," and "AMG Essay". After each
biography and album review, the name of the author, and the term "AMG" will be
listed. Ratings will be marked "AMG Ratings", relational elements such as the
following will be marked as: "AMG Roots & Influences", "AMG Similar/Related
Artists", "AMG Music Maps", "AMG Track Listings" and "AMG Similar Albums".
ALL-MOVIE GUIDE:
The following DATABASE information will be marked with the following
All Movie Guide logo and branding: Artist Biographies, Essays, MovieViews, and
Album Reviews will be marked "AMG Biography" and "AMG Review," and "AMG
MovieView," and "AMG Essay." After each biography and album review, the name of
the author, and the term "All-Movie Guide" will be listed. Ratings will be
marked "AMG Ratings", relational elements such as the following will be marked
as: "AMG Movie Recommends."
Set forth on the following pages are examples of the presentations of the All
Music Guide DATABASE elements, and the appropriate copyright notices, which are
pre-approved by AEC.
CONFIDENTIAL
<PAGE>
Page 16
EXHIBIT III
CONSIGNMENT INVENTORY OPERATIONAL AND BUSINESS RULES
1) Company agrees to provide AEC with a detailed description the SKU's and an
estimated quantity of each SKU, and the Suggested Retail Price (SRP) for
each SKU prior to AEC moving forward on establishing a consignment service.
2) Common items (items that exist in the AEC One Stop Group product file) will
not be accepted as consignment inventory. a) If a product is in the AEC One
Stop Group database but not stocked, the product will be handled as a
backorder.
3) Consignment product will be warehoused separately. These products will not
be intermingled with other AEC inventory and will not be made available to
other retail entities unless mutually agreed upon in writing by AEC and
Company.
4) All consignment products must have at least ONE identifiable SKU number
(catalog number) on each item (preferably on the spine or other visible
area of the SKU).
5) All consignment products must have a UPC code ON EACH INDIVIDUAL PRODUCT
BEFORE ITS ARRIVAL TO AEC.
a) All products must have ONE UPC code assigned and displayed on each
item of consignment product. If the assignment of a UPC is not
possible by Company, then AEC and Company will determine a means
whereby AEC we provide this as an added service. The standard fee
charged for the application and creation of a UPC is $0.25 per each
piece.
b) All products must be in received in "READY-TO-STOCK" condition.
Meaning, t-shirts must be individually folded (and bagged if Company
requires them to be so), etc. If items are not received in
READY-TO-STOCK condition, AEC will provide this service per individual
item for an additional $0.25 per each piece.
6) AEC will carry no more than 30 pieces of each consignment item unless
otherwise negotiated and no more than 300 unique items (SKU's) may be sent
to AEC, unless otherwise agreed to.
7) AEC will be afforded a one (1%) shrinkage factor.
8) AEC will accept new SKU's (into the database once a month); new SKU's must
be received at AEC by the 5th of each month, unless otherwise agreed.
9) Consignment product information (descriptive information identifying the
product) must be submitted in the attached format. This information must be
submitted at least one week prior to placing a purchase order for these
goods, giving AEC's data entry operators enough time to enter the detailed
product information into the AEC product database.
10) A complete list of items and the number of pieces per item to be delivered
must be provided to AEC at least one week prior to shipment of the goods as
per the purchase order format provided. This allows creation of the PO,
which, in turn, generates the data, required to facilitate proper receipt
of the goods into the AEC warehouse.
11) All packages received at the AEC receiving docks must be clearly marked as
[COMPANY NAME - CONSIGNMENT GOODS].
CONFIDENTIAL
<PAGE>
Page 17
12) AEC will charge $5.00 per location (a location is a bin established in the
warehouse to house the SKUS) per month for each SKU not achieving a minimum
turn rate of 12 turns annually. The annual turn rate calculation will begin
90-days after SKU has arrived to AEC and will be measured monthly on a
rolling 90-day period. AEC warehouse space is at a premium, therefore, the
location fee is applied to insure that all items stocked as consignment are
active SKU's.
13) Corrugated shipping containers and related packaging materials (used to
send consignment items to the consumer and to return merchandise to
Company) will be purchased by AEC and charged (at AEC's cost) back to
Company.
14) Retailer will provide necessary insurance coverage for all products
warehoused at AEC and provide copies of such documentation.
