<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-80627
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
TUNES.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7375 36-4159052
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
640 NORTH LASALLE STREET
SUITE 560
CHICAGO, ILLINOIS 60610
(312) 642-7560
(Address, including zip code, and telephone number, including area code, of
Registrant's
principal executive offices)
HOWARD A. TULLMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TUNES.COM INC.
640 NORTH LASALLE STREET
SUITE 560
CHICAGO, ILLINOIS 60610
(312) 642-7560
(Name, address, including zip code, and telephone number, including area code,
of
agent for service)
------------------
Copies to:
RICHARD R. DENNERLINE JAMES J. JUNEWICZ
MARK L. HEIMLICH MAYER, BROWN & PLATT
FREEBORN & PETERS 190 SOUTH LASALLE STREET
311 SOUTH WACKER DRIVE CHICAGO, IL 60603
CHICAGO, IL 60606 (312) 782-0600
(312) 360-6000 (312) 701-7711 (FAX)
(312) 360-6575 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock, par value $0.01 per share $69,000,000 $19,182
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 20, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
P R O S P E C T U S
4,000,000 SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
---------
We are selling 4,000,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 600,000 additional shares of our common
stock to cover over-allotments.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $13.00 and $15.00 per share. We
have applied to have the common stock included for quotation on the Nasdaq
National Market under the symbol "TUNZ".
--------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Tunes.com (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
SALOMON SMITH BARNEY
SG COWEN
U.S. BANCORP PIPER JAFFRAY
, 1999
<PAGE>
[INSIDE FRONT GATEFOLD]:
The images on the inside cover consist of samples of pages from our Web sites,
TUNES.COM, ROLLINGSTONE.COM, THESOURCE.COM and DOWNBEATJAZZ.COM, that show
examples of the content and features available on those sites.
Call-outs for TUNES.COM home page image:
1. GET PERSONAL
Content and recommendations are tailored to each user's musical preferences.
Users can also create their own MyTunes profile.
2. FIND IT FAST
Quickly search our comprehensive collection of music content.
3. DOWNLOAD THIS
Download songs in MP3 and other formats; start with the rising stars picked
by editors from ROLLING STONE and THE SOURCE.
4. TRY BEFORE YOU BUY
Listen to approximately one million song clips from 350,000 albums.
5. WHEN YOU WANT THEM
Watch over 1,000 music videos, available on demand.
6. PHOTOGRAPHIC MEMORIES
Cruise our exclusive, extensive archives of concert photos and ROLLING STONE
magazine covers.
7. PERFORMING LIVE ON YOUR PC
Watch live webcasts of concerts, music festivals, recording sessions,
parties, interviews, fashion shows, movie premieres -- our cameras are
recording it live, streaming it to fans' PCs.
8. REACH MUSIC FANS
Targeted advertising and sponsorship opportunities across our network of
sites.
9. INTERACTIVE RADIO
Listen to 13 stations of streaming music, with single click access to artist
information, voting and purchase.
10. MAKE CONNECTIONS
Check out the profiles of site members who listen to similar music.
11. EXCLUSIVE CONTENT FROM LEADING MUSIC MAGAZINES
ROLLING STONE'S online alter ego, with daily original content and archived
features, photos, interviews and reviews.
The online voice of THE SOURCE, the "Bible of Hip-Hop," with previews,
reviews, interviews, fashion, videos and games.
The online gig for DOWN BEAT'S jazz and blues music, with news and reviews,
and more than 65 years of archived interviews and photos.
Logos for sidebar on fold-out page:
DISTRIBUTION AND TECHNOLOGY
America Online
AltaVista
CDnow
Lycos
<PAGE>
Microsoft
Netscape
RealNetworks
Snap
Yahoo!
Photograph of Jennifer Lopez on other fold-out page:
List of choices on tunes.com overlaying picture
Pop
Favorite Artists
On the 6
Play All Tracks
Music Video
Photos
Rolling Stone Review
Contest
If you love music, you'll lust after Tunes.com. There's over a million song
clips, 85,000 artist profiles, 1,000 music videos, the hottest MP3s and tons of
content created with ROLLING STONE, DOWN BEAT and THE SOURCE. It's the ultimate
stop on the Web for music. Ready to dance? Jump in at www.tunes.com Logo.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
TUNES.COM HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
TUNES.COM IS NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE
OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY
THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF
THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary........................................................................................ 4
Risk Factors.............................................................................................. 9
Information Regarding Forward-Looking Statements.......................................................... 26
Use of Proceeds........................................................................................... 27
Dividend Policy........................................................................................... 27
Capitalization............................................................................................ 28
Dilution.................................................................................................. 29
Selected Consolidated Financial Data...................................................................... 30
Selected Pro Forma Consolidated Financial Data............................................................ 31
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 32
Business.................................................................................................. 42
Management................................................................................................ 57
Related Party Transactions................................................................................ 66
Principal Stockholders.................................................................................... 70
Description of Capital Stock.............................................................................. 73
Shares Eligible for Future Sale........................................................................... 77
Underwriting.............................................................................................. 78
Legal Matters............................................................................................. 80
Experts................................................................................................... 80
Where You Can Find More Information....................................................................... 80
Index to Financial Statements............................................................................. F-1
</TABLE>
--------------
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY INCLUDES SELECTED FINANCIAL AND OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS BEGINNING ON
PAGE F-1, BEFORE YOU DECIDE WHETHER TO INVEST IN OUR COMMON STOCK. WHEN WE REFER
TO TUNES.COM, WE, US OR OUR COMPANY, WE ARE REFERRING TO TUNES.COM INC. AND ITS
SUBSIDIARIES.
OUR COMPANY
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our hub Web site, TUNES.COM, is a "one-stop shop" designed to appeal
to a broad spectrum of music fans by covering a wide range of genres, from urban
to rock to classical. The TUNES.COM Web site is supported by and integrated with
our network of genre-specific Web sites: ROLLINGSTONE.COM -- rock and pop,
THESOURCE.COM -- urban and hip-hop and DOWNBEATJAZZ.COM -- jazz and blues. We
have built these Web sites through our exclusive relationships with leading
music industry magazines, ROLLING STONE, THE SOURCE and DOWN BEAT. Our Web sites
provide advertisers and retailers with an attractive channel to reach consumers
across both broad and targeted demographic groups. We generate revenue from a
number of sources, including advertising, sponsorships, promotions, e-commerce
and content syndication.
Our sites offer one of the Web's most comprehensive collections of music
content, including approximately 1,000,000 song clips, 1,000 music videos,
130,000 album reviews and 85,000 artist profiles. Through our Web sites, a
visitor may:
- watch a live concert or music video;
- read a daily news story, artist biography or album review;
- listen to an audio preview of an album or to ROLLING STONE RADIO, our
originally programmed Internet radio;
- download near CD-quality digital music;
- communicate with fellow fans through home pages, chat sessions or message
boards; or
- buy CDs.
In addition to producing our Web sites, we provide our content to a number
of major Web sites, including Yahoo!, Netscape, AltaVista, Lycos and Snap, as
well as approximately 5,000 fan Web sites and over 100 radio station Web sites.
We are also a featured content provider, or anchor tenant, on America Online's
music channel, where our "Rolling Stone" button, linking users to
ROLLINGSTONE.COM, is prominently displayed.
Our Web sites have grown significantly in 1999. Monthly page views have
increased from 10.7 million during October 1998 to 22.9 million during June
1999. Registered users have increased from 308,000 as of December 31, 1998 to
681,000 as of June 30, 1999. Our revenue was $2.5 million for 1998 and $2.0
million for the six months ended June 30, 1999. Although we have experienced
increases in the level of traffic, number of registered users and revenue, we
incurred a net loss of $13.0 million in 1998 and $12.5 million for the six
months ended June 30, 1999. We expect to continue to incur significant losses
and negative cash flows for the foreseeable future.
OUR OPPORTUNITY
The Web is becoming an essential medium for advertisers and commerce. The
Web offers advertisers a level of targetability, interactivity and measurability
not available in traditional media. Forrester Research estimates that online
advertising in North America will increase from $1.3 billion in
4
<PAGE>
1998 to $10.7 billion in 2003. In addition, the Web enables companies to conduct
e-commerce which is often faster, less expensive and more convenient than
traditional commerce. Forrester Research estimates that the total value of
retail goods and services, other than automobiles and travel, purchased on the
Web in the United States will increase from $4.8 billion in 1998 to $78.6
billion in 2003.
Music is one of the world's leading forms of entertainment. It is also big
business. The Recording Industry Association of America reports that domestic
sales of recorded music were $13.7 billion in 1998. The Web is emerging as an
important source of music, dramatically altering the way consumers discover,
listen to and purchase music. Historically, consumers' ability to discover new
songs and artists has been strongly influenced by large record labels and
traditional media, such as radio, television and print. However, the Web offers
music fans major advantages over traditional media, such as unprecedented
interactivity and access to new and archived music content on demand. For
example, the Web enables music fans to access and download music directly from
artists through the use of new technologies.
The convergence of music and the Web has produced numerous music-related Web
sites. Most of these Web sites offer relatively limited content, features and
services or are restricted to a specific genre, artist or record label. As a
result, consumers often must navigate a bewildering array of Web sites without
any assurance of fulfilling their online music needs.
OUR STRATEGY
We intend to create the premier online music network, providing music fans
with extensive and exclusive music content, community features and e-commerce
services. We provide a compelling online music experience, featuring exclusive
content from three of the leading names in music: ROLLING STONE, THE SOURCE and
DOWN BEAT. In addition, we offer music content covering a wide range of genres
to attract visitors of diverse tastes. Our Web sites present our content in an
organized and easy to use format with interactive community features that
provide users with an enjoyable music experience. We intend to continue to
expand our traffic and user base to provide advertisers with an attractive
channel designed to reach both broad and targeted demographic groups. Our
strategy is to:
- deliver compelling music content;
- provide easy to use and feature-rich Web sites;
- grow our music community;
- build the Tunes.com brand and network;
- capitalize on the brand recognition of ROLLING STONE, THE SOURCE and DOWN
BEAT;
- generate advertising and sponsorship revenue; and
- generate e-commerce revenue.
5
<PAGE>
RISK FACTORS
We operate in a rapidly changing industry and face intense competition from
other Internet-based companies as well as traditional media and entertainment
companies. Our material risks are described under "Risk Factors." These risks
include the following:
- we have a limited operating history;
- we have incurred and expect that we will continue to incur substantial
losses;
- we operate in an extremely competitive market and many of our competitors
have substantially greater resources and larger user bases;
- we substantially rely upon our relationships and agreements with third
parties for content and to generate traffic to our Web sites and generate
revenue; and
- we have in the past received a large portion of our revenue from a few
sources.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................ 4,000,000 shares
Common stock to be outstanding after this
offering.................................. 13,080,953 shares
Use of proceeds............................. Expand sales, advertising and marketing
programs, develop strategic relationships,
finance capital expenditures and fund other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...... "TUNZ"
</TABLE>
--------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING
THE OUTSTANDING SHARE INFORMATION ABOVE:
- GIVES EFFECT TO THE CONVERSION OF ALL 5,719,962 OUTSTANDING SHARES OF
PREFERRED STOCK INTO 7,149,953 SHARES OF COMMON STOCK WHICH WILL OCCUR
UPON COMPLETION OF THIS OFFERING;
- GIVES EFFECT TO A 1.25-FOR-1 STOCK SPLIT OF OUR COMMON STOCK WHICH WILL
OCCUR IMMEDIATELY PRIOR TO COMPLETION OF THIS OFFERING;
- EXCLUDES 2,332,764 SHARES THAT MAY BE ISSUED UPON EXERCISE OF OUTSTANDING
OPTIONS AS OF JUNE 30, 1999 AT A WEIGHTED AVERAGE EXERCISE PRICE OF $4.86
PER SHARE AND 2,161,899 SHARES RESERVED FOR FUTURE AWARDS UNDER OUR STOCK
OPTION PLANS;
- EXCLUDES 250,000 SHARES RESERVED FOR ISSUANCE UNDER OUR EMPLOYEE STOCK
PURCHASE PLAN;
- EXCLUDES WARRANTS TO PURCHASE 1,522,710 SHARES AT A WEIGHTED AVERAGE
EXERCISE PRICE OF $3.30 PER SHARE;
- GIVES EFFECT TO THE ISSUANCE OF 125,000 ADDITIONAL SHARES OF COMMON STOCK
ARISING FROM OUR ACQUISITION OF TUNES NETWORK IN JULY 1998. WE HAVE AGREED
TO ISSUE UP TO 125,000 ADDITIONAL SHARES TO FORMER SHAREHOLDERS OF TUNES
NETWORK IF WE MEET SPECIFIC MINIMUM EQUITY MARKET CAPITALIZATION
THRESHOLDS AT ANY TIME PRIOR TO THREE MONTHS AFTER THE DATE OF THIS
PROSPECTUS, DETERMINED BY MULTIPLYING THE NUMBER OF SHARES OUTSTANDING
IMMEDIATELY PRIOR TO THIS OFFERING BY THE GREATER OF THE PRICE PER SHARE
IN THIS OFFERING OR THE AVERAGE OF THE HIGHEST CLOSING SALES PRICES OF OUR
COMMON STOCK FOR ANY FIVE DAYS DURING SUCH THREE-MONTH PERIOD. FOR
PURPOSES OF THIS PROSPECTUS, WE HAVE ASSUMED THAT WE WILL ISSUE ALL
125,000 SHARES; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
-------------------
Initially, we operated as an Illinois limited liability company named
Digital Entertainment Network, L.L.C. from July 1996 until our reorganization in
June 1997 into a Delaware corporation named JAMtv Corporation. We changed our
name to Tunes.com Inc. in February 1999.
Our principal offices are located at 640 North LaSalle Street, Suite 560,
Chicago, Illinois 60610, and our telephone number is (312) 642-7560.
THE INFORMATION ON OUR WEB SITES IS NOT A PART OF THIS PROSPECTUS.
7
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data in conjunction with our
financial statements and the notes thereto beginning on page F-1 of this
prospectus and the information under "Selected Consolidated Financial Data,"
"Selected Pro Forma Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The pro forma
financial data set forth below gives effect to the following as of the beginning
of the respective period, for statement of operations data, and as of June 30,
1999, for balance sheet data:
- the conversion of all outstanding shares of preferred stock into 7,149,953
shares of common stock which will occur upon completion of this offering;
- the acquisition of Tunes Network in July 1998 and the related issuance of
an assumed 125,000 additional shares of common stock to occur shortly
following this offering; and
- the amortization of a $1,500,000 license fee triggered by the May 1999
preferred stock issuance.
The pro forma as adjusted balance sheet data reflects the sale of 4,000,000
shares of our common stock in this offering, assuming an initial public offering
price of $14.00 per share and the application of the resulting net proceeds
after deducting estimated underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
JULY 2, 1996 SIX
(INCEPTION) YEAR ENDED SIX MONTHS ENDED PRO FORMA MONTHS
TO DECEMBER 31, JUNE 30, YEAR ENDED ENDED
DECEMBER 31, -------------------- -------------------- DECEMBER 31, JUNE 30,
1996 1997 1998 1998 1999 1998 1999
------------- --------- --------- --------- --------- ------------ ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Advertising...................... $ -- $ 284 $ 970 $ 271 $ 1,372 $ 983 $ 1,372
Other............................ -- 281 1,515 861 626 1,742 626
------------- --------- --------- --------- --------- ------------ ---------
Total revenue.................. -- 565 2,485 1,132 1,998 2,725 1,998
Cost of revenue.................... -- 1,268 4,045 2,040 2,003 4,464 2,092
------------- --------- --------- --------- --------- ------------ ---------
Gross deficit...................... -- (703) (1,560) (908) (5) (1,739) (94)
Operating expenses:
Operations and development....... 32 458 1,880 408 1,781 2,321 1,781
Sales and marketing.............. 37 1,064 4,034 1,123 3,144 4,037 3,144
General and administrative....... 153 1,245 2,837 1,086 2,004 3,075 2,004
Depreciation and amortization.... 2 157 1,778 137 1,726 4,101 2,309
Stock compensation............... -- 10 1,375 152 3,854 1,578 3,854
------------- --------- --------- --------- --------- ------------ ---------
Total operating expenses....... 224 2,934 11,904 2,906 12,509 15,112 13,092
------------- --------- --------- --------- --------- ------------ ---------
Loss from operations........... (224) (3,637) (13,464) (3,814) (12,514) (16,851) (13,186)
Other income, net.................. 7 115 428 194 47 351 47
------------- --------- --------- --------- --------- ------------ ---------
Net loss....................... (217) (3,522) (13,036) (3,620) (12,467) $ (16,500) $ (13,139)
------------ ---------
------------ ---------
Accretion of redeemable convertible
preferred stock.................. -- (363) (1,570) (541) (1,321)
------------- --------- --------- --------- ---------
Net loss attributable to common
stockholders................. $ (217) $ (3,885) $ (14,606) $ (4,161) $ (13,788)
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Basic and diluted net loss per
share(1)......................... $ (0.31) $ (2.70) $ (9.88) $ (2.89) $ (8.23) $ (2.89) $ (1.79)
------------- --------- --------- --------- --------- ------------ ---------
------------- --------- --------- --------- --------- ------------ ---------
Weighted average shares outstanding
used in basic and diluted per
share calculation(1)............. 704,525 1,438,163 1,477,964 1,438,163 1,676,243 5,715,119 7,342,671
------------- --------- --------- --------- --------- ------------ ---------
------------- --------- --------- --------- --------- ------------ ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 14,229 $ 14,229 $ 65,509
Working capital........................................................... 13,746 13,746 65,026
Total assets.............................................................. 22,028 23,778 75,058
Long-term debt, less current portion...................................... 121 121 121
Redeemable convertible preferred stock.................................... 42,186 -- --
Total stockholders' equity (deficit)...................................... (23,131) 20,805 72,085
</TABLE>
- ------------------------------
(1) See note 3 of notes to our consolidated financial statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
8
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT DECISION. ANY
OF THE RISKS DESCRIBED BELOW COULD SERIOUSLY IMPAIR OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION. WE BELIEVE THE RISKS DESCRIBED BELOW ARE THE
MOST SIGNIFICANT RISKS WE FACE, BUT MAY NOT BE THE ONLY ONES THAT WE FACE.