15) All items received by AEC must have supporting documentation indicating
that the items were obtained through legal channels and Company has the
legal right to sell the product and to request AEC to warehouse and fill
the orders on their behalf.
16) Consignment handling fees ("Consignment Product Handling Fees") are
calculated as follows: For items sold to the consumer at the following
Suggested Retail Price the following table identifies the handling fees AEC
will charge Company.
<TABLE>
<CAPTION>
SRP AEC HANDLING FEE PER
--- --------------------
ITEM SHIPPED
------------
<S> <C>
$0.00 to $19.99 $2.00
$20.00 to $49.99 $2.50
$50.00 to $99.99 $3.00
$100.00 to $XXX.XX $4.00
</TABLE>
CONFIDENTIAL
<PAGE>
EXHIBIT 10.12
CONFIDENTIAL
DISTRIBUTION AND FULFILLMENT AGREEMENT
THIS DISTRIBUTION AND FULFILLMENT AGREEMENT (the "AGREEMENT") is made as
of _____________, 1999 (the "EFFECTIVE DATE") by and between AUDIOHIGHWAY.COM, a
California corporation, with its principal place of business at 20600 Mariani
Avenue, Cupertino, California 95014 (the "SELLER"), and INGRAM ENTERTAINMENT
INC., a Tennessee corporation, with its principal place of business at Two
Ingram Boulevard, La Vergne, Tennessee 37089 (the "DISTRIBUTOR").
1. DEFINITIONS.
1.1 "BACK ORDERED PRODUCTS" means Products that Distributor
does not have in stock in its shipping facilities at the time an Order is
submitted for them.
1.2 "BUSINESS DAY" means a day on which Distributor regularly
conducts business, excluding holidays.
1.3 "CUSTOMER" means a person in the United States, its
territories and protectorates, who orders Products from Seller's online
retail store.
1.4 "DAMAGED PRODUCTS" means Products shipped by Distributor
which are damaged during shipment to Customers to the extent that the
Products cannot be used for their intended purpose. Products damaged
while in the care, custody, or control of the Customer are not Damaged
Products for purposes of this Agreement.
1.5 "DEFECTIVE PRODUCTS" means Products shipped by Distributor
which contain manufactured defects which prevent them from being used for
their intended purpose.
1.6 "EDI" means electronic data interchange for transmitting
data between computers via a value-added network (mailbox service
provider) or via the Internet.
1.7 "ELECTRONIC REPORT" means information provided
electronically.
1.8 "FTP" means file transfer protocol utilized to provide
information necessary for placing orders with Distributor via a
value-added network or the Internet.
1.9 "INSERTS" means custom insertions acceptable to Distributor
which Seller delivers to Distributor at no expense to Distributor and
which Seller requests to be included with Shipments.
1.10 "ORDER" means a Product order placed by Seller in
accordance with this Agreement.
1.11 "PRODUCTS" means Distributor's (or its vendors') products
Seller may purchase pursuant to this Agreement.
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CONFIDENTIAL
1.12 "SHIPMENT" means a shipment of Product by Distributor in
response to an Order.
1.13 "SHIPPING FACILITIES" means Distributor facilities in the
United States designated from time-to-time by Distributor as
direct-to-consumer distribution facilities.
1.14 "UNMERCHANDISABLE PRODUCTS" means Products shipped by
Distributor which are shopworn, soiled and/or otherwise not in reasonably
acceptable condition for commercial distribution.
2. ELECTRONIC DATA TRANSMISSION. Electronic data transmissions
between Distributor and Seller shall be via EDI or other mutually agreed upon
means of electronic data transmissions. For EDI through a value-added network,
Seller will pay all usual and customary fees related to transmission and
retrieval through Seller's value-added network and any related interconnect
charges to or from Distributor's value-added network. Distributor will furnish
Seller the specifications for FTP and any other mutually agreed upon means of
electronic data transmission (other than EDI). Distributor may change those
specifications from time-to-time on not less than 30 days prior written notice
to Seller.
3. FULFILLMENT SERVICES.
3.1 ORDERS. Seller will transmit, via electronic data
transmission, Orders to Distributor. Each Order shall contain the
following information: (a) the Customer's name and complete shipping
address; (b) the Distributor-approved shipping method to be used; (c) the
text of any special messages to the Customer (messages from the Customer
to a third party recipient are excluded per SECTION 3.9); and (d) the
Products to be shipped and their quantity.
3.2 FULFILLMENT. After receipt of an Order, Distributor will
use reasonable efforts to: (a) fill the Order from Products in stock at
the Shipping Facilities; (b) print all packing slips excluding Inserts;
(c) insert all packing slips and Inserts; (d) print and affix shipping
labels on Shipments; (e) when made available by Distributor, print the
text of any special message reasonably acceptable to Distributor on the
standard packing slip requested by Seller in the Order; (f) ship the
Order to the Customer; (g) order from the vendor any Back Ordered
Products and notify Seller that the Back Ordered Products are backordered
(in which case Seller may, via electronic data transmission to
Distributor, elect to terminate the Order with respect to the Back
Ordered Products or to terminate the Order in total); and (h) if not
terminated as described in CLAUSE (g), ship any Back Ordered Products
following their receipt by Distributor at the Shipping Facilities in
accordance with the terms of this Section. Provided Distributor receives
an Order and the related picking ticket is printed no later than 1:00
p.m., central time, Distributor will use commercially reasonable efforts
to ship the Order that same Business Day. If the Order is received and
the related picking ticket is printed after 1:00 p.m., central time,
Distributor will use commercially reasonable efforts to ship the Order
the following Business Day. If Distributor does not ship an Order as
provided above, Distributor will notify Seller no later than the second
following Business Day, and Seller may without obligation cancel the
Order by notice to Distributor via electronic data transmission. Seller
will also have the right to cancel an Order by notice to Distributor via
electronic
2
<PAGE>
CONFIDENTIAL
data transmission at any time prior to the printing or generation of the
pick ticket with respect to that Order. Seller will not be invoiced for
cancelled Orders. Seller will notify Customers of Order cancellations.
3.3 PACKING SLIPS. Packing slips printed and inserted in
Shipments by Distributor will be agreed upon in "look and feel" by
Distributor and Seller, based on Seller's specifications and
Distributor's capability.
3.4 SHIPMENT. Distributor will use commercially reasonable
efforts to ship Products in accordance with the Distributor-approved
shipping methods specified by Seller in the Order. Distributor will use
commercially reasonable efforts to package all Shipments in a manner to
prevent damage during shipment, the "look and feel" of which packaging
will be agreed upon by Distributor and Seller, based on Seller's
specifications and Distributor's capability. Distributor will cooperate
with Seller in tracking any lost shipments and filing any related carrier
claims. Except as specifically set out in this Agreement, all shipping
shall be at the expense of Seller. The risk of loss for Products shall
pass from Distributor when the Products are delivered to the carrier for
shipment to the Customers.
3.5 MASTER DATABASE LICENSE AGREEMENT. This Agreement
incorporates by reference the terms of the Master Database License
Agreement in the form of EXHIBIT A hereto (the "DATABASE LICENSE"). The
Database License describes the Products as of the most recent update of
the Ingram Entertainment Inc. Master Database (the "MASTER DATABASE")
made available to Seller. Distributor makes no representation or
warranty as to the availability of any of the Products, whether or not
included in the Master Database; however, Distributor will not knowingly
misstate its inventory levels in any material manner.
3.6 REPORTS TO SELLER.
(a) Each Business Day, Distributor will furnish Seller
Electronic Reports of the following: (A) all Shipments made that
Business Day by Order number and tracking number (if available),
all Products contained in each Order, and all Back Ordered
Products by order number, and (B) Orders received, but not
shipped, and the status of each such Order; and (C) all Product
returns (identified by Return Authorization Number) processed by
Distributor indicating quantity and item(s) received and other
information in reasonably sufficient detail (I.E. Customer and
invoice number) to allow Seller to properly credit Customers for
such returns.
(b) On a monthly basis, Distributor shall provide a
statement of account which details (i) all invoices sent to Seller
during the prior calendar month; (ii) all payments received from
Seller during the prior calendar month, and other credits made
against Seller's payment obligations; and (iii) all unpaid
invoices.