ADDITIONAL RISKS THAT ARE NOT YET KNOWN TO US OR THAT WE CURRENTLY THINK ARE
IMMATERIAL ALSO COULD SERIOUSLY IMPAIR OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION. THE TRADING PRICE OF OUR STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
WE HAVE A LIMITED OPERATING HISTORY SO IT IS DIFFICULT TO EVALUATE OUR BUSINESS
AND PROSPECTS
We began our business in July 1996 and started operating our Web sites in
March 1997 -- JAMTV.COM, March 1998 -- ROLLINGSTONE.COM, July 1998 -- TUNES.COM,
December 1998 -- THESOURCE.COM and February 1999 -- DOWNBEATJAZZ.COM. As a
result, we have only a limited operating history on which you can evaluate our
business and prospects. You should consider our prospects in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
an early stage of development, particularly companies in new and rapidly
evolving Internet-based markets such as online advertising, e-commerce and
provision of online content. To address these risks and uncertainties, we must,
among other things:
- offer compelling music content;
- increase awareness of our brands;
- continue to develop and upgrade our Web sites and related technology,
operating systems and capacity;
- attract a larger audience to our Web sites, lengthen the time they spend
there and build our community of registered users;
- maintain current and develop new strategic relationships with, among
others, content providers, other Web sites, Web portals, record labels,
and advertisers and their agencies;
- increase our advertising revenue and revenue from other sources;
- implement and execute our business and marketing strategy successfully;
- respond to competitive developments; and
- attract, integrate, retain and motivate qualified personnel.
We may not be successful in accomplishing these objectives. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" for more detailed information on our limited operating history.
THE MARKET FOR ONLINE MUSIC CONTENT IS NEW AND UNPROVEN AND IF IT DOES NOT
DEVELOP WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT REVENUE
We seek to attract and retain visitors to our Web sites by offering a
variety of music content. The market for music content on the Internet is new
and rapidly evolving, so there is uncertainty whether demand for our services
will develop, be sustained and generate significant revenue. If the market for
online music content or products fails to develop or develops more slowly than
expected, or if our services do not achieve or sustain market acceptance, we may
not be able to generate significant revenue. We cannot assure you that we will
be able to attract and retain a significant number of visitors to our Web sites.
9
<PAGE>
WE DEPEND ON OUR EXCLUSIVE RELATIONSHIPS WITH THE PUBLISHERS OF ROLLING STONE,
THE SOURCE AND DOWN BEAT MAGAZINES FOR CONTENT AND THEIR BRAND NAME RECOGNITION
AND MAY NOT BE ABLE TO ATTRACT VISITORS TO OUR WEB SITES IF THESE RELATIONSHIPS
TERMINATE OR BECOME NONEXCLUSIVE
ROLLING STONE. We depend significantly upon our relationship with Straight
Arrow Publishers Company, L.P., the publisher and owner of ROLLING STONE
magazine, for editorial content, access to the archives of ROLLING STONE and our
use of the brand name "Rolling Stone," as well as for press coverage, business
and marketing opportunities, strategic relationships and potential acquisitions.
If we are unable to continue our relationship with Straight Arrow and to utilize
its content and the Rolling Stone brand name on our Web sites, or if Straight
Arrow provides its content or makes its Rolling Stone brand name accessible to
our competitors, we may generate less traffic which would reduce our revenue. In
addition, if Straight Arrow is not able to continue to obtain license rights for
online distribution of its magazine content from third-party contributors, we
would not be able to make this content available on our Web sites which could
reduce the number of visitors to our Web sites. Our agreement with Straight
Arrow will terminate in November 2005 unless we have a market capitalization of
at least $150 million at that time, in which case it will terminate in November
2010. Straight Arrow may terminate the agreement earlier if we fail to maintain
the technical reliability reasonably required to keep our ROLLINGSTONE.COM Web
site available on commercially reasonable terms, other than due to regularly
scheduled maintenance and network and other outages that are not due to our
actions or that are not our fault. This right to terminate also applies if the
Web site is unavailable for more than a total of 24 hours in any 60-day period
or 12 consecutive hours. Straight Arrow also may terminate the agreement earlier
if we fail to comply with our other obligations under the agreement, including
our obligations to pay annual license fees, royalty payments or other amounts
due to Straight Arrow, or if we are acquired by a competitor of ROLLING STONE or
another company that is unacceptable to Straight Arrow.
Under our agreement with Straight Arrow, we obtained the right to use the
"Rolling Stone," "RollingStone Online" and "RollingStone.com" trademarks and
their derivatives in connection with the Internet and the right to use the
ROLLINGSTONE.COM domain name. If our agreement with Straight Arrow terminates,
we will not be entitled to use these trademarks or the ROLLINGSTONE.COM domain.
During the six months ended June 30, 1999, revenue generated from our
ROLLINGSTONE.COM Web site accounted for approximately 54% of our total revenue
and ROLLINGSTONE.COM generated approximately 66% of the total number of page
views on all of our sites. As a result, the loss of our right to use the ROLLING
STONE trademarks, domain or content would damage our reputation and severely
limit our ability to generate advertising, e-commerce and other revenue. See
"Business -- Strategic Relationships."
THE SOURCE AND DOWN BEAT. We also depend upon our relationships with Source
Enterprises, Inc., the publisher and owner of THE SOURCE magazine, and Maher
Publications, Inc., the publisher and owner of DOWN BEAT magazine, for editorial
content, access to the archives of those magazines and our use of their brand
names and domain names. If we are unable to continue either of these
relationships and to exclusively utilize the content, brand names and domain
names of these magazines, we may generate reduced Web site traffic and revenue.
Our agreement with Source Enterprises will terminate in December 2003 and our
agreement with Maher Publications will terminate in February 2001. Either Source
Enterprises or Maher Publications may terminate their respective agreement
earlier if we fail to comply with our obligations under those agreements,
including our obligations to pay fees, royalties or other amounts due. See
"Business -- Strategic Relationships."
WE NEED TO CONTINUE TO DEVELOP COMPELLING CONTENT AND FEATURES TO ATTRACT
VISITORS TO OUR WEB SITES
Our future success depends on our ability to continue to offer compelling
music content and Web site features. If we do not deliver compelling music
content and features, we may be unable to attract and retain significant numbers
of visitors to our Web sites, which would reduce our advertising and e-commerce
revenue. Our ability to deliver compelling music content and features depends
upon the quality of our editorial and design staff and the editorial and design
staffs of our magazine content providers, our ability to anticipate and
capitalize upon trends in music and the Web and our access to
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content owned or controlled by others, including videos, audio previews of songs
or song clips and artwork.
WE DEPEND ON THE MUSIC INDUSTRY AND OTHERS FOR CONTENT AND WE MAY NOT BE ABLE TO
ATTRACT VISITORS TO OUR WEB SITES IF WE CANNOT OBTAIN THAT CONTENT
In addition to the content we develop on our own and license from the
publishers of ROLLING STONE, THE SOURCE and DOWN BEAT, we rely upon record
labels, artists and other content owners for a significant amount of the content
we offer on our Web sites, including music videos, album art, CD audio previews,
photographs, artist biographies, artist interviews, tour information, live
performances and other content. Our licensed content is provided to us in many
cases under nonexclusive licenses, which may be revoked by the content providers
at any time or upon short notice. In addition, in many instances we do not have
express license agreements to use content. For example, we do not have written
license agreements for a significant portion of the music videos on our Web
sites. Universal Music Group notified us, as well as other music Web site
operators, in February 1999 that we are no longer authorized to use its music
videos on our Web sites and we have since removed those videos from our Web
sites.
In addition, because some of our content providers directly and indirectly
compete with us, these content providers may seek competitive advantage by
limiting or denying our access to their content. For example, Sony Music
Entertainment has a significant interest in Launch Media and EMI Group recently
announced making a significant investment in and entering into an exclusive
five-year licensing arrangement with Musicmaker.com. In addition, BMG
Entertainment and Universal Music Group jointly operate a music-oriented Web
site named GETMUSIC.COM and also recently announced their intent to jointly
develop an Internet music delivery system named Electronic Media Distribution.
WE DO NOT HAVE LICENSES FOR A SUBSTANTIAL AMOUNT OF MUSIC AND ASSOCIATED ARTWORK
AVAILABLE ON OUR WEB SITES, WHICH MAY SUBJECT US TO INFRINGEMENT DAMAGES AND
SIGNIFICANT LICENSE FEES OR LOSS OF ACCESS TO THAT CONTENT
We place CD audio previews, associated album art and music videos on our Web
sites to attract users and to promote the sale of music. We do not have license
agreements to digitally perform, copy or display a substantial portion of that
content. We could, therefore, be required to remove this content from our Web
sites, pay substantial royalties, pay substantial infringement damages and
penalties to the content copyright owners, incur substantial legal fees and
other costs and indemnify our content providers for infringement costs and
damages under our agreements with them. It is also possible that the content
copyright owners could successfully seek to shut down our Web sites until any
possible infringement claims are resolved. Any of these actions could seriously
damage our business.
For example, on our Web sites, we place album art and approximately
60-second audio previews of CD tracks of classical, jazz and country albums and
approximately 30-second audio previews of CD tracks of albums of other genres of
music. We believe that at least one-half of our collection of audio previews and
album art is not covered by license agreements. The Recording Industry
Association of America, representing the interests of record labels, in an open
letter to all webcasters, notified us that we are responsible for the payment of
license fees for the digital performance of sound recordings on our Web sites.
To date, we have not paid any license fees for this content, and we do not have
an agreement with the RIAA. We may be subject to substantial penalties if we are
found to have knowingly violated the copyrights of others.
WE WILL BE REQUIRED TO PAY ADDITIONAL ROYALTIES FOR THE BROADCAST OF MUSIC ON
THE WEB WHICH MAY SIGNIFICANTLY INCREASE OUR OPERATING COSTS
We have entered into a license agreement with the American Society of
Composers, Authors and Publishers and are currently negotiating a license with
Broadcast Music, Inc. for the performance of musical compositions on the Web
which will obligate us to pay royalties. We believe that the highest royalty
rate for 1999 payable under the ASCAP license agreement is 1.6% of the higher of
gross revenue generated by our Web sites or our operating expenses relating to
the operation of our Web
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sites. In addition, we believe that the highest royalty rate for 1999 payable
under the BMI license is 1.75% of gross revenue generated by our Web sites. The
royalties that we must pay, and the terms and conditions of the license
agreements, may change and those changes may materially harm our business. In
addition, these license agreements do not grant us performance rights outside
the United States. Accordingly, we could be subject to royalties, damages for
infringement or denied access to content because our Web broadcasts or other
content may be available outside the United States.
We also broadcast songs in a continuous stream over the Web on our ROLLING
STONE RADIO. The Digital Millennium Copyright Act, which was adopted in October
1998, imposed new performance fees and royalties governed by this Act on digital
performances of sound recording such as those on ROLLING STONE RADIO and any
other continuous streaming broadcasts that we may make available in the future.
In a June 1998 letter widely distributed to webcasters, the Recording Industry
Association of America notified us that it intends to form a clearing house for
performance licenses for sound recordings. In addition, the RIAA notified us in
this letter of our need to obtain licenses for digital performances of sound
recordings on ROLLING STONE RADIO. The statutory royalty rates for these
compulsory licenses have been the subject of protracted negotiations between the
RIAA and the Digital Media Association, an organization representing the
interests of webcasters, beginning in December 1998, and, to date, a schedule of
statutory royalties has not been determined. The amount of royalties that we may
be required to pay for compulsory licenses for digital performances of sound
recordings may be substantial and may materially damage our business. We plan to
continue to digitally perform a number of sound recordings on our Web sites
without paying royalties to the record labels until an industry-wide solution
has been reached.
WE MAY HAVE TO PAY HIGHER FEES FOR CONTENT WHICH COULD HURT OUR BUSINESS
Our licensed content is provided to us in many cases by record labels,
artists and other content owners for minimal or no charge. If these content
owners begin charging us significant license fees for their content, we either
will be required to make significant payments or lose access to their content,
which may reduce the number of visitors to our Web sites.
WE WILL CONTINUE TO LOSE MONEY UNLESS WE SIGNIFICANTLY INCREASE ADVERTISING
REVENUE FROM OUR WEB SITES
We expect that our revenue and operating results for the foreseeable future
will depend significantly on advertising revenue generated from selling
sponsorships or other advertising on our Web sites. Our advertising revenue was
$970,000 in 1998 and $1.4 million for the six months ended June 30, 1999. Our
losses were $13.0 million in 1998 and $12.5 million for the six months ended
June 30, 1999. If we do not significantly increase advertising revenue, our
business will continue to lose money. Increasing advertising revenue will depend
on the Internet becoming an effective advertising medium and many other factors,
including our:
- conducting effective marketing and selling efforts aimed at advertisers;
- increasing the size of our audience and the time they spend at our Web
sites;
- attracting demographically desirable audiences to our Web sites;
- accurately measuring the size and demographic characteristics of our
audience;
- being able to collect information about visitors to our Web sites; and
- maintaining and developing our relationships with Web portal sites to
attract additional visitors.
Our failure to achieve one or more of these goals could significantly impact our
ability to generate advertising revenue. In addition, even if we generate
increased traffic, there is no assurance that such increased traffic will result
in significant revenue. See "-- We have a history of significant losses and
anticipate significant continuing losses" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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OUR AGREEMENTS WITH ADVERTISERS ARE SHORT-TERM SO WE MAY NOT HAVE A STEADY FLOW
OF ADVERTISING REVENUE
Our failure to develop long-term relationships with advertisers and
consumers could reduce our advertising revenue. Our contracts with advertisers
generally are between two weeks and six weeks in duration. As a result, we
cannot depend upon a steady stream of revenue from advertisers. In addition, the
short-term nature of these contracts allows our advertisers to move from our Web
sites to those of our competitors or to other advertising media, which may
deprive us of the opportunity to build advertiser or consumer loyalty.
OUR ADVERTISING REVENUE MAY NOT GROW IF THE INTERNET DOES NOT BECOME AN
EFFECTIVE ADVERTISING MEDIUM
Advertising on the Internet is relatively new and rapidly evolving and its
effectiveness, compared to traditional media, is uncertain. Forrester Research
estimates that online advertising in North America will increase from $1.3
billion in 1998 to $10.7 billion in 2003. However, if the Internet advertising
market does not develop or develops more slowly than is expected, we may not
generate enough advertising revenue to ever become profitable. Widespread use of
Internet advertising depends upon businesses accepting a new way of marketing
their products. Businesses may find advertising on the Internet to be
undesirable or less effective for promoting their products and services relative
to traditional advertising media.
While commonly accepted standards have been established for measuring the
effectiveness of advertising through traditional media, no recognized standard
has been established to measure the effectiveness of Internet advertising. If a
standard does not develop or develops more slowly than expected, advertising on
the Internet may decrease or increase at a rate less than we currently project
and/or advertisers may not be willing to pay as much to advertise on the
Internet. In addition, the widespread adoption of technologies that permit
Internet users to block advertisements on Web sites could adversely affect the
growth of the Internet as an advertising medium.
THERE IS INTENSE INTERNET ADVERTISING COMPETITION WHICH MAY REDUCE ADVERTISING
RATES AND REVENUE
Reduced rates for Internet advertising could reduce our revenue. There is
intense competition for the sale of advertising on high-traffic Web sites. As a
result, vendors quote a wide range of rates for advertising services. It is
therefore difficult to project levels of Internet advertising that will be
realized generally or by any specific Web site. Competition for advertisers
among present and future Web sites, as well as competition with other
traditional media for advertisers, may result in significant price competition,
which may reduce the advertising rates we charge.
WE NEED TO INCREASE PUBLIC AWARENESS OF OUR BRANDS OR WE MAY NOT BE ABLE TO
ATTRACT A SIGNIFICANT NUMBER OF VISITORS TO OUR WEB SITES
Our ability to attract and retain visitors to our Web sites significantly
depends on our ability to develop a brand identity for Tunes.com and increase
public awareness of the ROLLING STONE, THE SOURCE and DOWN BEAT brands on the
Web. To date, a majority of our user traffic and revenue has been generated by
our ROLLINGSTONE.COM Web site. We need to significantly increase the awareness
of our other Web sites, including the TUNES.COM Web site, to significantly
increase traffic and revenue. The DOWNBEATJAZZ.COM and THESOURCE.COM Web sites
have been only recently launched, and the TUNES.COM Web site was only recently
relaunched as our hub Web site.