3.7 LICENSE. Seller hereby grants to Distributor a limited,
nonexclusive, nontransferable license to (a) distribute the Inserts in
connection with the Products, and
3
<PAGE>
CONFIDENTIAL
(b) use Seller's trademarks in accordance with
Seller's specifications on Product invoices and other materials
provided to Customers. The use of Seller's trademarks, however, shall
be limited to that which is reasonably necessary to carry out the
purposes of this Agreement. The licenses contemplated by this
paragraph are deemed expired upon termination of this Agreement for any
reason.
3.8 NON-EXCLUSIVE DEALING. Nothing in this Agreement requires
either party to this Agreement to deal exclusively with the other in any
capacity.
3.9 NO THIRD PARTY MESSAGES. Seller understands that
Distributor offers to certain clients the ability to permit customers of
those clients to include with the Order a message from the customer to a
third party recipient of the Products in the Order. Seller further
understands that Distributor does not have the ability to block or
prevent the customers of any particular client (including the Seller)
from offering or from the client or its customers utilizing, that
messaging feature. Seller and Distributor nonetheless agree that Seller
will not have the right to utilize or offer this messaging service to its
Customers, and that any offering of this messaging service by Seller to
Customers or any use of the messaging service by Seller or any Customer
will constitute a breach of this Agreement by Seller and an Event of
Default for purposes of SECTION 8.3. Seller acknowledges that, in any
event, Distributor does not have the capability to screen or review any
such message and agrees that Distributor has no obligation to do so.
4. RETURNS.
4.1 RETURNS GENERALLY. (a) In order for returned Products
(including Defective Products, Unmerchandisable Products, Damaged
Products, and Products erroneously shipped to Customers) to be eligible
for credit pursuant to this Agreement, Seller agrees to the following
procedures:
(i) Seller will furnish each Customer desiring to return
Products a return authorization number of no more than eight
characters, all of which must be alpha numeric; and
(ii) Seller will furnish to Distributor that
authorization number; the Seller's account number; the item
number(s) or UPC number(s) of the Products being returned; the
quantity of each Product being returned; Seller's invoice number
to which the return is to be applied; and the reason for the
Product return (carrier damage, shipped in error, defective,
Customer error, Customer change in preference, etc.).
Within five Business Days of Distributor's receipt of the returned
Products, all returned Products will be logged into Distributor's
inventory, Seller will be issued a credit by Distributor for the lowest
price per unit paid by Seller to Distributor for the returned Products
(excluding freight and handling fees) or, if less, the current market
value of those Products; PROVIDED, HOWEVER, that if Seller furnishes
Distributor the applicable invoice number and the returned Products have
been received by Distributor no more than 60 days after the invoice date,
such credit will be equal to the order or line item amounts for the
returned Products shown on that invoice. In the event of the return by
4
<PAGE>
CONFIDENTIAL
Customers of Defective Products, Unmerchandisable Products, Products
shipped erroneously to Customers, and/or Damaged Products, the credit set
out in this paragraph will include the freight costs initially charged to
Seller by Distributor for those Products. The credit set out in this
paragraph will be reduced by any applicable processing fee described in
SECTION 4.2. Distributor will provide Seller with information in
reasonably sufficient detail (I.E. Seller's RA number and invoice number
(if provided by Customer)) to allow Seller to properly credit Customers
for such returns. Credit memos for returns will be processed by
Distributor and delivered to Seller within 15 days after Distributor's
receipt of the returned Product. Credits issued to Seller under any such
credit memos will be applied immediately to payables incurred by Seller.
Seller will reimburse Distributor per normal payment terms set out in
SECTION 5.3 for any freight costs charged to Distributor by the carrier
due to Customer refusal to accept delivery of Products correctly shipped
to the Customer which are then returned by the carrier to Distributor.
Distributor's sole liability for any Defective Products, Unmerchandisable
Products, Products erroneously shipped to Customers, and/or Damaged
Products will be acceptance of their return and issuance of the credit
set out in this paragraph. If Seller desires replacement of any of the
four types of Products described in the preceding sentence, Seller will
initiate a new order for the replacement Products.
(b) Distributor will not be obligated to accept any returns of
Products submitted more than 60 days after shipment of such Products to a
Customer, including returns of Defective Products, Damaged Products,
Unmerchandisable Products and/or erroneously shipped Products.