To increase brand awareness, traffic and revenue, we intend to substantially
increase advertising and promotional efforts and provide high quality products
and services. However, we cannot assure you that we will be able to achieve
these goals or that our marketing activities will result in increased or
sustainable revenue.
In accordance with our agreement with the owner of the JAM trademark, we
intend to redirect traffic from, and shut down, our JAMTV.COM Web site at the
end of 1999. During June 1999, the JAMTV.COM Web site generated 1.4 million page
views, or 6% of the 22.9 million total page views on all of our Web sites. To
retain users of the JAMTV.COM Web site within our network, we intend to redirect
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traffic from the JAMTV.COM Web site to the TUNES.COM Web site prior to year-end.
There is no assurance that we will be able to retain a significant amount of
traffic currently on the JAMTV.COM Web site and there is no assurance that users
of that site will migrate to the other sites in our network. See "Related Party
Transactions -- Transactions with our Stockholders, Executive Officers and
Directors."
WE DEPEND UPON RELATIONSHIPS WITH THIRD PARTY WEB SITES TO ATTRACT VISITORS TO
OUR WEB SITES AND THESE RELATIONSHIPS MAY TERMINATE OR MAY NOT PRODUCE A
SIGNIFICANT NUMBER OF VISITORS
We rely upon contractual relationships with third party Web sites to attract
a significant portion of the user traffic on our Web sites. For example, during
the second quarter of 1999, user traffic generated from the top five
arrangements accounted for approximately 10% of page views on our Web sites. We
have entered into agreements with America Online, Netscape, Yahoo! and the
providers of other third party Web sites. Our failure to maintain existing
relationships, establish additional relationships or fully capitalize on such
relationships could reduce the number of visitors to our Web sites. In addition,
the failure of these third parties to perform their obligations under our
agreements with them could harm our business. See "Business -- Strategic
Relationships -- Distribution Network."
OUR MARKET IS HIGHLY COMPETITIVE WHICH MAY ADVERSELY AFFECT OUR REVENUE AND
BUSINESS
We currently compete directly and indirectly for advertisers, users, content
providers, CD sales and rights to music events with other music Web sites and
traditional off-line media, including television. Increased competition could
result in a decline in the number of visitors to our Web sites and reduced
advertising and e-commerce revenue. The online content and entertainment market
is new, rapidly evolving and highly competitive. We anticipate that competition
will continue to intensify in the future from both online competitors and
traditional off-line media. Increased competition may also arise from television
networks that offer interactive music content to their viewers. Barriers to
entry are relatively minimal. As a result, current and new competitors can
launch new Web sites at a relatively low cost. In addition, many of our
competitors offer, or could offer, content that is similar to the content we
offer, other than content that we exclusively license from the publishers of
ROLLING STONE, THE SOURCE and DOWN BEAT. The availability of such content on our
competitors' Web sites or television networks could reduce the number of
visitors to our Web sites.
Our management believes our most significant competitors currently are Web
sites operated by MTV, Ultimate Band List and Launch Media. We anticipate that
the number of our competitors will increase in the future. We believe that the
principal competitive factors in the online music content and entertainment
market are and will increasingly be brand recognition and integrity, size,
variety and scope of content, ease of access and use, quality of the
entertainment experience and of the webcasts and technical expertise.
In addition, formidable competition may emerge through mergers and
acquisitions. For example, in June 1999, America Online announced an agreement
to acquire Spinner Networks, Inc., an Internet radio company and Nullsoft Inc.,
a company that provides digital audio software.
New technologies and the expansion of existing technologies may also
increase the competitive pressures on us. Many of our competitors may be able to
respond more quickly than we can to new or emerging technologies and changes in
Internet user requirements and to devote greater resources than we can to the
development, promotion and sale of their services. We cannot assure you that our
current or potential competitors will not develop products and services
comparable or superior to those developed by us or adapt more quickly than we
can to new technologies, evolving industry trends or changing Internet user
preferences. See "Business -- Competition."
MANY COMPETITORS HAVE SUBSTANTIAL COMPETITIVE ADVANTAGES WHICH MAY MAKE IT MORE
DIFFICULT TO GROW OUR BUSINESS
Many of our current and potential competitors may enjoy substantial
competitive advantages, including:
- longer operating histories;
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- significantly greater financial, technical and marketing resources;
- significantly greater brand recognition;
- better access to content; and
- substantially larger user and/or membership bases.
Such competitors may therefore have a significantly greater ability to attract
users, advertisers and consumers of commercial goods which could harm our
business.
A PORTION OF OUR REVENUE IS DERIVED FROM BARTER TRANSACTIONS THAT DO NOT
GENERATE CASH
We generate a portion of our revenue from non-cash barter transactions in
which we exchange advertising space on our Web sites for reciprocal advertising
space on other Web sites or other promotional services. As a result, revenue
from barter transactions does not generate cash that we can use for general
corporate purposes, such as paying general operating expenses. Revenue from
barter transactions represented approximately 6% of our revenue in 1998 and 27%
of our revenue for the six months ended June 30, 1999. We expect to continue to
enter into barter transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND DEVELOPMENT OF TECHNOLOGIES TO PRESENT CONTENT AND FACILITATE
E-COMMERCE
Our business will depend on our users being able to access our content and
conduct e-commerce without significant delays or aggravation associated with
inadequate Internet capacity or bandwidth. This will depend upon the maintenance
of a reliable network with the necessary speed, data capacity and security, as
well as timely development of complementary products, such as high speed modems,
for providing reliable Internet access and services. The failure of the Internet
to achieve these goals will reduce our ability to generate significant revenue.
If Web usage grows, the Internet infrastructure may not adequately support
the demands placed on it by this growth and its performance and reliability may
decline. In addition, Web sites have experienced interruptions in their services
as a result of outages and other delays occurring throughout the Internet
infrastructure. If these outages or delays occur frequently in the future, Web
usage, as well as the usage of our Web sites, could grow more slowly or decline.
THE INTERNET IS SUBJECT TO RAPID CHANGE WHICH COULD RESULT IN SIGNIFICANT
ADDITIONAL COSTS
The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. Keeping pace with the
introduction of new standards and technological developments could result in
significant additional costs or prove to be difficult or impossible for us. The
failure to keep pace with these changes and to continue to enhance and improve
the responsiveness, functionality and features of our Web sites could harm our
ability to attract and retain users. Among other things, we will need to license
or develop leading technologies, enhance our existing services and develop new
services and technologies that address the varied needs of our users.
OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND
PRIVACY OF OUR USERS' INFORMATION
Adverse publicity and consumer concern about theft and the privacy of users
on the Internet may reduce our user traffic and e-commerce and may cause our Web
sites to be less attractive to advertisers. This reduction in user traffic,
e-commerce or interest by advertisers could significantly reduce our revenue. In
particular, a number of published reports have indicated that a perceived lack
of security of commercial data, such as credit card numbers, has significantly
impeded commercial exploitation of the Internet to date, and there can be no
assurance that new technologies will satisfactorily address these security
concerns. See "-- Internet laws and regulations may change which could adversely
affect our business" and "-- We may be subject to liability for misuse of users'
private information."
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FINANCIAL RISKS
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND ANTICIPATE SIGNIFICANT CONTINUING
LOSSES
To date we have not been profitable. We have incurred losses and negative
operating cash flows since we began operations and incurred a net loss of $13.0
million in 1998 and $12.5 million for the six months ended June 30, 1999. As of
June 30, 1999, we had an accumulated deficit of $32.5 million. We expect to
incur significant losses and negative operating cash flows for the foreseeable
future. We plan to continue to significantly increase our operating expenses to
increase our customer base, enhance our brand image, obtain additional content
and support our growing infrastructure. If we are unable to generate sufficient
traffic, we may never generate significant revenue and we may never earn a
profit. Even if we do achieve profitability in the future, we cannot assure you
that we will be able to sustain or increase profitability in subsequent periods.
See "-- We will continue to lose money unless we significantly increase
advertising revenue from our Web sites" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE WHICH MAY RESULT IN VOLATILITY IN
OUR STOCK PRICE AND MAY MAKE IT DIFFICULT TO FORECAST OUR FUTURE PERFORMANCE
Our revenue and expenses may significantly fluctuate from
quarter-to-quarter, which could result in our failure to meet expectations of
securities analysts and investors and cause the trading price of our common
stock to decline. Fluctuations in quarterly results also make it difficult to
predict future performance. Our future revenue, expenses and operating results
are likely to change significantly from quarter-to-quarter due to a number of
factors, many of which are outside of our control. These factors include:
- demand for advertising on our Web sites;
- amount and timing of capital expenditures and other costs relating to the
expansion of our operations;
- impact of agreements with the publishers of ROLLING STONE, THE SOURCE and
DOWN BEAT and others regarding revenue sharing;
- amount and timing of fixed or contingent expenses, license fees, royalties
and other payments;
- type of online advertisements sold and the prices charged for
advertisements;
- seasonal declines in advertising sales, which typically occur in the first
calendar quarter; and
- general economic conditions, as well as economic conditions specific to
digital media and the music industry.
Given the factors described above and the other risks described in this
prospectus, you should not rely on quarter-to-quarter comparisons of our results
of operations to predict future performance.
WE MAY BE UNABLE TO ACCURATELY FORECAST OUR REVENUE AND MAY NOT BE ABLE TO
REDUCE EXPENSES TO COMPENSATE FOR REVENUE SHORTFALLS
We may be unable to accurately forecast our future revenue because of our
limited operating history and the emerging nature of the markets in which we
compete. Our current and future expense levels are based largely on our
forecasts concerning future revenue and are to a large extent fixed.
Accordingly, we may be unable to adjust spending in time to compensate for any
unexpected revenue shortfall. A shortfall in our revenue from the amounts that
we forecast could result in significant losses.
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WE WERE DEPENDENT ON CDNOW FOR 33% OF OUR REVENUE DURING 1998 AND 28% OF OUR
REVENUE DURING THE FIRST SIX MONTHS OF 1999
During 1998, CDnow accounted for $826,000, or 33%, of our total revenue.
During the six months ended June 30, 1999, CDnow accounted for $562,000, or 28%,
of our total revenue. Most of the revenue was generated from advertising and
content licensing. As a result of the amendment of our agreement with CDnow
effective in July 1999, we expect these amounts to significantly decline during
the remainder of 1999, which could have a material adverse effect on our revenue
if not offset by increased revenue from other sources. See "Business --
Strategic Relationships."
BECAUSE SPENDING ON MUSIC IS DEPENDENT ON DISCRETIONARY CONSUMER SPENDING, WE
ARE SUSCEPTIBLE TO FLUCTUATIONS IN GENERAL ECONOMIC CONDITIONS
We believe that revenue from music sales and paraphernalia and related
advertising is dependent on discretionary consumer spending. Our revenue will
therefore be subject to fluctuations based upon the general economic conditions
of the United States and foreign countries in which we or our advertisers do
business. If there is a general economic downturn or recession in the United
States or in such foreign countries, general consumer spending in these markets
likely would decline. Our advertising revenue and other online commercial
activity may decrease as a result.
WE MAY BE UNABLE TO MEET FUTURE CAPITAL REQUIREMENTS WHICH COULD LIMIT OUR
GROWTH
We anticipate that the net proceeds of this offering, together with current
available funds, will be sufficient to satisfy our anticipated needs for working
capital, capital expenditures and business expansion for at least the next 12
months. We may need additional cash at that time or even prior to that time if
we change our operating plan, our actual operations do not meet our operating
plan or if we make acquisitions. Alternatively, we may need to raise additional
funds sooner in order to fund more rapid expansion, develop new or enhanced
services or respond to competitive pressures.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available when and to the extent
required or that, if available, it will be on acceptable terms. If adequate
funds are not available on acceptable terms, we may not be able to fund our
expansion or future operations, develop or enhance our products or services or
respond to competitive pressures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
WE MAY SEEK TO RAISE ADDITIONAL FUNDS OR FINANCE ACQUISITIONS BY ISSUING CAPITAL
STOCK WHICH WOULD REDUCE THE PERCENTAGE OWNERSHIP OF EXISTING STOCKHOLDERS
We may seek to raise additional funds or finance acquisitions by issuing
equity or convertible debt securities, which would reduce the percentage
ownership of existing stockholders. Furthermore, any new securities could have
rights, preferences and privileges senior to those of the common stock.
RISKS RELATING TO OUR OPERATIONS
IF WE DO NOT MANAGE OUR GROWTH WE MAY NOT BE ABLE TO EFFECTIVELY OPERATE OUR
BUSINESS
Since our inception in July 1996, we have rapidly and significantly expanded
our operations. We anticipate that we will continue to expand our operations to
compete effectively and to exploit potential market opportunities. This
expansion has placed, and is expected to continue to place, a significant strain
on our management, operations, systems and financial resources. Failure to
manage our growth effectively could adversely affect our business. From
September 1, 1996 to June 30, 1999, we grew from five to approximately 89
full-time employees. Our recently hired employees also include several key
managerial, technical and operations personnel, and we expect to add additional
key personnel in the near future. To manage our recent growth and any future
growth of our operations and personnel, we must improve and effectively utilize
our existing operational, management, marketing and financial
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systems and successfully train and manage our employees. In addition, we may
also need to increase the capacity of our software, hardware and
telecommunications systems on short notice. We also will need to manage an
increasing number of complex relationships with users, strategic affiliates,
advertisers and other third parties.
WE MAY NOT BE ABLE TO INTEGRATE THE OPERATIONS OF ANY COMPANIES WE MAY ACQUIRE
We are an early stage company and have in the past and may in the future
seek to grow in part through acquisitions. We likely will need to integrate our
internal systems, policies and procedures with those of any company we may
acquire. These systems may include accounting methods and employment and human
resource programs. There can be no assurances that our systems, policies or
procedures will be implemented successfully into any company we acquire. There
also may be delays, complications and expenses relating to such implementation
and integration. Any acquisition we may make generally will be accompanied by
risks, including:
- the assimilation of the operations and personnel of the acquired
companies;
- the potential disruption of our ongoing business;
- the inability of our management to successfully incorporate acquired
technology and rights into our services and products;
- additional expense associated with amortization of acquired intangible
assets;
- the difficulty of maintaining uniform standards, controls, procedures and
policies; and
- the potential impairment of relationships with employees, customers, and
content, technology and distribution sources.
WE RELY ON THIRD PARTIES FOR OUR WEB SITE OPERATIONS AND WE MAY BE SUBJECT TO
SYSTEM DISRUPTIONS, WHICH COULD REDUCE OUR REVENUE
Our ability to attract users to our Web sites and maintain relationships
with advertisers depends on the performance, reliability and availability of our
Web sites and network infrastructure. The maintenance and operation of
substantially all of our Internet communications hardware and servers have been
outsourced to the facilities of Exodus Communications, Inc. in Jersey City, New
Jersey. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems and interrupt our
services. Computer viruses, electronic break-ins or other similar disruptive
events also could disrupt our services. System disruptions could result in the
unavailability or slower response times of our Web sites and that would reduce
the number of advertisements delivered, the quality of our users' experience and
the attractiveness of our Web sites to users and advertisers, which could reduce
our revenue. Our insurance policies may not adequately compensate us for losses
we may incur because of any disruptions in our systems. In addition, under our
agreement with Exodus, it is generally not liable to us for any damage or loss
it may cause to our business and, accordingly, we may be unable to seek
reimbursement from Exodus for losses caused by it.
Service disruptions could adversely affect our revenue and, if they were
prolonged, would seriously harm our business and reputation. In addition,
service disruptions could result in the termination of our rights under our
agreement with the publisher of ROLLING STONE magazine, which would seriously
harm our business. See "-- We depend on our exclusive relationships with the
publishers of ROLLING STONE, THE SOURCE and DOWN BEAT magazines for content and
their brand name recognition and may not be able to attract visitors to our Web
sites if these relationships terminate or become nonexclusive."
WE MAY HAVE CAPACITY CONSTRAINTS WHICH COULD REDUCE OUR REVENUE
Our ability to attract users to our Web sites and maintain relationships
with advertisers also depends on our ability to have sufficient system capacity
and reliability to accommodate the demands of our user traffic. If we are unable
to increase the data storage and processing capacity of our systems
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as fast as demand for our Web sites grows, our Web sites could operate with
slower response times or could fail to operate for unknown periods of time.
Slower response times or unscheduled down-time would reduce the number of
advertisements delivered, the quality of our users' experience and the
attractiveness of our Web sites to users and advertisers, which could reduce our
revenue.
Since launching our first Web site in March 1997, we have experienced slower
response times and unscheduled down-time of our systems due to capacity
restraints. We believe that those interruptions will continue to occur from time
to time in the future. We do not carry business interruption insurance to
compensate us for losses that may occur as a result of these interruptions.
These service interruptions could adversely affect our revenue and, if they were
prolonged, would seriously harm our business and reputation. In addition,
capacity constraints which result in unscheduled down-time of our services could
result in the termination of our rights under our agreement with the publisher
of ROLLING STONE magazine, which would seriously harm our business. See "-- We
depend on our exclusive relationships with the publishers of ROLLING STONE, THE
SOURCE and DOWN BEAT magazines for content and their brand name recognition and
may not be able to attract visitors to our Web sites if these relationships
terminate or become nonexclusive."
WE DEPEND UPON TIMELY INSTALLATIONS OF LINES, FEEDS AND DOWNLOADS, AND THEIR
FAILURES MAY RESULT IN DISRUPTIONS IN OUR SERVICES
We depend upon receipt of timely installations of lines, feeds and content
downloads from content providers, such as our magazine content providers and
third-party webcast venues. Any failure or delay in the transmission or receipt
of such feeds and downloads, whether on account of our system failure, our
content providers, telecommunications providers, Internet service providers or
otherwise, could disrupt the delivery of content and delay its availability on
our Web sites or disrupt our live Internet concerts, or webcasts, which could
adversely affect our performance and business. We rely on third-party services
to provide us with access to the Internet. In addition, we depend upon Web
browsers and Internet service providers and online service providers to provide
Internet users with access to our Web sites. See "Business -- Infrastructure,
Operations and Technology."
OUR INFRASTRUCTURE IS VULNERABLE TO UNAUTHORIZED ACCESS WHICH MAY RESULT IN
MISAPPROPRIATION OF PROPRIETARY INFORMATION AND CAUSE DISRUPTIONS IN OUR
SERVICES
Our infrastructure is vulnerable to unauthorized access, physical or
electronic computer break-ins, computer viruses and other disruptive problems.
Internet service providers have experienced, and may continue to experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees and others. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. Security breaches relating to our
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage our reputation and our
relationships with our content providers and advertisers. We also could be
liable to our content providers, advertisers and other parties for the damages
caused by such breaches or we could incur substantial costs as a result of
defending claims for those damages. We may need to expend significant capital
and other resources to protect against such security breaches or to address
problems caused by such breaches. We cannot assure you that our security
measures will prevent disruptions or security breaches.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER OR OTHER KEY EMPLOYEES COULD ADVERSELY
AFFECT OUR BUSINESS
Our success depends to a significant extent on the continued contributions
of our senior management team, especially Howard A. Tullman, our Chairman and
Chief Executive Officer. We are not the beneficiaries of any life insurance
covering any of our executives or employees. We entered into a three-year
employment agreement with Mr. Tullman in June 1997 and a two-year employment
agreement with Stuart B. Frankel, our Chief Financial Officer, in April 1998.
The loss of either
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Mr. Tullman or Mr. Frankel or other key employees would likely have a material
adverse effect on our business.
WE NEED TO RETAIN AND ATTRACT CREATIVE, TECHNICAL, SALES, MARKETING AND
FINANCIAL PERSONNEL TO EFFECTIVELY OPERATE OUR BUSINESS
We believe that our performance will depend in large part upon our ability
to attract and retain additional highly skilled creative, technical, sales,
marketing and financial personnel, especially those with experience in the music
and Internet industries. If we do not succeed in attracting new personnel or
retaining and motivating our current personnel, our business could be adversely
affected. Competition for such personnel, especially creative and technical
talent, is intense. We have in the past experienced, and we expect to continue
to experience, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications.
YEAR 2000 PROBLEMS FOR US, OUR SUPPLIERS OR OUR CUSTOMERS COULD INCREASE OUR
LIABILITIES OR EXPENSES AND IMPACT OUR PROFITABILITY
The Year 2000 problem could harm our business and financial results. We may
discover Year 2000 problems in our systems that may require us to upgrade
systems at a substantial cost. In addition, software and hardware from third
parties that have been integrated into our systems may need to be updated or
replaced, which may be time-consuming and expensive. In addition, we rely on
third parties such as Exodus to support and operate our systems. Failures or
interruptions of our systems or those of third parties because of Year 2000
problems could seriously damage our business and our relationships with our
content, distribution and technology providers, advertisers and users. For
example, if our ROLLINGSTONE.COM Web site is unavailable for 12 or more
consecutive hours, our agreement with the publisher of ROLLING STONE could be
terminated. In addition, failures, interruptions or other service problems due
to Year 2000 could result in lost revenue, increased operating costs and loss of
significant user traffic. Governmental agencies, public utilities, Internet
service providers and others that we rely on or that our customers rely on and
which we do not control may not be Year 2000 compliant. This could result in
systemic failures beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, and prevent us from providing our
content or reduce user traffic. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
RISKS RELATING TO INTELLECTUAL PROPERTY RIGHTS AND GOVERNMENT REGULATION
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS AND COPYRIGHTS WHICH COULD RESULT IN
THE LOSS OF OUR RIGHTS OR INCREASED COSTS
Our financial performance and ability to compete depends to a significant
degree on the protection of our content and of the goodwill associated with our
trademarks. We also depend on our magazine content providers, including the
publishers of ROLLING STONE, and our other content licensors to protect rights
in the content we license from them, including their copyrights and trademarks.
We rely on copyright laws to protect the original content we develop for
placement on our Web sites, including our feature articles and artist databases.
In addition, we rely on trademark laws to protect our brands and to provide
additional protection for the unique appearance of our Web sites. A substantial
amount of uncertainty exists concerning the scope of protection copyright and
trademark laws afford on the Internet, and we cannot be assured that copyright
and trademark laws will adequately protect our content, trademarks and other
proprietary rights. In addition, policing unauthorized use of our content,
trademarks and other proprietary rights could be very expensive, difficult or
impossible, particularly given the global nature of the Internet.
We do not have registrations for "TUNES.COM," "MYTUNES" and the Tunes.com
logo as trademarks and may not be able to prevent others from using those
trademarks. We are also aware of a number of uses by third parties of the word
"tunes" in connection with music and Internet services.
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The prior use of the word "tunes" and the possible descriptive nature of that
word of music-related services may further limit our ability to prevent others
from using "tunes," "tunes.com" or similar derivative terms to identify goods or
services related to music or otherwise. Use of our brand name or its derivatives
by others could dilute our brand identity and divert users from our products and
services.
Effective protection of our copyrights and trademarks may be unenforceable
or limited in foreign countries. Given the global nature of the Internet, we
cannot control the ultimate destination of our services. In addition, other than
pending applications for registration of the "Tunes.com" brand and the Tunes.com
logo in Canada, we have not applied for registration of our trademarks,
copyrights or other proprietary rights in foreign countries and we may not be
able to use our proprietary brands in those foreign countries. As a result, any
competitive advantage we may establish domestically through our goodwill and
brand image would be eroded and could diminish our ability to compete in foreign
markets.
THIRD-PARTY DEVELOPERS MAY BE ABLE TO PREVENT US FROM USING OR CHARGE US
ROYALTIES FOR SOME OF OUR PROPRIETARY TECHNOLOGY
Some of our proprietary software and technology was developed by third-party
consultants. In some cases, we do not have assignments of ownership rights for
consultant-developed software and technology. As a result, those third-party
consultants may claim ownership interests in part of our proprietary technology
and, accordingly, may force us to stop using this technology or to pay royalties
for it in the future.
WE MAY NOT BE ABLE TO PREVENT THIRD PARTIES FROM USING OUR DOMAIN NAMES WHICH
COULD DECREASE THE VALUE OF THESE DOMAIN NAMES
Our trademark rights may not be sufficient to prevent third parties from
acquiring or using domain names that infringe or otherwise decrease the value of
our trademarks and domain names. We currently hold the Internet domain name
"TUNES.COM," as well as various other related domain names. We do not hold the
domain names "tunes.net" or "tunes.org." We use the following domain names under
license: ROLLINGSTONE.COM, THESOURCE.COM and DOWNBEATJAZZ.COM. Domain names
generally have been regulated by the Commerce Department through contract with
Network Solutions, Inc., a company that has exclusively administered the
so-called top-level domain names ending in ".com," ".net" and ".org." We expect
that the regulation of domain names in the United States and in foreign
countries will continue to evolve and change. For example, the Commerce
Department recently appointed the nonprofit Internet Corporation for Assigned
Names and Numbers to further privatize the administration of domain names and to
address regulatory issues, including the appointment of additional domain name
registrars and the adoption of new domain name dispute policies. The ICANN
recently has appointed several new domain name registrars who will sell and
administer domain names and the effect this will have on the regulation of
domain names is uncertain. Internet regulatory bodies also could establish
additional top-level domains or modify the rights of current holders of domain
names. As a result, the value of the ".com" domain could be diluted and decrease
the number of visitors to our Web sites, and we may not acquire or maintain the
"TUNES.COM" domain name in all of the countries in which we intend to conduct
business. In addition, we may not be able to continue licensing
ROLLINGSTONE.COM, THESOURCE.COM and DOWNBEATJAZZ.COM in the future or these
names may not be available for our use in other countries into which we may
expand. See "Business -- Strategic Relationships" and "-- Intellectual
Property."
INTERNET LAWS AND REGULATIONS MAY CHANGE WHICH COULD ADVERSELY AFFECT OUR
BUSINESS
We are subject to various laws and regulations relating to our business,
although there are few laws or regulations that apply directly to Internet-based
services. Due to the increasing popularity and use of the Internet, laws and
regulations may be adopted with respect to the Internet that could decrease the
demand for our services, increase our cost of doing business and decrease our
revenue opportunities. Such laws and regulations may cover issues such as user
privacy, security, pricing, taxation, content,
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copyrights and distribution and quality of services. The growth and development
of the market for online entertainment, content and commercial transactions may
result in more stringent consumer protection laws that impose additional burdens
on those companies providing such online content, online advertising or other
online commercial transactions. The enactment of laws or regulations that limit
or regulate these activities may impede our growth and increase our costs. See
"Business -- Government Regulation."
WE MAY BE SUBJECT TO LIABILITY FOR MISUSE OF USERS' PRIVATE INFORMATION
Our privacy policy provides that we will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is available to users
when they initially register on our TUNES.COM Web site and also is easily
accessible on our Web sites. Despite this policy, if third persons were able to
penetrate our network security or otherwise misappropriate, or if we
inadvertently disclose, our users' personal information or credit card
information, we could be subject to liability. These liabilities could include
claims for unauthorized purchases with credit card information, impersonation or
other similar fraud claims. They could also include claims for other misuses of
personal information, such as for unauthorized marketing purposes. These claims
could result in litigation which may cause us to incur substantial costs.
Legislatures and government agencies have adopted and are considering
adopting laws and regulations regarding the collection and use of personal
information obtained from individuals when accessing Web sites. For example,
Congress recently enacted the Children's Online Privacy Protection Act which
restricts the ability of Internet companies to collect information on children
under the age of 13 without their parents' consent. In addition, the Federal
Trade Commission and state and local authorities have been investigating
Internet companies regarding their use of personal information. We could incur
additional expenses if new laws or regulations regarding the use of personal
information are introduced or if these authorities choose to investigate our
privacy practices. While we have implemented and intend to implement additional
programs designed to enhance the protection of the privacy of our users, these
programs may not conform with laws or regulations that are adopted. In addition,
these legislative and regulatory initiatives may adversely affect our ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide advertisers with demographic
information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data. The directive could
impose restrictions that are more stringent than current Internet privacy
standards in the United States. Although it is uncertain whether this directive
and resulting legislation will apply to companies located in the United States,
if it were applied to us, the directive may prevent us from collecting data from
users in European Union member countries. Historically, approximately 4% to 6%
of the visitors to our Web sites have been from European Union member countries.
Other countries have adopted or may adopt similar legislation. See "Business --
Government Regulation."
OUR MARKETING AND SALES EFFORTS RELY HEAVILY ON OUR ABILITY TO COLLECT USER
INFORMATION
We typically place information commonly referred to as "cookies" on a user's
hard drive without the user's knowledge or consent. We use cookies for a variety
of reasons, including enabling us to limit the frequency with which a user is
shown a particular advertisement. Any reduction or limitation in the use of
cookies could limit the effectiveness of this technology, which may reduce
advertising revenue. Several currently available Internet browsers allow users
to modify their browser settings to remove cookies at anytime or to prevent
cookies from being stored on their hard drives. In addition, some Internet
commentators, privacy advocates and governmental bodies have suggested limiting
or eliminating the use of cookies. Laws relating to privacy and the use of the
Internet to collect personal information could limit our ability to collect data
and use our database. Because we use email for direct marketing, any legislative
or consumer efforts to further regulate unsolicited bulk emails,
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commonly referred to as "spam," as well as other laws and the policies of our
technology providers, such as Exodus, regulating the use of email could
significantly impair our marketing efforts.
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITES OR PRODUCTS SOLD
THROUGH OUR WEB SITES
We may be liable to third parties for content published on our Web sites and
other Web sites where our syndicated content appears if the music, artwork, text
or other content available violates their copyright, trademark or other
intellectual property rights or if the available content is defamatory, obscene
or pornographic. Those types of claims have been brought, sometimes
successfully, against Web site operators in the past. We also may be liable for
content uploaded or posted by our users on our Web sites, such as mp3 files,
postings on our message boards, chat-room discussions and copyrightable works.
In addition, we could have liability to some of our content licensors for claims
made against them for content available on our Web sites. We also could be
exposed to these types of claims for the content that may be accessed from our
Web sites or other Web sites via links to other Web sites. We may need to
implement measures to reduce exposure to these types of claims. Such measures
may not be successful and may require us to expend significant resources. We
also may be sued for product liability claims relating to products sold through
our Web sites or Web sites where our syndicated content appears. Any litigation
as a result of defending these types of claims could result in substantial costs
and damages. Our insurance may not adequately protect us against these types of
claims or the costs of their defense or payment of damages.
OUR CONTESTS AND SWEEPSTAKES MAY BE SUBJECT TO STATE AND FEDERAL LAWS WHICH
COULD REDUCE OUR AUDIENCE AND REVENUES
Our contests and sweepstakes may be subject to state and federal laws
governing lotteries and gambling, which may restrict our ability to offer
contests and sweepstakes in some geographic areas or altogether. Any
restrictions on these promotions could deprive us of a significant method for
attracting user traffic to our Web sites. Reductions in our user audience would
adversely affect our revenue. We cannot be certain that our contests and
sweepstakes will continue to be exempt from such laws.
WE MAY BE LIABLE FOR THE COLLECTION OF SALES AND OTHER TAXES WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE FROM E-COMMERCE
The imposition of sales and other taxes could adversely affect our ability
to become profitable. Currently, we collect state sales taxes only for
e-commerce transactions we conduct with residents of the states of California,
Illinois and New York. However, one or more other states may seek to impose
sales tax collection obligations on us. A number of proposals have been made at
the state and local level that would impose additional taxes on the sale of
goods and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of e-commerce and could adversely affect our
opportunity to generate revenue from e-commerce. Moreover, if any state or
foreign country were to successfully assert that we should collect sales or
other taxes for the sale of merchandise on our system, additional administrative
burdens would be placed on our operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by Congress. However, this
legislation, known as the Internet Tax Freedom Act, imposes only a three-year
moratorium ending on October 21, 2001 on state and local taxes on e-commerce
where such taxes are discriminatory and on Internet access unless such taxes
were generally imposed and actually enforced prior to October 1, 1998. Failure
to renew this legislation would allow various states to impose taxes on
Internet-based commerce.
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OFFERING RISKS
OUR DIRECTORS AND EXECUTIVE OFFICERS WILL CONTROL 37% OF COMMON STOCK AND BE
ABLE TO SIGNIFICANTLY INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL
After this offering, our directors and executive officers will, in the
aggregate, beneficially own or otherwise control approximately 37% of our
outstanding common stock. These stockholders will be able to significantly
influence matters requiring approval of our stockholders, including the election
of directors and the approval of significant corporate transactions. This
concentration of ownership could discourage others from initiating potential
merger, takeover or other change of control transactions. As a result, the
market price of our common stock could be adversely affected. See "Principal
Stockholders."
SALES OF STOCK TO EMPLOYEES AND KEY INDIVIDUALS WILL REDUCE YOUR OWNERSHIP
PERCENTAGE
We seek to attract and retain officers, directors, employees and other key
individuals in part by offering them stock options and other rights to purchase
shares of common stock. The exercise of stock options will reduce the percentage
ownership in Tunes.com of the then existing stockholders. As of June 30, 1999,
we had outstanding options to purchase 2,332,764 shares of our common stock. We
also have received 2,161,899 shares for future grants under our option plans. In
addition, the compensation committee of our board of directors has approved an
employee stock purchase plan which provides for the issuance of up to 250,000
shares of our common stock. See "Management -- Stock Incentive Plans."
ACCELERATION OF VESTING OF OPTIONS UPON COMPLETION OF THIS OFFERING MAY REDUCE
THE COMMITMENT OF EMPLOYEES AND KEY INDIVIDUALS
Most of the stock options that we have granted to employees will become
exercisable upon completion of this offering. As a result, the financial
incentive of employees and key individuals to continue to work for us may be
diminished. We expect substantially all option holders will be subject to a
180-day lock-up following this offering. However, upon the expiration of this
180-day period, these employees will be able to exercise these options and sell
their shares. As a result, we may be unable to retain these employees or we may
be required to grant additional options or provide other financial incentives to
retain them. See "Management -- Stock Incentive Plans."