4.2 PROCESSING FEE. For returns of Products (other than
returns of Defective Products, Unmerchandisable Products, Damaged
Products, or Products erroneously shipped to Customers), Seller will pay
Distributor a processing fee of $0.65 per unit for all units returned.
The processing fee will reduce the amount of any credits provided
pursuant to SECTION 4.1.
4.3 MINT, RESALABLE CONDITION. All Product returned to
Distributor (except for returns of Defective Products, Unmerchandisable
Products, or Damaged Products) must be with the original packaging intact
(including manufacturer's shrink wrap) and otherwise in mint, resalable
condition. No credit will be issued for any returned Product not in
mint, resalable condition with the original packaging intact.
5. PAYMENT.
5.1 PRICES. Product prices to be paid by Seller to Distributor
are set forth on EXHIBIT B. Distributor may change such prices with 30
days' prior written notice.
5.2 FEES. Fees for services provided by Distributor to Seller
are set forth on EXHIBIT C. Distributor may change such fee amounts with
30 days prior written notice.
5.3 PAYMENT TERMS. Distributor will invoice Seller upon
shipment of Product. To the extent Seller establishes a credit line with
Distributor, all invoices shall be due and payable thirty days from
invoice date. Distributor may establish a credit line for Seller based
upon Seller's credit application and submission of financial data per
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<PAGE>
CONFIDENTIAL
Distributor's policies. Seller understands that if a credit line with
Distributor is established, it may be modified from time-to-time based
upon Distributor's credit review and credit policies. Any amounts not
paid when due will be subject to a late charge of 1 1/2% per month (18%
per annum) on the overdue balance (or, if less, the maximum amount
permitted by applicable law).
5.4 ADVERTISING. Distributor will pass through to Seller a
proportionate share of any co-op advertising or market development funds
from vendors applicable to the Products. All advertising must have prior
approval of Distributor and the vendor to qualify for pass through. In
order to qualify for these funds, Seller acknowledges its understanding
that it must provide Distributor and the vendor with acceptable proof of
performance on forms and within the time frames specified by vendor.
Deductions for advertising prior to receipt of credit are prohibited.
6. DISCLAIMER AND INDEMNITY.
6.1 DISCLAIMER. DISTRIBUTOR PROVIDES ALL PRODUCTS, MATERIALS
AND SERVICES TO SELLER AND ITS CUSTOMERS "AS IS," AND DISTRIBUTOR
DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION THE IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT,
MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE. However, the
foregoing disclaimer does not limit any warranties provided by Product
vendors to either Seller or its Customers. Each party acknowledges that
it has not entered into this Agreement in reliance upon any warranty or
representation except as specifically set forth herein. DISTRIBUTOR HAS
NOT LICENSED OR PROVIDED AND DOES NOT HEREBY LICENSE OR PROVIDE SELLER
THE RIGHT TO USE ANY LOGO, TRADEMARK, OR OTHER INTELLECTUAL PROPERTY OF
DISTRIBUTOR, ANY SUPPLIER OR VENDOR, OR ANY OTHER PARTY.
6.2 INDEMNITY. To the extent Distributor is indemnified,
held harmless, and defended by the applicable supplier of Products to
Distributor, Distributor hereby agrees to indemnify, hold harmless, and
defend Seller from (a) all claims, damages, costs and expenses,
including reasonable attorneys' fees and litigation expenses, arising out
of or as a result of, or from legal proceedings threatened or instituted
against Distributor as a result of, any claims by third persons or
entities that any of the Products (i) in any way violates any existing
law, or infringes upon or misappropriates any copyright, patent,
trademark, trade secret, right of publicity, right of privacy, or other
proprietary rights of any third party, either in whole or in part; (ii)
contains or includes matters which, if published, will be libelous or
defamatory; and (iii) fails to comply with all laws for each country in
which the Product is intended to be delivered; and (b) any claims by any
6
<PAGE>
CONFIDENTIAL
person or entity that the person or entity has a right to receive any
royalty or other payment as a result of Seller's sales of the Products
pursuant to this Agreement.
7. LIMITATION OF LIABILITY. NEITHER DISTRIBUTOR NOR SELLER SHALL BE
LIABLE FOR PUNITIVE, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OR LOST
PROFITS (INCLUDING DUE TO NEGLIGENCE) ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, EVEN IF SUCH PARTY HAS NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.