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE WHICH COULD PREVENT INVESTORS FROM
RESELLING THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares will be
determined by negotiations between the underwriters and us. The market price of
our common stock is likely to significantly vary from the initial offering
price, to be highly volatile and could be subject to wide fluctuations in
response to many factors, some of which are beyond our control, including the
factors described in this section and the following:
- quarterly variations in our operating results;
- operating or financial results that vary from the expectations of
securities analysts and investors;
- changes in estimates by securities analysts and others of our future
financial performance;
- the discussion of our company or stock price in online investor
communities, such as chat rooms and bulletin boards;
- changes in market valuations of other Internet or online service
companies;
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- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- damage to our business by government laws and regulations or decisions;
- additions or departures of key personnel;
- future sales of our common stock; and
- general stock market price and volume fluctuations.
The market prices of stock for Internet-related and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the past or present operating performance of such
companies. Such market prices may not be sustainable and may be subject to wide
variations. If our common stock trades to such levels following this offering,
it may thereafter experience a material decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert our management's
attention and resources.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS IN THE PUBLIC MARKET
COULD CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock in the public market
following this offering could cause the market price of our common stock to
decline. After this offering, assuming a public offering price of $14.00 per
share, we will have outstanding 13,080,953 shares of common stock. All the
shares sold in this offering will be freely tradable. Of the remaining 9,080,953
shares of common stock outstanding after this offering, 4,361,495 shares will be
eligible for sale in the public market beginning 181 days after the date of this
prospectus. The remaining 4,719,458 shares will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act. However, holders of
substantially all of these shares have registration rights that may permit these
stockholders to resell their shares in the public market earlier than they
otherwise could have been sold. We also intend to register all of the 4,750,000
shares reserved for issuance under our stock option plans and employee stock
purchase plan shortly after this offering. As of June 30, 1999, options to
purchase 2,332,764 shares were outstanding, 1,832,495 of which will be
exercisable upon completion of this offering. Warrants to purchase 1,522,710
shares were outstanding as of June 30, 1999. These shares will become eligible
for sale one year following exercise of the warrants subject to volume and other
requirements of Rule 144. In addition, holders of warrants to purchase 151,582
shares have registration rights.
ANTI-TAKEOVER PROVISIONS OF OUR CHARTER, BYLAWS AND DELAWARE LAW COULD MAKE A
THIRD-PARTY ACQUISITION OF US MORE DIFFICULT AND COULD REDUCE THE PRICE
INVESTORS ARE WILLING TO PAY FOR OUR STOCK
Our certificate of incorporation and bylaws and Delaware corporate law
contain provisions that could delay, defer or prevent a change in control of our
company or a change in our management. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. As a result, these provisions
could limit the price that investors are willing to pay in the future for shares
of our common stock. These provisions:
- authorize our board of directors to issue preferred stock, without prior
stockholder approval, with voting or other rights senior to those of our
common stock;
- provide for a staggered board of directors, so it will take two successive
annual meetings to replace a majority of our directors;
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- prohibit stockholder action by written consent;
- prohibit stockholders from calling a special meeting;
- restrict the ability of stockholders to remove directors; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF PROCEEDS AND MAY FAIL TO USE
THEM EFFECTIVELY TO GROW OUR BUSINESS
As of the date of this prospectus, we cannot specify the particular uses for
the net proceeds we will receive from this offering. If our management does not
apply these funds effectively, our revenue could decrease and our stock price
could decline. See "Use of Proceeds."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE
THAN EXISTING STOCKHOLDERS
The initial public offering price is expected to be substantially higher
than the net tangible book value per share of our common stock. Purchasers of
our common stock in this offering will suffer immediate and substantial
dilution. The dilution will be $8.94 per share in the net tangible book value of
the common stock based on an assumed initial public offering price of $14.00 per
share. If outstanding options and warrants to purchase shares of common stock
are exercised, there could be further dilution. Existing stockholders paid an
average price of $5.09 per share. See "Dilution."
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements, including statements about our business plans, sources of revenue,
content, Web sites, strategic relationships, anticipated growth, future
prospects of advertising and commercial activity on the Internet and our use and
rate of use of proceeds from this offering. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from our future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among other things, those items discussed under "Risk Factors"
and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" or "continue" or
other forms of or the negative of those terms or other comparable terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
undertake no obligation to update publicly any forward-looking statement after
the date of this prospectus.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of 4.0 million shares of our
common stock will be approximately $51.3 million, assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and estimated offering expenses. If the underwriters exercise their
over-allotment option in full, we estimate that the net proceeds will be
approximately $59.1 million.
We have no current specific plans for the net proceeds of this offering. We
currently intend to use the net proceeds to expand our sales and advertising
campaigns, brand-name promotions and other marketing efforts, to develop
strategic relationships, to finance capital expenditures and to fund other
general corporate purposes. We may also use a portion of the net proceeds to
acquire or invest in businesses, technologies, content, products or services,
although no specific acquisitions are currently planned and no portion of the
net proceeds has been allocated for any such acquisition or for the other listed
purposes. The amount of funds that we actually use for these purposes may vary
significantly based upon many factors, especially changes to our business plans
and material variances in projected revenue and expenses. Accordingly, our
management will have broad discretion in the application of the net proceeds.
Pending such uses, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities. See "Risk Factors --
Our management has broad discretion over use of proceeds and may fail to use
them effectively to grow our business."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis after giving effect to the 1.25-for-1 stock split;
- on a pro forma basis to reflect:
(1) the conversion of all outstanding shares of preferred stock into
7,149,953 shares of common stock which will occur upon completion of
this offering; and
(2) the acquisition of Tunes Network in July 1998 and the related
issuance of an assumed 125,000 additional shares of common stock to
occur shortly following this offering.
- on a pro forma basis as adjusted to reflect the receipt by us of the
estimated net proceeds from the sale of the 4,000,000 shares of common
stock in this offering, assuming an initial public offering price of
$14.00 per share and the application of the resulting net proceeds after
deducting estimated underwriting discounts and estimated offering
expenses.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this prospectus. The
outstanding share information below excludes:
- 2,332,764 shares of common stock that may be issued upon the exercise of
outstanding options as of June 30, 1999 at a weighted average exercise
price of $4.86 per share and 2,161,899 shares currently reserved for
future awards under our stock option plans and 250,000 shares reserved for
issuance under our employee stock purchase plan; and
- warrants to purchase 1,522,710 shares at a weighted average exercise price
of $3.30 per share.
See "Management -- Stock Incentive Plans" and "Description of Capital Stock --
Warrants" and notes 6 and 7 of notes to our consolidated financial statements.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents.................................................... $ 14,229 $ 14,229 $ 65,509
--------- ----------- -----------
--------- ----------- -----------
Current maturities of long-term debt......................................... $ 89 $ 89 $ 89
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current portion......................................... $ 121 $ 121 $ 121
Redeemable convertible preferred stock, Series A through E, $0.01 par value,
actual -- 7,000,000 shares authorized and 5,719,962 shares issued and
outstanding; pro forma and pro forma as adjusted -- no shares authorized or
issued and outstanding..................................................... 42,186 -- --
Stockholders' equity:
Preferred stock, $0.01 par value, actual and pro forma -- no shares
authorized or issued and outstanding; pro forma as adjusted -- 5,000,000
shares authorized and no shares issued and outstanding................... -- -- --
Common stock, $0.01 par value, actual -- 11,500,000 shares authorized and
1,806,000 shares issued and outstanding; pro forma -- 9,080,953 shares
issued and outstanding; and pro forma as adjusted -- 50,000,000 shares
authorized and 13,080,953 shares issued and outstanding.................. 18 91 131
Additional paid-in capital................................................. 9,291 53,154 104,394
Common stock to be issued.................................................. 55 55 55
Accumulated deficit........................................................ (32,495) (32,495) (32,495)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (23,131) 20,805 72,085
--------- ----------- -----------
Total capitalization....................................................... $ 19,176 $ 20,926 $ 72,206
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
28
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$14.8 million, or $1.64 per share. Pro forma net tangible book value is
calculated by subtracting total liabilities from pro forma tangible assets. Pro
forma net tangible book value per share equals our pro forma net tangible book
value divided by our pro forma number of outstanding shares of common stock
after giving effect to:
- the conversion of all outstanding shares of preferred stock into 7,149,953
shares of common stock which will occur upon completion of this offering;
and
- the acquisition of Tunes Network in July 1998 and the related issuance of
an assumed 125,000 additional shares of common stock to occur shortly
following this offering.
Assuming the sale of 4,000,000 shares of our common stock in this offering at an
assumed initial public offering price of $14.00 per share and after deducting
estimated underwriting discounts and estimated offering expenses, our pro forma
adjusted net tangible book value as of June 30, 1999 would have been
approximately $66.1 million, or $5.06 per share. This represents an immediate
increase in pro forma net tangible book value of $3.42 per share to existing
stockholders and an immediate dilution of $8.94 per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution to you:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 14.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 1.64
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 3.42
---------
Pro forma net tangible book value per share, as adjusted for this offering... 5.06
---------
Dilution per share to new investors.......................................... $ 8.94
---------
---------
</TABLE>
The following table summarizes as of June 30, 1999, on the pro forma as
adjusted basis described above, the number of shares of common stock purchased
from us, the total consideration for such shares, and the average price per
share paid by existing stockholders and by investors purchasing shares of common
stock in this offering, before deducting estimated underwriting discounts and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 9,080,953 69.4% $ 46,239,620 45.2% $ 5.09
New investors............................. 4,000,000 30.6 56,000,000 54.8 14.00
------------ --------- -------------- ---------
Total................................. 13,080,953 100.0% $ 102,239,620 100.0%
------------ --------- -------------- ---------
------------ --------- -------------- ---------
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants. As of June 30, 1999, there were outstanding options
to purchase a total of 2,332,764 shares of common stock with a weighted average
exercise price of $4.86 per share, and, currently, there are outstanding
warrants to purchase 1,522,710 shares of common stock with a weighted average
exercise price of $3.30 per share. To the extent that any of these options or
warrants are exercised, there would be further dilution to you. See
"Capitalization," "Management -- Stock Incentive Plans," "Description of Capital
Stock -- Warrants" and notes 6 and 7 of notes to our consolidated financial
statements.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from July 2, 1996, our inception, to December 31, 1996 and the years
ended December 31, 1997 and 1998 and the balance sheet data as of December 31,
1997 and 1998, are derived from our audited financial statements, which are
included elsewhere in this prospectus. The balance sheet data as of December 31,
1996 are derived from our audited financial statements which are not included in
this prospectus. The statement of operations data for the six-month periods
ended June 30, 1998 and 1999 and the balance sheet data as of June 30, 1999 are
derived from our unaudited financial statements contained elsewhere in this
prospectus, which include, in our belief, all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of such data.
The results of operations data for any of the periods are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 2, 1996
(INCEPTION) SIX MONTHS ENDED JUNE
TO YEAR ENDED DECEMBER 31, 30,
DECEMBER 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Advertising.................................... $ -- $ 284 $ 970 $ 271 $ 1,372
Other.......................................... -- 281 1,515 861 626
------------- ----------- ----------- ----------- -----------
Total revenue................................ -- 565 2,485 1,132 1,998
Cost of revenue.................................. -- 1,268 4,045 2,040 2,003
------------- ----------- ----------- ----------- -----------
Gross deficit.................................... -- (703) (1,560) (908) (5)
Operating expenses:
Operations and development..................... 32 458 1,880 408 1,781
Sales and marketing............................ 37 1,064 4,034 1,123 3,144
General and administrative..................... 153 1,245 2,837 1,086 2,004
Depreciation and amortization.................. 2 157 1,778 137 1,726
Stock compensation............................. -- 10 1,375 152 3,854
------------- ----------- ----------- ----------- -----------
Total operating expenses..................... 224 2,934 11,904 2,906 12,509
------------- ----------- ----------- ----------- -----------
Loss from operations......................... (224) (3,637) (13,464) (3,814) (12,514)
Other income, net................................ 7 115 428 194 47
------------- ----------- ----------- ----------- -----------
Net loss..................................... $ (217) $ (3,522) $ (13,036) $ (3,620) $ (12,467)
Accretion of redeemable convertible preferred
stock........................................... -- (363) (1,570) (541) (1,321)
------------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders............................... $ 217 $ (3,885) $ (14,606) $ (4,161) $ (13,788)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share(1).......... $ (0.31) $ (2.70) $ (9.88) $ (2.89) $ (8.23)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Weighted average shares outstanding used in basic
and diluted per share calculation(1)............ 704,525 1,438,163 1,477,964 1,438,163 1,676,243
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 30,
1996 1997 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 561 $ 2,674 $ 4,251 $ 14,229
Working capital.......................................................... 478 3,379 3,240 13,746
Total assets............................................................. 634 5,602 11,413 22,028
Long-term debt, less current portion..................................... -- -- 161 121
Redeemable convertible preferred stock................................... -- -- 22,116 42,186
Total stockholders' equity (deficit)..................................... 533 (3,342) (13,618) (23,131)
</TABLE>
- --------------------------
(1) See note 3 of notes to our consolidated financial statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
30
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected pro forma consolidated statement of operations data set forth
below is presented for informational purposes only and may not be indicative of
the operating results that would have been achieved had the transactions
described below been in effect as of the beginning of the periods presented and
should not be considered as being representative of future operating results.
The selected pro forma consolidated financial data is derived from the unaudited
pro forma combined financial information included elsewhere in this prospectus
and gives effect to the following as of the beginning of the respective periods,
for statement of operations data, and as of June 30, 1999, for balance sheet
data:
- the conversion of all outstanding shares of preferred stock into 7,149,953
shares of common stock which will occur upon completion of this offering;
- the acquisition of Tunes Network in July 1998 and the related issuance of
an assumed 125,000 additional shares of common stock to occur shortly
following this offering; and
- the amortization of a $1,500,000 license fee triggered by the May 1999
preferred stock issuance.
The pro forma as adjusted balance sheet data as of June 30, 1999 gives effect to
the receipt by us of the estimated net proceeds from the sale of the shares of
our common stock in this offering at an assumed initial public offering price of
$14.00 per share and after deducting estimated underwriting discounts and
estimated offering expenses.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Advertising................................................................... $ 983 $ 1,372
Other......................................................................... 1,742 626
----------------- -------------
Total revenue............................................................... 2,725 1,998
Cost of revenue................................................................. 4,464 2,092
----------------- -------------
Gross deficit................................................................... (1,739) (94)
Operating expenses:
Operations and development.................................................... 2,321 1,781
Sales and marketing........................................................... 4,037 3,144
General and administrative.................................................... 3,075 2,004
Depreciation and amortization................................................. 4,101 2,309
Stock compensation............................................................ 1,578 3,854
----------------- -------------
Total operating expenses.................................................... 15,112 13,092
----------------- -------------
Loss from operations........................................................ (16,851) (13,186)
Other income.................................................................... 351 47
----------------- -------------
Net loss.................................................................... $ (16,500) $ (13,139)
----------------- -------------
----------------- -------------
Pro forma basic and diluted net loss per share(1)............................... $ (2.89) $ (1.79)
----------------- -------------
----------------- -------------
Weighted average shares outstanding used in pro forma basic and diluted per
share calculation(1)........................................................... 5,715,119 7,342,671
----------------- -------------
----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 14,229 $ 65,509
Working capital................................................................... 13,746 65,026
Total assets...................................................................... 23,778 75,058
Long-term debt, less current portion.............................................. 121 121
Redeemable convertible preferred stock............................................ -- --
Total stockholders' equity........................................................ 20,805 72,085
</TABLE>
- --------------------------
(1) See note 3 of notes to our financial statements for an explanation of the
method used to determine the number of shares used to compute per share
amounts.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto of Tunes.com and the other financial
information included elsewhere in this prospectus. In addition to historical
information, the following discussion and other parts of this prospectus contain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by this forward-looking
information due to the factors discussed in "Risk Factors," "Business" and
elsewhere in this prospectus.
OVERVIEW
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our hub Web site, TUNES.COM, is a "one-stop shop" designed to appeal
to a broad spectrum of music fans by covering a wide range of genres, from urban
to rock to classical. The TUNES.COM Web site is supported by and integrated with
our network of genre-specific Web sites: ROLLINGSTONE.COM -- rock and pop,
THESOURCE.COM -- urban and hip-hop and DOWNBEATJAZZ.COM -- jazz and blues. We
have built these Web sites through our exclusive relationships with leading
music industry magazines, ROLLING STONE, THE SOURCE and DOWN BEAT. Our Web sites
provide advertisers and retailers with an attractive channel to reach consumers
across both broad and targeted demographic groups. We generate revenue from a
number of sources, including advertising, e-commerce and content syndication.
We began our business in July 1996 and started operating our Web sites in
March 1997 -- JAMTV.COM, March 1998 -- ROLLINGSTONE.COM, July 1998 -- TUNES.COM,
December 1998 -- THESOURCE.COM and February 1999 -- DOWNBEATJAZZ.COM. In July
1998, we acquired Tunes Network, Inc., now Tunes Acquisition Corp., which had
operated the TUNES.COM Web site since November 1996.
ADVERTISING REVENUE. We generate advertising revenue from the sale of
integrated marketing campaigns, banner advertisements and sponsorships on our
Web sites and on co-branded Web sites under content distribution agreements.
Advertising revenue also includes barter revenue, which represents an exchange
of advertising space on our network of sites for reciprocal advertising space on
the Web sites of third parties. Barter revenue and the corresponding expense is
recognized in the period the advertising is displayed at the fair value of the
consideration received or provided, whichever is more readily determinable.
Barter revenue represented approximately 6% of Tunes.com's total revenue during
1998 and 27% of total revenue during the six months ended June 30, 1999. During
the second half of 1999, we expect barter revenue to decline as a percentage of
total revenue compared to the level of barter revenue recognized during the six
months ended June 30, 1999, as we focus on generating additional cash-based
advertising revenue. Advertising revenue is generally recognized in the period
in which the advertisement is displayed or campaign is run, provided that we
have no significant remaining obligations and our collection of the resulting
receivable is probable. Our obligations typically include guarantees of a
minimum number of advertising impressions delivered, or times that
advertisements appear in pages viewed by users. We sell advertisements on a cost
per thousand impressions, or CPM, basis, a cost per click-through, or CPC, basis
or a cost per action, or CPA, basis. Advertisements billed on a CPM basis
require advertisers to pay us an agreed-upon amount for the advertising
impressions delivered. Advertisements billed on a CPC and CPA basis require
advertisers to pay us an agreed-upon amount when users click through to the
advertiser's Web site or take a required action in response to the
advertisements, respectively. In a CPC contract, we recognize revenue as members
click-through to the advertiser's Web site or otherwise respond to the
advertisement. In the case of a CPA contract, we may experience delays in
recognizing revenue pending receipt of data from the advertiser.
32
<PAGE>
OTHER REVENUE. We generate other revenue from content licensing, e-commerce
and product development. Revenue from licensing or sublicensing our content to
third parties, such as other Web sites, is recognized over the period of the
license agreement with the third party. We expect revenue from content licensing
to decrease as a percentage of total revenue as a result of projected growth in
advertising and e-commerce revenue. E-commerce revenue generated from the sale
of CDs and other music-related merchandise through our Web sites is recognized
when the products are shipped to customers, net of allowances for returns. We
generate product development revenue from the development of content for
multimedia CDs under third-party contracts and the development of microsites and
other Web-based services. This revenue is generally recognized when the product
is delivered, except for services provided under longer-term contracts where
revenue is recognized on a percentage-of-completion basis over the life of the
project. We expect revenue from these development and maintenance activities to
decrease in the future as we focus our resources on generating advertising and
e-commerce revenue.
COST OF REVENUE. Our cost of revenue consists primarily of expenses
required to publish and present our Web sites, produce and present streaming
video and audio concerts and support and deliver our content services. Examples
of costs of revenue include content, royalty and license fees, revenue sharing
fees, telecommunications expenses and employee compensation. To date, we have
entered into a number of license agreements and strategic relationships in order
to obtain content, generate additional traffic and registered users and
establish additional sources of revenue. For example, we pay a portion of the
advertising and e-commerce revenue we generate from our genre-specific Web
sites, ROLLINGSTONE.COM, THESOURCE.COM and DOWNBEATJAZZ.COM, to the publishers
of the affiliated magazines. See "Business -- Strategic Relationships."
OPERATIONS AND DEVELOPMENT EXPENSE. Operations and development expense
consists primarily of expenses required to design, develop and maintain our Web
sites and underlying technology, including technology-related expenses, outside
service expenses and employee compensation and related expenses. We believe that
significant future investments in Web site development will be required for us
to remain competitive. Therefore, we expect to continue to increase our
operations and development expenses in absolute dollars for the foreseeable
future.
SALES AND MARKETING EXPENSE. Sales and marketing expense consists of
expenses required to promote our Web sites and generate advertising and
e-commerce revenue. Examples of sales and marketing expenses include salaries
and related expenses, advertising, marketing, promotional and public relations
expenses. We believe that increasing our sales and marketing efforts will be
critical to increasing our revenue and, therefore, we expect sales and marketing
expense to continue to increase as additional sales personnel are hired and we
pursue an increased branding and marketing campaign.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists of expenses required to promote our Web sites and generate advertising
and e-commerce revenue. Examples include salary and related costs for general
corporate functions including finance and accounting, legal, human resources and
administration as well as professional service fees and facilities costs. We
expect general and administrative expenses to increase in absolute dollars in
future periods as we continue to develop and maintain the executive and
administrative infrastructure necessary to support the growth of our business
and operate as a publicly traded company.
NET LOSSES. We have incurred significant losses and negative cash flows
since our inception. Through June 30, 1999, we have incurred cumulative losses
of $29.2 million. As of June 30, 1999, we had an accumulated deficit of $32.5
million, including the accretion of redeemable convertible preferred stock of
$3.3 million. These losses have been funded primarily through the issuance of
preferred stock and convertible promissory notes. Since we believe that our
success will depend largely upon our ability to increase traffic to our Web
sites, build brand names superior to our competition, integrate developing
technologies and increase advertising and other revenue opportunities, we intend
33
<PAGE>
to invest heavily in marketing and brand promotion, technological resources,
sales, content development and strategic relationships. We anticipate that we
will incur significant losses for the foreseeable future and that the rate at
which losses will be incurred may increase from current levels.
In light of the evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenue and
operating results are not meaningful and should not be relied upon as indicative
of future performance. We believe that advertising sales in traditional media,
such as television and radio, generally are lower in the first calendar quarter.
Our revenue is also affected by seasonal patterns in advertising, which would
become more noticeable if our revenue growth does not continue at its recent
rate. We do not believe that our historical growth rates are indicative of
future results.
RESULTS OF OPERATIONS
From July 2, 1996, our inception, through the first quarter of 1997, our
operations were limited and consisted primarily of start-up activities. We did
not generate any revenue until April 1997 and only started to significantly
expand our operations beginning in June 1997. Advertising and other revenue from
CDnow accounted for approximately 33% of our total revenue in 1998 and 28% for
the six months ended June 30, 1999. We expect that revenue from CDnow will
decline and will account for a smaller percentage of our total revenue in the
future.
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE
For the six months ended June 30, 1998 and 1999, total revenue increased
$867,000 from $1.1 million to $2.0 million.
ADVERTISING REVENUE. For the six months ended June 30, 1998 and 1999,
advertising revenue increased by $1.1 million, from $271,000 to $1.4 million,
and accounted for approximately 24% and 69% of total revenue, respectively. For
the six months ended June 30, 1998 and 1999, we generated advertising revenue
from barter transactions of $71,000 and $536,000, respectively. The increase in
advertising revenue from period to period was due primarily to traffic growth
driven by the launch of the ROLLINGSTONE.COM Web site in March 1998 and the
launch of the redesigned TUNES.COM hub site on March 1, 1999, as well as a
higher number of ad impressions and sponsorships sold to new and existing
advertisers. For the six months ended June 30, 1998 and 1999, total ad
impressions were 24.0 million and 226.9 million, respectively. In addition, we
expanded our sales force in the fourth quarter of 1998 from one to five
employees and from five to eight employees in the first six months of 1999. We
plan to continue increasing the number of salespeople throughout 1999. During
the six months ended June 30, 1999, no one advertiser accounted for more than
15% of total advertising revenue.
OTHER REVENUE. For the six months ended June 30, 1998 and 1999, other
revenue decreased by $234,000, from $860,000 to $626,000, and accounted for
approximately 76% and 31% of total revenue, respectively. The decrease in other
revenue was primarily the result of a $456,000 decrease in product development
revenue due to our continued emphasis on generating increased advertising and e-
commerce revenue and a decreased emphasis on product development revenue. The
decrease in product development revenue was partially offset by a $121,000
increase in e-commerce revenue and $100,000 of other revenue related to our
agreement with CDnow. Prior to our July 1998 acquisition of Tunes Network, we
generated nominal e-commerce revenue. Although we expect to continue generating
product development revenue and content license revenue in future periods, we
expect to experience a continued decrease in product development revenue and
content license revenue as a percentage of total revenue due to our emphasis on
generating increased advertising and e-commerce revenue.
34
<PAGE>
COST OF REVENUE
For the six months ended June 30, 1998 and 1999, cost of revenue remained
relatively consistent at $2.0 million, but decreased as a percentage of revenue,
from 180% to 100%, respectively. The decrease in cost of revenue as a percentage
of revenue is primarily the result of increased advertising revenue and
decreased revenue from the development of interactive CD products. Cost of
revenue remained relatively consistent in absolute dollars as the decreased
product development costs and outside production costs associated with the
production of fewer interactive CD products were offset by increased
telecommunication costs associated with the expanded bandwidth required to
support the increased traffic on our Web sites, increased license fees and
revenue sharing fees associated with the increased advertising revenue,
increased editorial and operations staff necessary for the production of
music-related information and programming on our Web sites, and increased costs
associated with e-commerce revenue.
OPERATING EXPENSES
OPERATIONS AND DEVELOPMENT EXPENSE. For the six months ended June 30, 1998
and 1999, operations and development expense increased by $1.4 million, from
$408,000 to $1.8 million. The increase was primarily due to wages and costs
arising from our employment of an additional 14 technology employees during the
second half of 1998 and first half of 1999 as well as the expanded use of
consultants, for the development of additional Web sites and enhancement of
existing Web sites in late 1998 and the first six months of 1999.
SALES AND MARKETING EXPENSE. For the six months ended June 30, 1998 and
1999, sales and marketing expense increased by $2.0 million, from $1.1 million
to $3.1 million. The increase in sales and marketing expense was primarily the
result of our increased advertising on other Web sites as well as fees
associated with Web site tenancy agreements. In addition, from March 31, 1998 to
June 30, 1999, we increased our sales and marketing departments from two to 18
employees.
GENERAL AND ADMINISTRATIVE EXPENSE. For the six months ended June 30, 1998
and 1999, general and administrative expense increased by $0.9 million, from
$1.1 million to $2.0 million. The increase was primarily attributable to salary
and related expenses for additional personnel and increased professional fees.
From March 31, 1998 to June 30, 1999, we expanded our combined finance and
accounting, legal, human resources and administrative departments, from four to
16 employees.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense consists of the depreciation of property and equipment and the
amortization of goodwill and other intangible assets acquired in connection with
our acquisition of Tunes Network. For the six months ended June 30, 1998 and
1999, depreciation and amortization expense increased by $1.6 million, from
$137,000 to $1.7 million. Depreciation expense increased due to purchases of
property and equipment, and amortization expense increased due to the
amortization of goodwill and intangible assets resulting from our acquisition of
Tunes Network. The acquisition of Tunes Network resulted in goodwill and other
intangible assets of $5.6 million, which is being amortized over an estimated
useful life of 24 months, or $2.8 million annually. The amortization of goodwill
related to the Tunes Network acquisition will increase shortly after the
consummation of this offering as a result of the issuance of additional shares
to former shareholders of Tunes Network.
STOCK COMPENSATION EXPENSE. Stock compensation expense includes the
non-cash amortization of the fair value of warrants and stock options issued to
non-employees. In connection with agreements with our magazine content
providers, we issued warrants to purchase our common stock. The estimated fair
value of the warrants at each date of issuance is amortized over the initial
terms of the agreements or earlier as they become fully exercisable. The
estimated fair value of stock options held by non-employees is amortized over
the remaining life of the option or until vested in accordance with
35
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." For the six months ended June 30, 1998 and 1999, stock
compensation expense increased by $3.7 million, from $152,000 to $3.9 million.
The increase was primarily the result of our sale of preferred stock in May
1999, which triggered an increase in the number of shares issuable upon exercise
of the Straight Arrow warrant and the vesting of the outstanding warrants issued
to Straight Arrow and Source Enterprises. We expect stock compensation expense
to increase in the period of the closing of this offering as a result of the
accelerated vesting of stock options held by non-employees upon the closing of
this offering. See "Management -- Stock Option Plans."
OTHER INCOME
Interest income primarily represents interest earned on cash and cash
equivalents, marketable securities and a restricted escrow account relating to
our agreement with Straight Arrow, the publisher of ROLLING STONE. See "--
Liquidity and Capital Resources" and "Business -- Strategic Relationships --
Content Providers." For the six months ended June 30, 1998 and 1999, interest
income decreased by $35,000 from $191,000 to $156,000, due to lower balances in
cash and cash equivalents. Interest expense for the six months ended June 30,
1998 and 1999 increased by $72,000, from $336 to $72,000. Interest expense in
1999 primarily represents interest incurred on the $4.0 million convertible
promissory notes that were issued in March and April 1999 and were converted
into preferred stock in May 1999.
INCOME TAXES
We have incurred net operating losses from our inception through June 30,
1999. No benefit for federal and state income taxes is reported in our financial
statements as the deferred tax assets generated by these losses and other
temporary differences have been fully reserved because of uncertainty regarding
our ability to generate taxable income prior to the expiration of the
carryforward period. At December 31, 1998, we had net operating loss
carryforwards totaling approximately $14.7 million which expire beginning in
2011. Based on the Internal Revenue Code and changes in our ownership,
utilization of the net operating loss carryforward may be subject to significant
annual limitations. See note 11 to our consolidated financial statements.
NET LOSSES
Since our inception, we have incurred net losses totaling $29.2 million. We
anticipate that we will incur significant losses for the foreseeable future and
that the rate at which losses will be incurred may increase.
INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUE
For the years ended December 31, 1997 and 1998, revenue increased by $1.9
million from $565,000 to $2.5 million. We did not generate any revenue from July
2, 1996, our inception, to December 31, 1996 (the Inception Period) and first
generated revenue in April 1997.
ADVERTISING REVENUE. For the years ended December 31, 1997 and 1998,
advertising revenue increased by $686,000 from $284,000 to $970,000 and
accounted for 50% and 39% of total revenue, respectively. The increase in
advertising revenue was due primarily to the launch of the ROLLINGSTONE.COM Web
site in March 1998 and a higher number of ad impressions and sponsorships sold.
During 1997 and 1998, total ad impressions were 4.8 million and 90.9 million,
respectively. During 1997 and 1998, we generated advertising revenue from barter
transactions of $174,000 and $157,000, respectively. During 1998, no one
advertiser accounted for more than 18% of total advertising revenue.
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OTHER REVENUE. For the years ended December 31, 1997 and 1998, other
revenue increased by $1.2 million, from $281,000 to $1.5 million and accounted
for approximately 50% and 61% of total revenue, respectively. This increase was
due to increases in content licensing revenue, product development revenue and
e-commerce revenue. During 1998, we generated $625,000 of content licensing
revenue from one customer. Prior to April 1998, we did not generate any revenue
from content licensing and related services. Product development revenue
increased by $410,000, from $241,000 during 1997 to $651,000 during 1998.
Revenue associated with longer-term contracts for the development of interactive
CD products accounted for approximately 84% and 75% of total product development
revenue during 1997 and 1998, respectively. During 1998, one customer accounted
for approximately 75% of total product development revenue. During 1998,
e-commerce revenue was $193,000 and accounted for 8% of total revenue. The
primary source of e-commerce revenue in 1998 was CD sales generated through our
TUNES.COM Web site following the acquisition of Tunes Network in July 1998. We
generated virtually no e-commerce revenue during 1997.
COST OF REVENUE
For the years ended December 31, 1997 and 1998, cost of revenue increased by
$2.7 million from $1.3 million to $4.0 million. We did not recognize any cost of
revenue during the Inception Period, as we did not begin generating revenue
until April 1997. The increase in cost of revenue from period to period was
primarily the result of increased content licensing fees, revenue sharing fees
and costs associated with increases in editorial and operations staff necessary
for the production of music-related information and programming on our Web
sites. In addition, telecommunication costs increased as we expanded our
capacity to support and deliver our services to the increased traffic on our Web
sites.
OPERATING EXPENSES
OPERATIONS AND DEVELOPMENT EXPENSE. For the years ended December 31, 1997
and 1998, operations and development expense increased by $1.4 million from
$458,000 to $1.9 million. Operations and development expense was $32,000 for the
Inception Period. The increases in operations and development expense from
period to period were primarily the result of increased costs incurred in
connection with the development of additional Web sites and systems.
SALES AND MARKETING EXPENSE. For the years ended December 31, 1997 and
1998, sales and marketing expense increased by $2.9 million from $1.1 million to
$4.0 million. Sales and marketing expense was $37,000 for the Inception Period.
The increases in sales and marketing expense for each period were primarily the
result of increased advertising on other Web sites and in ROLLING STONE magazine
and the hiring of additional sales and marketing personnel and related costs.
Advertising and promotion expenses increased by $2.0 million from $460,000 in
1997 to $2.5 million in 1998. From December 31, 1997 to December 31, 1998, we
expanded our sales and marketing department from two to 10 employees.
GENERAL AND ADMINISTRATIVE EXPENSE. For the years ended December 31, 1997
and 1998, general and administrative expense increased by $1.6 million from $1.2
million to $2.8 million. General and administrative expense was $153,000 for the
Inception Period. The increases in general and administrative expense in each
period were primarily attributable to salary and related expenses for additional
personnel and increased professional fees. From December 31, 1997 to December
31, 1998, we expanded our combined finance and accounting, legal, human
resources and administrative departments from four to 12 employees.
DEPRECIATION AND AMORTIZATION EXPENSE. For the years ended December 31,
1997 and 1998, depreciation and amortization expense increased by $1.6 million
from $157,000 to $1.8 million. Depreciation and amortization expense was $2,000
for the Inception Period. The increases in
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depreciation and amortization expense were primarily attributable to the
amortization of goodwill and intangible assets resulting from our acquisition of
Tunes Network in July 1998.