EXCEPT AS PROVIDED IN SECTION 6.2 ABOVE, IN NO EVENT SHALL DISTRIBUTOR BE LIABLE
TO SELLER IN AN AMOUNT EXCEEDING THE AMOUNTS ACTUALLY PAID BY SELLER TO
DISTRIBUTOR HEREUNDER. EXCEPT AS PROVIDED IN SECTION 6.2 ABOVE, THE ONLY
LIABILITY DISTRIBUTOR WILL HAVE WITH RESPECT TO ANY DEFECTIVE PRODUCTS, DAMAGED
PRODUCTS, UNMERCHANDISABLE PRODUCTS, AND/OR PRODUCTS ERRONEOUSLY SHIPPED WILL BE
THE RETURN RIGHTS OF CUSTOMERS AND THE OBLIGATION TO PROVIDE THE CREDITS
DESCRIBED IN THIS AGREEMENT.
8. TERM AND TERMINATION.
8.1 TERM. Unless earlier terminated as specified below, this
Agreement commences on the Effective Date and expires on the first
anniversary of the Effective Date; PROVIDED, HOWEVER, that unless a party
exercises its termination rights provided herein, the term shall be
automatically renewed for successive one year periods.
8.2 TERMINATION FOR CONVENIENCE. Either party may terminate
this Agreement at any time during any renewal term for its convenience
upon 60 days prior written notice to the other.
8.3 EVENT OF DEFAULT. Either party may terminate this
Agreement immediately upon the occurrence of an Event of Default by the
other party. As used herein, an "Event of Default" means the defaulting
party's failure to cure, after receipt of not less than 30 days' prior
written notice from the non-defaulting party, any of the following: (a)
failure of the defaulting party to observe or perform any condition or
obligation imposed on the defaulting party under this Agreement
(including payment obligations); (b) breach of any warranty made by the
defaulting party under this Agreement; or (c) filing of a voluntary
petition in bankruptcy or having an involuntary petition filed against
the defaulting party, or the execution of an assignment for the benefit
of creditors of the defaulting party. The option to terminate this
Agreement shall be in addition to, and not in lieu of, any other remedy
available to the terminating party under this Agreement or at law or
equity, all such remedies being cumulative.
8.4 EFFECT OF TERMINATION. Upon expiration or termination, at
Seller's option, Distributor will either (a) fulfill all pending Orders
in accordance with their terms, in which case all applicable covenants
and licenses under this Agreement shall survive to the limited extent
necessary to fulfill such Orders, or (b) cancel all pending Orders and
immediately refund any payments already made for such pending Orders and
any credits due. Absent election by Seller, Distributor may elect (a) or
(b). Further, the parties will
7
<PAGE>
CONFIDENTIAL
promptly reconcile accounts payable and receivable and bring the balance
owed, if any, current. SECTIONS 2, 4, 6, 7, 8.4, 9, 10, 11, and 12 shall
survive termination or expiration.
9. CONFIDENTIALITY. The parties agree, during the term of this
Agreement and for the five year period following its termination or expiration,
to keep strictly confidential and not disclose to any party, other than its
agents, employees, contractors, or advisors, and then only on a need to know
basis after having informed such individuals of the confidential nature of the
information and such party's obligation to protect that confidentiality and not
to disclose such information except as set out herein, the following: (a) any
term or condition of this Agreement or of any transaction entered into pursuant
to it, or (b) any information about the other party or its business, operations,
products, finances, customers, distributors, systems, budgets, or liabilities
obtained in connection with this Agreement or the transactions contemplated by
it. Distributor further agrees that any Customer information provided to
Distributor by Seller for shipping purposes will not be used for solicitation or
any other purpose by Distributor. The Customer lists and other proprietary
information submitted by Seller in the course of fulfilling the terms of this
Agreement shall be kept strictly confidential except as expressly contemplated
by this Agreement, and Distributor shall not use or disseminate Seller's
proprietary customer information without obtaining Seller's express written
consent in advance. The provisions of this Section shall not apply to
information which (w) is already known to the receiving party or is publicly
available at the time of disclosure; (x) becomes publicly available after
disclosure through no act of the receiving party; (y) is disclosed by the
disclosing party without an obligation or reasonable expectation of
confidentiality; or (z) is required by law to be disclosed (after providing the
disclosing party the opportunity to seek a protective order at its expense).
Neither party shall issue any press release or similar publicity statement
concerning this Agreement's existence or terms without both parties' prior
approval.
10. COMPLIANCE WITH LAWS. At its own expense, each party will comply
with all applicable laws and regulations regarding its activities related to
this Agreement. Each party represents and warrants that it has the full legal
right and authority to enter into this Agreement and perform its obligations
hereunder.
11. TAXES. Seller is for all purposes the seller of the Products to
its Customers and shall be responsible for any and all sales and similar taxes
arising from such sales. SELLER SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS
DISTRIBUTOR AND ITS AFFILIATES, AND THEIR RESPECTIVE OFFICERS, DIRECTORS,
EMPLOYEES, AND CONTRACTORS, FROM ANY AND ALL SALES TAX AND OTHER TAX LIABILITY
(INCLUDING ANY OBLIGATION TO COLLECT AND REMIT ANY TAX) ARISING FROM THE SALE OF
PRODUCTS TO CUSTOMERS UNDER THIS AGREEMENT, INCLUDING RELATED INTEREST,
PENALTIES, AND OTHER CHARGES.
12. GENERAL PROVISIONS.
12.1 GOVERNING LAW. This Agreement will be governed and
construed in accordance with the laws of the State of Tennessee without
giving effect to conflict of laws principles.
12.2 SEVERABILITY; HEADINGS. If any provision herein is held to
be invalid or unenforceable for any reason, the remaining provisions will
continue in full force without
8
<PAGE>
CONFIDENTIAL
being impaired or invalidated in any way. Headings are for reference
purposes only and in no way define, limit, construe or describe the scope
or extent of such section.
12.3 FORCE MAJEURE. If performance hereunder is prevented,
restricted or interfered with by any action or condition whatsoever
beyond the reasonable control of a party, the party so affected, upon
giving prompt notice to the other party, shall be excused from such
performance to the extent of such prevention, restriction or
interference. Each party shall use commercially reasonable efforts to
mitigate the effect of a force majeure.
12.4 INDEPENDENT CONTRACTORS. The parties are independent
contractors, and no agency, partnership, joint venture, employee-employer
or franchisor-franchisee relationship is intended or created by this
Agreement. Neither party shall make any warranties or representations on
behalf of the other party.
12.5 NOTICE. Except as otherwise specified, any notices
hereunder shall be given to the appropriate party at the address
specified above or at such other address as the party shall specify in
writing. Notice shall be deemed given, upon personal delivery, if sent
by fax, upon confirmation of receipt, if sent by certified or registered
mail, postage prepaid, when sent; or if sent by overnight courier, upon
receipt.
12.6 ENTIRE AGREEMENT; WAIVER. This Agreement sets forth the
entire understanding and agreement of the parties, and supersedes any and
all oral or written agreements or understandings between the parties, as
to the subject matter of this Agreement. Except as otherwise provided
herein, it may be changed only by a writing signed by both parties. The
waiver of a breach of any provision of this Agreement will not operate or
be interpreted as a waiver of any other or subsequent breach.
"SELLER" "DISTRIBUTOR"
AUDIOHIGHWAY.COM INGRAM ENTERTAINMENT INC.
By:________________________ By:__________________________
Print Name:________________ Print Name:__________________
Title:_____________________ Title:_______________________
9
<PAGE>
CONFIDENTIAL
EXHIBITS
A. Master Database License Agreement
B. Product Pricing
C. Fee
10
<PAGE>
CONFIDENTIAL
EXHIBIT A
MASTER DATABASE LICENSE AGREEMENT ("DATABASE LICENSE")
For the set up fee of $5,000 and a monthly fee of $700 for subsequent updates
(so long as such updates are made available in the discretion of Ingram
Entertainment Inc.), Ingram Entertainment Inc. (the "Company") is prepared to
deliver to you the Ingram Entertainment Inc. Master Database, including updates
(collectively the "Material"), subject to the following terms and conditions.