STOCK COMPENSATION EXPENSE. For the years ended December 31, 1997 and 1998,
stock compensation expense increased by $1.4 million from $10,000 to $1.4
million. The increase was due to a charge of $913,000 in 1998 for the
accelerated vesting of stock options held by former employees as well as the
inclusion of 12 months of warrant compensation expense in 1998 compared to one
month in 1997. We did not recognize any stock compensation expense during the
Inception Period.
OTHER INCOME
For the years ended December 31, 1997 and 1998, interest income increased by
$333,000, from $100,000 to $433,000. Other income was $7,000 for the Inception
Period. The increases in interest income for each period are primarily
attributable to higher average balances in cash and cash equivalents and, during
the years ended December 31, 1997 and 1998, the restricted escrow account
established to pay our quarterly license fee under our agreement with Straight
Arrow. See "-- Liquidity and Capital Resources."
SELECTED QUARTERLY OPERATING RESULTS
The table below sets forth unaudited quarterly statements of operations data
for Tunes.com for the six most recent quarters. This information has been
prepared on substantially the same basis as the audited financial statements. We
believe this data includes all necessary adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. This information
should be read in conjunction with the audited financial statements of Tunes.com
and the related notes thereto included elsewhere in this prospectus. Historical
operating results for any quarter are not necessarily indicative of the
operating results for any future period. We believe that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter of each year. The same may be true with Internet
advertising, which is new and rapidly evolving. Our revenue is also affected by
seasonal patterns in advertising, which could become more evident depending on
the extent to which the Internet is accepted as an advertising medium. See "Risk
Factors -- Our quarterly operating results may fluctuate which may result in
volatility in our stock price and may make it difficult to forecast our future
performance."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
SEPT. 30, DEC. 31,
MAR. 31, 1998 JUNE 30, 1998 1998 1998 MAR. 31, 1999 JUNE 30, 1999
------------- ------------- ------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Advertising.................. $ 145 $ 126 $ 232 $ 467 $ 620 $ 752
Other........................ 309 552 352 302 357 269
------------- ------------- ------------- ------------ ------------- -------------
Total revenue.............. 454 678 584 769 977 1,021
Cost of revenue................ 991 1,049 824 1,181 984 1,019
------------- ------------- ------------- ------------ ------------- -------------
Gross deficit.................. (537 ) (371 ) (240 ) (412 ) (7 ) 2
Operating expenses............. 1,167 1,739 3,626 5,372 3,921 8,588
------------- ------------- ------------- ------------ ------------- -------------
Loss from operations......... $ (1,704 ) $ (2,110 ) $ (3,866 ) $ (5,784 ) $ (3,928 ) $ (8,586 )
------------- ------------- ------------- ------------ ------------- -------------
------------- ------------- ------------- ------------ ------------- -------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception in July 1996, we have financed our operations primarily
through private sales of convertible preferred stock and convertible promissory
notes. Net proceeds from these sales in 1997 and 1998 totaled $19.7 million. At
June 30, 1999, our primary source of liquidity consisted of $14.2 million of
cash and cash equivalents. In August 1999, we anticipate entering into a lease
facility
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which will be available for a one-year term and will provide for borrowings of
up to $1.0 million for equipment purchases. Any borrowings made under this
proposed lease facility would be payable by us over a 36-month term.
Net cash used in operating activities was $9.3 million, $3.2 million and
$131,000 for the years ended December 31, 1998 and 1997 and the Inception
Period, respectively. For the six-month period ended June 30, 1999, net cash
used in operating activities was $7.0 million. Net cash used in operating
activities in all such periods was primarily attributable to net losses and
increases in accounts receivable, prepaid expenses and other current assets,
which were partially offset by increases in noncash charges, accounts payable
and other accrued expenses. Sources of cash for the years ended December 31,
1998 and 1997 also included deferred revenue increases related primarily to
advances from CDnow. In June 1999, the advances required under the original
contract with CDnow were reduced.
Net cash used for investing activities was $93,000, $2.7 million and $58,000
for the years ended December 31, 1998 and 1997 and the Inception Period,
respectively. For the six-month period ended June 30, 1999, net cash used for
investing activities was $1.7 million. The principal uses of cash for investing
activities for all periods were purchases of property and equipment, the
acquisition of Tunes Network in July 1998 and our payment in November 1997 of
$2.0 million into a restricted escrow account to pay the $250,000 quarterly
license fee under the agreement with Straight Arrow, publisher of ROLLING STONE,
which is described more fully in "Business -- Strategic Relationships." This
payment was partially offset in 1998 and 1999 by the reduction of the restricted
escrow account as these funds were used to pay the quarterly license fee.
Additionally, in June 1999 we paid Straight Arrow a $1.5 million license fee,
which was triggered by the issuance of convertible preferred stock in May 1999.
This fee will be amortized over the remaining term of our agreement with
Straight Arrow, as extended.
Net cash provided by financing activities was $11.0 million, $8.0 million
and $750,000 for the years ended December 31, 1998 and 1997 and the Inception
Period, respectively. For the six-month period ended June 30, 1999, net cash
provided by financing activities was $18.6 million. Financing activities
consisted principally of the issuance of preferred stock and convertible
promissory notes. In June 1997, we issued shares of Series A-I preferred stock
for $4.5 million of cash and the retirement of $500,000 of then outstanding
Tunes.com notes. During October 1997, we issued shares of Series A-II preferred
stock for an aggregate of $1.0 million. During November and December 1997, we
issued shares of Series B preferred stock for $2.3 million of cash and $20,000
of professional services. During February and March 1998, we issued shares of
Series C preferred stock for an aggregate of $4.0 million of cash. During May
and June 1998, we raised an additional $8.2 million through the issuance of
shares of Series A-III preferred stock and shares of Series D preferred stock.
In March and April 1999, we issued $4.0 million of convertible promissory notes
and warrants. In May 1999, we issued shares of Series A-IV preferred stock and
shares of Series E preferred stock for aggregate consideration of $20.3 million,
which includes the conversion of the $4.0 million of convertible promissory
notes issued in March and April 1999. During 1997 and 1998 and for the six
months ended June 30, 1999, we incurred costs in connection with the issuance of
equity securities of $238,000, $100,000 and $1.2 million, respectively. During
the six months ended June 30, 1999, Tunes.com incurred $423,000 in costs in
connection with this offering.
We currently have no material commitments for capital expenditures. However,
we anticipate a substantial increase in our capital expenditures and lease
commitments consistent with projected growth in operations, infrastructure and
personnel. We also plan to increase our advertising and marketing expenditures
to promote our Web sites and increase the number of visitors to our Web sites.
Under our agreement with Straight Arrow, we are required to pay an annual
license fee of $1.0 million and purchase $1.1 million of advertising and other
services annually in ROLLING STONE magazine until November 2000. For the five
years ending November 2005, we are required to pay Straight Arrow an annual
license fee of $1.3 million and purchase at least $1.1 million of advertising in
ROLLING STONE
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subject to increases. In addition, we have entered into various Web tenancy
agreements, or agreements under which we pay to place our content on a Web site,
that require us to pay fees of at least $1.5 million during 1999, of which
$600,000 has been paid through June 30, 1999. We expect to make Web tenancy fee
payments in similar or greater amounts during years subsequent to 1999.
Additionally, we expect, from time-to-time, to evaluate possible acquisitions of
or investments in businesses, services and technologies that are complementary
to those of Tunes.com.
We believe that existing cash balances, cash equivalents and cash generated
from operations, together with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. On a long-term basis, we expect
that we will require additional equity or debt financing to support our further
expansion. Our capital requirements depend on several factors, including the
market acceptance of commerce and advertising over the Internet, our ability to
increase our level of traffic, the amount of expenditures for strategic
relationships, acquisitions, advertising, promotion and marketing and the cost
of Web site upgrades. The timing and amount of such capital requirements cannot
be predicted accurately. If capital requirements materially vary from those
currently planned, we may require additional financing sooner than anticipated.
We have no commitments for any additional financing and there can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all. Any additional equity financing may be dilutive to our
stockholders, and debt and preferred stock financing, if available, may involve
restrictive covenants with respect to dividends, raising future capital and
other financial and operational matters which could restrict our operations or
finances. If we are unable to obtain additional financing as needed, we may be
required to reduce the scope of our operations or our anticipated expansion. See
"Risk Factors -- We may be unable to meet future capital requirements or may
issue additional common stock or securities with rights that are senior to our
common stock."
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to be ready for such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
Our business could suffer if the systems on which we depend to conduct our
operations are not Year 2000 ready. Our potential areas of exposure include:
- information technology, including computers and software that we have
developed internally or purchased or licensed from third parties or that
we may purchase or license in the future;
- non-information technology, including telephone systems and other
equipment that we use internally; and
- external, third party systems, particularly the systems that comprise the
Internet and those products and services that allow our users to access
the Internet.
We have formed an internal Year 2000 evaluation committee and are currently
engaged in an evaluation and the testing of our software and hardware for Year
2000 readiness. We have completed our initial assessment of Year 2000 readiness
for both our information and non-information technology. Based on our initial
assessment, we believe all non-information technology, including phone systems,
upon which we are materially dependent, is Year 2000 ready. We intend to resolve
any Year 2000 readiness issues relating to material information technology that
we use internally primarily through normal upgrades or, when necessary, through
replacement of existing software with Year 2000 ready products. If our
production and operational systems that support our Web sites are not Year 2000
ready
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by December 31, 1999, portions of our services may become unavailable to
visitors to our Web sites. Our initial assessment of our systems has shown that
there is no single component that likely would make our services totally
unavailable. We intend to complete the testing of our technologies, the
replacement or correction of our non-ready technologies and the testing of any
replacement or corrected technologies by October 1999.
We rely to a large extent on third parties for the maintenance and
operations of our hardware and software systems. Even if our internal systems
are Year 2000 ready, the failure of Exodus or our other key vendors to be Year
2000 ready could substantially disrupt and damage our operations. As a result,
we recently began to survey third-party entities with which we transact
business, including critical vendors and financial institutions, for Year 2000
readiness. We expect to complete this survey by August 1999. At this time, we
cannot estimate the effect, if any, that non-ready systems at these entities
could have on our business, results of operations or financial condition, and
there can be no assurance that the impact, if any, would not be material. If our
software systems do not function properly as to dates starting in the year 2000
and beyond either because of our own or third party systems, this may result in
a material adverse effect on our business, results of operations or financial
condition. See "Risk Factors -- Year 2000 problems for us, our suppliers or our
customers could increase our liabilities or expenses and impact our
profitability."
To date, we have not incurred any material expenditures in connection with
identifying, evaluating or addressing Year 2000 readiness issues. Most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 readiness matters in general. At this time, we do not have
the information necessary to estimate the potential costs of revisions to our
systems should such revisions be necessary or of the replacement of third-party
software, hardware or services that are determined not to be Year 2000 ready. If
significant revisions are necessary, we may be required to expend large
financial and other resources to address the situation.
We do not currently have a contingency plan to deal with the worst-case
scenario involving Year 2000-related failures of technologies on which we are
dependent. We intend to develop a plan for this scenario by October 1999. Our
contingency plan will outline our plans and procedures for dealing with
unanticipated difficulties resulting from Year 2000-related failures. Potential
Year 2000 problems will vary in significance, ranging from minor software errors
to network failures. Our services would not be available under our worst case
scenario, potentially resulting in loss of revenue and reputation, especially
since we are an Internet based company, and a decrease in the number of visitors
to our Web sites. In addition, Year 2000 problems may result in termination of
our agreement with Straight Arrow. See "Risk Factors -- Year 2000 problems for
us, our suppliers or our customers could increase our liabilities or expenses
and impact our profitability." Although we do not anticipate the occurrence of
this worst case scenario, our contingency plan will include procedures to follow
if it occurs. If our present efforts to address the Year 2000 readiness issues
are not successful, or if partners, manufacturers, suppliers and other third
parties do not successfully address these issues, our business, operating
results and financial position could be materially and adversely affected.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from investments in
overnight money-market accounts, certificates of deposit and commercial paper.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical one percentage point
adverse change in interest rates would not materially affect the fair value of
interest sensitive financial instruments at June 30, 1999.
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BUSINESS
OVERVIEW
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our network of Web sites ranked among the top five music content Web
sites as measured by unique visitors in June 1999. Our hub Web site, TUNES.COM,
is a "one-stop shop" designed to appeal to a broad spectrum of music fans by
covering a wide range of genres, from urban to rock to classical. The TUNES.COM
Web site is supported by and integrated with our network of genre-specific Web
sites: ROLLINGSTONE.COM -- rock and pop, THESOURCE.COM -- urban and hip-hop and
DOWNBEATJAZZ.COM -- jazz and blues. We have built these Web sites through our
exclusive relationships with leading music industry magazines, ROLLING STONE,
THE SOURCE and DOWN BEAT. Our Web sites provide advertisers and retailers with
an attractive channel to reach consumers across both broad and targeted
demographic groups. We generate revenue from a number of sources, including
advertising, sponsorships, promotions, e-commerce and content syndication.
Our sites offer one of the Web's most comprehensive collections of music
content, including approximately 1,000,000 song clips, 1,000 music videos,
130,000 album reviews and 85,000 artist profiles. Through our Web sites, a
visitor may:
- watch a live concert or music video;
- read a daily news story, artist biography or album review;
- listen to an audio preview of an album or to ROLLING STONE RADIO, our
originally programmed Internet radio;
- download near CD-quality digital music;
- communicate with fellow fans through home pages, chat sessions or message
boards; or
- buy CDs.
In addition to producing our Web sites, we provide our content to a number
of major Web sites, including Yahoo!, Netscape, Alta Vista, Lycos and Snap, as
well as approximately 5,000 fan Web sites and over 100 radio station Web sites.
We are also a featured content provider, or anchor tenant, on America Online's
music channel, where our "Rolling Stone" button, linking users to
ROLLINGSTONE.COM, is prominently displayed.
Our Web sites have grown significantly in 1999. Monthly page views have
increased from 10.7 million during October 1998 to 22.9 million during June
1999. Registered users have increased from 308,000 as of December 31, 1998 to
681,000 as of June 30, 1999. We intend to continue to increase our Web sites'
traffic and user base by capitalizing on the brand recognition of ROLLING STONE,
THE SOURCE and DOWN BEAT to promote our Web sites and the Tunes.com brand,
expanding our music content and community features and selectively pursuing
e-commerce opportunities.
INDUSTRY BACKGROUND
THE WEB AS A NEW MEDIUM FOR ADVERTISING AND COMMERCE
The Web is becoming an essential medium for advertisers because it offers a
level of targetability, interactivity and measurability not available in
traditional media. Through the Web, advertisers can efficiently reach specific
population groups and selected individuals with highly targeted interactive
advertisements and promotions. In addition, advertisers can measure the reach of
an advertisement by tracking the number of times an advertisement has been
viewed as well as the responses to the advertisement. Forrester Research
estimates that online advertising in North America will increase from $1.3
billion in 1998 to $10.7 billion in 2003.
The Web is also emerging as a medium for global commerce. A growing number
of consumers are transacting business over the Web, including purchasing CDs,
paying bills, booking airline tickets, trading securities and purchasing other
consumer goods. Online transactions can be faster, less
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expensive and more convenient than traditional commerce. Forrester Research
estimates that the total value of retail goods and services, other than
automobiles and travel, purchased on the Web in the United States will increase
from $4.8 billion in 1998 to $78.6 billion in 2003.
THE MUSIC INDUSTRY
Music is one of the world's leading forms of entertainment. It is also big
business. According to the Recording Industry Association of America, domestic
sales of recorded music were $13.7 billion in 1998.
Historically, consumers' ability to discover new songs and artists has been
strongly influenced by large record labels and traditional media, such as radio,
television and print. Record labels sign many artists to long-term contracts and
then deploy significant resources and capital to promote and distribute the
music of only those artists that they consider most promising. Radio stations
have also had a significant impact on consumers' access to music by
de-emphasizing the introduction of new music in favor of programming strategies
designed to appeal to the largest possible audience.
Despite the influence of major record labels and traditional media, there
has been an increasing number of new genres, artists and releases, resulting in
a rapidly growing catalog of available music. In addition, there has been
significant growth in the number of independent labels, which has been fueled
largely by artists, such as rap artists in the early 1980s, who created new
non-mainstream genres.
MUSIC AND THE WEB
The Web is emerging as an important source of music, dramatically altering
the way consumers discover, listen to and purchase music. According to Jupiter
Communications, domestic sales of recorded music over the Internet are projected
to grow from approximately $36.6 million in 1997 to $1.6 billion in 2002. The
Web offers music fans major advantages over traditional media, such as
unprecedented interactivity and access to new and archived music content on
demand. Since music initially appeared on the Web, the number and types of music
Web sites have expanded to include content, fan, e-commerce and downloadable
music sites. As a result, both consumers and artists have embraced the Web as an
attractive medium for exploring and distributing music content. Forrester
Research estimates that approximately 50 million individuals will be capable of
downloading and playing digital music by the end of 1999. In addition, a number
of artists, such as Public Enemy, Green Day, Hole and Todd Rundgren, either sell
CDs directly through their Web sites or allow visitors to purchase and download
digital music.