1. WAIVER OF FEES: Provided you use the Company as your primary
supplier of pre-recorded video software, DVD software, and
audiobooks for the one-year period following the date you sign the
agreement to which this Database License is an Exhibit, the
Company will waive the above $5,000 set-up fee and the $700 update
fees. Following that one-year period, the Company will waive the
$700 update fees provided that at all times following that
one-year period you have continued to use the Company as your
primary supplier for above products. In the event you do not use
the Company as your primary supplier of those products during the
initial one-year period of this Database License, you agree
retroactively to pay the Company the above fee which the Company
waived in anticipation of its primary suppler status. If you fail
to use the Company as your primary supplier after the first year,
however, you will not be liable for the above retroactive payment.
Your obligation to use the Company as your primary supplier of the
above products shall be subject to the following exceptions: (a)
products not carried by the Company; (b) purchases of used
products; (c) orders which the Company is unable to fill from
inventory on hand or inventory with an expected delivery date to
the Company of no more than 48 hours from the date of your order;
or (d) orders in excess of the credit limit extended to you by the
Company, provided you are within your credit terms with the
Company at the time of such order.
2. LIMITATION ON USE. You may provide access to the Material
available via kiosks, on-line services including electronic
bulletin systems, and through Internet on-line search and query
systems as appropriate to encourage the resale of products in the
Material. This excludes and prohibits the right to copy,
distribute or sell the Material or portions thereof, apart from
your product(s) that may incorporate the Material (or portions
thereof) as a component thereof. A violation of the preceding
sentence will terminate this Database License at which time you
will agree to return the Material within 10 days of termination
and to purge the Material entirely from your systems where the
Material is stored and/or used.
3. CONFIDENTIAL INFORMATION. As used herein, "Confidential
Information" shall mean the Material and all extracts, analysis,
summaries, reviews, and other items prepared by you which contain
or are derived in any way from the Material.
4. CONFIDENTIALITY OBLIGATION. You agree with respect to the
Material and Confidential Information that you (a) will not use it
for any purpose except that which is expressly contemplated by
this agreement; (b) will not assign or transfer it to any party
(other than a successor to all or substantially all of your
assets); and (c) will not disclose to
11
<PAGE>
CONFIDENTIAL
any third party directly or indirectly that it was received from
or is attributable to the Company.
5. NO REPRESENTATION. You acknowledge that, while the Company
believes the Material and Confidential Information to be generally
reliable, none of the Company or its affiliates, employees,
agents, or contractors has made or is hereby making any express or
implied representation or warranty as to the accuracy or
completeness of the Material or Confidential Information. You
further agree that none of them will have any liability to you for
any errors or omissions in or related to it. None of the Company
or any of the above other entities or individuals has any
obligation to inform you of or correct any errors or omissions in
the Material or Confidential Information of which it or they may
have knowledge or become aware.
12
<PAGE>
CONFIDENTIAL
EXHIBIT B
VIDEO: Seller will receive Distributor's gross cost plus 8% pricing on all
pre-recorded video software.
DVD: Seller will receive Distributor's gross cost plus 6% pricing on all DVD
software.
AUDIOBOOKS: Seller will receive a discount of 40% off Retail pricing on all
audiobooks.
13
<PAGE>
CONFIDENTIAL
EXHIBIT C
SET UP: None
FREIGHT: Manifested freight will be passed through to Seller.
HANDLING FEE: Seller will be charged $ .65 per unit shipped to Customers.
INSERTS: Seller will be charged $0.05 per insertion for standard inserts (such
as small catalogs, single page information/promotion cards, etc.). Non-standard
inserts are priced on a per item basis.
14
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 12, 2000, accompanying the financial
statements of audiohighway.com (the Company) included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999. We hereby consent to
the incorporation by reference of said report in the Company's Registration
Statement on Form S-8 (File No. 333-95627).
/s/ GRANT THORNTON LLP
San Jose, California
April 12, 2000
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,628
<SECURITIES> 9,524
<RECEIVABLES> 337
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 13,740
<PP&E> 1,432
<DEPRECIATION> 384
<TOTAL-ASSETS> 15,795
<CURRENT-LIABILITIES> 3,517
<BONDS> 0
0
0
<COMMON> 33,162
<OTHER-SE> (20,995)
<TOTAL-LIABILITY-AND-EQUITY> 15,795
<SALES> 2,060
<TOTAL-REVENUES> 2,060
<CGS> 1,925
<TOTAL-COSTS> 1,925
<OTHER-EXPENSES> 12,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 950
<INCOME-PRETAX> (12,672)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,672)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
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