Music consumers have increasingly used their computers to play music that
they receive, or download, from the Internet and to store audio files for
playback on their computers and on portable devices. Because music files can be
very large, technologies have been developed that compress the size of these
files. These compression technologies now permit consumers to download to their
computers near CD-quality audio files at rates that are much faster than
uncompressed file formats. As a result of consumers' acceptance of downloading
music, numerous compression technologies have been developed by companies such
as a2b Music, Liquid Audio, Microsoft, Nullsoft and RealNetworks, and have
become widely available and used. In part as a reaction to consumer acceptance
of these technologies and in part pressed by a concern over piracy, record
labels have formed relationships to promote standards for digital music
delivery. For example, BMG Entertainment, Sony Music Entertainment and Universal
Music Group, among others, and leading technology providers, such as IBM,
Microsoft and RealNetworks, have formed the Secure Digital Music Initiative with
the objective of developing a standard for digital music security. Other
initiatives similar to SDMI have formed. However, no single standard has emerged
for the digital distribution of music.
The convergence of music and the Web has produced numerous music-related Web
sites. Most of these Web sites, however, offer relatively limited content,
features and services or are restricted to a specific genre, artist or record
label. As a result, consumers often must navigate a bewildering array of Web
sites without any assurance of fulfilling their online music needs.
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THE TUNES.COM SOLUTION AND STRATEGY
We intend to create the premier online music network, providing music fans
with extensive and exclusive music content, community features and e-commerce
services. We provide a compelling online music experience, featuring exclusive
content from three of the leading names in music: ROLLING STONE, THE SOURCE and
DOWN BEAT. In addition, we offer music content covering a wide range of genres
to attract visitors of diverse tastes. Our Web sites present our content in an
organized format that is easy to use and intuitive, with interactive community
features that provide users with an enjoyable music experience. We intend to
continue to expand our traffic and user base to provide advertisers with an
attractive channel designed to reach both broad and targeted demographic groups.
Our strategy is to:
- DELIVER COMPELLING MUSIC CONTENT. We plan to expand our music content
through strategic relationships and the development of original music
content. We intend to acquire and develop additional audio and video
content, including live and archived concerts, music videos, audio samples
and downloadable digital recordings. In addition, we intend to continue to
create and compile exclusive and original music content that we believe
will attract and engage our users, such as news, biographies and album
reviews, that provides users with a third-party, editorial perspective. We
also may deploy additional sites focused on other genres.
- PROVIDE EASY TO USE AND FEATURE-RICH WEB SITES. We will continue to
compile and organize content and utilize the latest technologies to enable
users to simply and quickly access the content they want. In addition, we
enable users to tailor their search of our vast collection of music
content to suit their individual preferences. Based on individual
preferences, we offer users suggestions about content that may interest
them. In addition, we plan to continue to provide the latest technologies
so that we may offer enhanced interactive and multimedia content. Current
examples of such features include the ability to download video and audio
for later use and receive Web broadcasts, or streaming, of video and
audio. As part of this strategy, we have joined with technology companies,
such as Microsoft and RealNetworks, to develop specific applications. For
example, through our relationship with RealNetworks, we launched ROLLING
STONE RADIO, our Web-based radio. See "--Strategic
Relationships--Technology and E-Commerce Relationships."
- GROW OUR MUSIC COMMUNITY. We have designed our hub Web site to develop a
loyal and active community of music fans dedicated to the Tunes.com
network. Interactive features include our chat rooms, message boards and
email capabilities. We plan to continue to introduce new features that
will extend and unify our user base, such as expanded home pages and
allowing users to email sound clips to each other. Our Web sites enable
users to create, post and share new content with other users. For example,
we enable users to post their own album reviews. In addition, we recently
launched our "Download This" feature which allows music fans to freely
download music created and provided to us by independent artists.
User-generated content is a dynamic source of music information and
encourages regular and active participation in the community. We believe
that the more time a user invests to develop content and interact with
others on our sites, the more likely it is that such a user will continue
to return to our sites for music content.
- BUILD THE TUNES.COM BRAND AND NETWORK. We plan to significantly increase
our general marketing and promotional activities through traditional and
new media to increase user traffic and to increase recognition of the
Tunes.com brand. We intend to further capitalize on the brand awareness of
ROLLING STONE, THE SOURCE and DOWN BEAT magazines. We will also seek to
drive user traffic through a combination of additional distribution
relationships, such as our tenancy on America Online, and through other
forms of offline and online promotion.
- GENERATE ADVERTISING AND SPONSORSHIP REVENUE. As we grow our user base and
traffic, we will develop an increasingly attractive channel for
advertisers to reach consumers. We emphasize the attractive demographics
of our user base, the emotional appeal and power of music to our users,
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and the ability to target specific segments of our audience based on their
music preferences. We intend to significantly expand our sales force and
marketing efforts in order to capitalize on advertising and sponsorship
revenue opportunities.
- GENERATE E-COMMERCE REVENUE. As part of our goal to provide our users with
a comprehensive music experience, we intend to expand our e-commerce
services. For example, we intend to grow our existing CD sales, and begin
to sell downloadable digital music within the next year. Later this year,
we plan to launch an online store featuring music-related merchandise.
OUR WEB SITES
Our network of Web sites consists of our hub site, TUNES.COM, as well as our
branded genre-specific Web sites: ROLLINGSTONE.COM, THESOURCE.COM and
DOWNBEATJAZZ.COM.
TUNES.COM HUB SITE
We intend to establish TUNES.COM as the Web's definitive music site by
capitalizing on one of the Web's largest collections of music content,
personalization tools and compelling genre-specific programming. By providing
customizable access to content residing on ROLLINGSTONE.COM, THESOURCE.COM and
DOWNBEATJAZZ.COM, as well as content from other third parties, we can provide a
single site solution for accessing, exploring and enjoying music content and
buying music on the Web. While many other sites are primarily focused on
specific genres, TUNES.COM provides the user with access to a wide range of
music. Users can enjoy revisiting classics as well as exploring new music. In
addition, TUNES.COM's features facilitate the discovery of music particularly
suited to each user's tastes and present easy and efficient access to one of the
largest catalogs of music information on the Web. In the third quarter of 1999,
we plan to enhance the TUNES.COM Web site with additional personalization tools
and community features.
GENRE-SPECIFIC WEB SITES
Each of our genre-specific sites features one of the major genres of music.
We believe each of our genre-specific Web sites is positioned to be a leading
online destination for music fans who prefer to focus on a particular style of
music. These sites may be accessed directly and are also integrated with the
TUNES.COM hub Web site.
- ROLLINGSTONE.COM -- We developed the ROLLINGSTONE.COM Web site in
conjunction with ROLLING STONE magazine. We believe that we have
positioned ROLLINGSTONE.COM to become the leading rock and pop Web site by
capitalizing on ROLLING STONE's brand, offline marketing and promotion,
long-standing label and artist relationships and exclusive new and
archived content. The ROLLINGSTONE.COM Web site was launched in March 1998
and generally attracts users 15 to 35 years of age.
- THESOURCE.COM -- We developed the THESOURCE.COM Web site in conjunction
with THE SOURCE magazine, a leading urban and hip-hop music and lifestyle
magazine and one of the fastest growing music publications. We believe
that we have positioned THESOURCE.COM to become the premier urban and
hip-hop Web site by capitalizing on THE SOURCE's brand, loyal customer
base, strong industry relationships, exclusive content and offline
marketing and promotion programs. Launched in December 1998, THESOURCE.COM
attracts predominantly male users 14 to 24 years of age.
- DOWNBEATJAZZ.COM -- We developed the DOWNBEATJAZZ.COM Web site in
conjunction with DOWN BEAT magazine, one of the oldest and most recognized
jazz and blues music publications. Launched in February 1999, the
DOWNBEATJAZZ.COM Web site is expected to attract visitors similar to DOWN
BEAT magazine's 25 to 54 age demographic.
In addition, we have operated our initial Web site, JAMTV.COM, since March
1997. We intend to redirect traffic from this site to TUNES.COM and cease
operating the JAMTV.COM Web site by the end of
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1999. See "Risk Factors -- We need to increase public awareness of our brands or
we may not be able to attract a significant number of visitors to our Web
sites."
The TUNES.COM hub site, together with our genre-specific sites, offers a
variety of content, community and e-commerce features to our users. We believe
that by providing a comprehensive online music experience, we will attract and
maintain a growing base of dedicated users.
CONTENT
We offer one of the Web's most comprehensive collections of music content,
including approximately 1,000,000 song clips, 1,000 music videos, 130,000 album
reviews and 85,000 artist profiles covering 18 major genres. On our sites, a
visitor may:
- watch a live concert in our VIRTUAL VENUE, a high bandwidth music video in
our BIG VIDEO section or music news in our DAILY VIDEO NEWS;
- read a daily news story, artist biography or album review;
- listen to an audio preview from an album or to ROLLING STONE RADIO, our
originally programmed Internet radio;
- download near CD-quality digital music through a number of technologies
including a2b Music, Liquid Audio, mp3 and Windows Media;
- browse our extensive collection of artist photos in our GALLERY;
- post concert or album reviews;
- access concert tour information; or
- access user generated reviews or music.
We believe the quality, quantity and nature of our content provides a
valuable online music experience for our users. Our magazine content providers
furnish us with a continuing source of new and fresh content such as news,
photos, interviews, feature stories and album and concert reviews. Our magazine
content providers also give us access to their historical archives. For example,
ROLLING STONE provides us with over 30 years of ROLLING STONE magazine covers
and reviews, while DOWN BEAT provides us with over 60 years of photographs and
profiles of legendary jazz musicians. Our editorial and artist relations staff
focuses on developing and acquiring content with and from artists and many of
the major and independent record labels. We currently obtain and develop content
from BMG, EMI, Sony Music, Universal, Beggars Banquet, CMC International,
Epitaph, Mute, No Limit/Priority, Platinum, Sub-Pop and TVT Records.
Through these relationships we have been able to offer a variety of music
content on our Web sites, including interviews, broadcasts over the Web, also
known as webcasts, music videos and in-studio performances. We have featured
video interviews and performances from a variety of new and established artists
and events, including:
WEBCASTS
- Dave Matthews Band
- Farm Aid
- Garbage
- KISS
- Lilith Fair
- Metallica
- The Rolling Stones
- Sheryl Crow
- The Smashing Pumpkins
INTERVIEWS
- Beck
- Ben Folds Five
- Bush
- Jonny Lang
- Julian Lennon
- Kid Rock
- Luscious Jackson
- Motley Crue
- Van Halen
VIDEOS
- Backstreet Boys
- Britney Spears
- Green Day
- Liz Phair
- Mariah Carey
- Master P
- Snoop Dogg
- TLC
- Usher
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COMMUNITY
We encourage visitors to our Web sites to become active participants in our
user community. Membership is free and only requires that a visitor provide his
or her email address, zip code, age and gender, and choose a member name and
password to be used throughout the site. Once registered on the TUNES.COM Web
site, members may use a variety of features and personalization tools which are
designed to facilitate active membership participation and loyalty.
We believe that music fans' tastes are an important part of their personal
identity and a powerful magnet for forming online communities. Our
personalization tools facilitate community development by enabling members to
actively express and share their music interests with each other. Upon
registering with TUNES.COM, our site automatically creates a member profile page
called MyTunes which offers users a range of personalization tools. Through
MyTunes, a member may:
- create a personal profile which includes a personal portrait, a virtual CD
collection catalogue and a selection of favorite artists;
- receive artist and album recommendations based upon usage history,
personal selection and demographic profile;
- customize the look and feel as well as the type of content displayed on
their TUNES.COM home page;
- display a teaser profile of their MyTunes page to users with similar music
interests; and
- browse other MyTunes profiles to discover favorite albums and artists of
other members and to read their album reviews.
Many of our community activities and features encourage user interaction and
the creation of user-generated content. Through our community-building
activities and features, members may:
- access email features, chat rooms or message boards;
- write and post album reviews; and
- upload original music for other members to download and enjoy.
These activities provide an additional source of music discovery and encourage
regular, active participation in our community. We believe that the more time a
user invests to develop content and interact with others on our sites, the more
likely it is that such user will continue to return to our sites for music
content.
COMMERCE
As part of our strategy to provide users with a comprehensive music
experience, we currently sell music CDs to consumers directly through our
TUNES.COM Web site. In addition, CDs are sold on our genre-specific Web sites
through CDnow and on ROLLING STONE RADIO through Amazon.com.
We intend to begin selling digital music on our Web sites within the next
year. We believe that our content, specifically our song clips and album
reviews, facilitates a user's purchase of digital music. In addition, as the
number of songs in digital format continues to multiply, we believe that
editorial content will become increasingly important. Through our relationships
with the publishers of ROLLING STONE, THE SOURCE and DOWN BEAT, we will provide
music fans with expansive editorial content, including song reviews and
commentary of digital music, from some of the leading editorial voices in the
music industry.
Later this year, we expect to launch an online merchandise and memorabilia
store that will be integrated with our Web sites. We initially expect to sell
licensed apparel such as t-shirts, jerseys and
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hats, jewelry, limited edition lithographs and prints and memorabilia such as
clothing and instruments. We are also pursuing e-commerce opportunities through
strategic and marketing relationships with retailers and service providers
focused on Web distribution. We believe that having broad based but targetable
audiences on our sites provides us with excellent opportunities to build
strategic e-commerce relationships with clothing retailers, consumer electronic
suppliers, music and booksellers and others.
ADVERTISING SALES AND PROMOTION
We generate a substantial portion of our revenue by selling advertising and
promotions prominently displayed on our Web sites. We generated $970,000, or
39%, of our revenue from advertising and promotion in 1998 and $1.4 million, or
69%, of our revenue from advertising and promotion for the six months ended June
30, 1999. Because music preferences are frequently considered by advertisers to
be indicative of an individual's interests and lifestyle, we gather extensive
data on site traffic, user demographics, personal interests and psychographic
data, using industry-standard measurement tools. We use this data with the goal
of providing our advertisers with a large, demographically desirable audience,
which can be targeted by segment, genre and individual tastes.
We offer several different advertising options that may be purchased as
stand alone products or as part of a more integrated marketing campaign.
Additionally, unlike traditional Web sites that offer only text based banner
advertisements, our extensive use of audio, video and multimedia content on our
Web sites enables us to offer advertisers compelling rich-media advertisements.
Advertising options on our sites include:
BANNERS. We offer banner advertisements on a general rotation or "run
of site" basis primarily to advertisers seeking to establish general brand
recognition across one or more of our sites. Targeted banner campaigns
generally appeal to advertisers seeking to communicate a particular message
regarding their product or service and are displayed when a user browses
through specific content sections on our sites.
SPONSORSHIP. We also offer sponsorship opportunities that enable
advertisers to associate their messages with our Web sites, live concerts
and coverage of events, such as Farm Aid and Lilith Fair, and special
features of our Web sites, such as BIG VIDEO and DAILY VIDEO NEWS.
Sponsorships are generally in the form of special promotions or contests and
are offered through fixed positions within our Web sites. We typically sell
sponsorships for a fixed monthly fee over the life of the contract and may
include other advertising components such as general rotation or targeted
banner advertisements or emails.
RICH MEDIA. We offer advertisers the ability to place their messages in
rich-media formats, which incorporate audio, video or other multimedia
elements. These advertisements typically are incorporated into the
presentation of music videos, DAILY VIDEO NEWS, audio clips, concert
webcasts, audio and video interviews and multimedia features. These
advertisements are presented to our users prior to, during, or at the
conclusion of the performance of our streaming or multimedia content. We
currently sell these advertisements at a higher rate than our traditional
banner ads.
TARGETED PROMOTIONS. Targeted promotions are designed to communicate to
users a "call to action" such as directly purchasing a product or service,
registering as a member with the advertiser or entering a particular
contest. We are typically paid for targeted promotions through a combination
of a flat fee and a per action basis.
We target traditional music advertisers for advertising on our Web sites,
including consumer product and service companies, record labels, entertainment
companies, technology companies, consumer electronics manufacturers, motion
picture studios, home video distributors, book publishers
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and automobile companies. Since January 1998, we have had over 100 advertisers.
Our largest advertisers, based upon our revenue during 1999, include:
<TABLE>
<S> <C> <C>
- -24/7 Media -Fans Only -Netscape
- -3Com -Fortune City -New City Net
- -Animalhouse.com -InterAdNet -Oldsmobile
- -Ashford.com -IBM -On Now
- -Berkeley Systems -JobKeys -Sony
- -Brown-Forman -Lycos -Sprint
- -CDnow -Microsoft -Think New Ideas
- -College Club -MSN -USA Today
- -Columbia House -musicmaker.com -Virgin Atlantic
- -Excite -MusicFile -VR Services
</TABLE>
Prior to October 1998, we primarily used a third-party to sell advertising
on our sites. Between December 31, 1998 and June 30, 1999 we increased our
internal sales staff from five to eight employees. In May 1999, we hired a Vice
President of Sales and began to focus even more resources on building and
developing our sales staff. We believe that having an internal sales force
allows us to better understand, respond to and meet advertisers' needs. We also
believe it increases our access to potential advertisers and enables us to
maintain strong relationships with our existing advertising clients. Our sales
staff creates a variety of value-added packages for advertisers that integrate
an advertiser's message with content available on our Web sites. Our sales staff
includes Internet sales personnel as well as those from traditional media. We
use Net Gravity ad serving software to provide advertising management and
delivery services for our sites and to provide advertisers with reports
describing the delivery of their advertisements.
MARKETING
We employ a variety of methods to promote our brands and drive traffic to
our Web sites. In addition to print ads and promotion in ROLLING STONE, THE
SOURCE, DOWN BEAT and other publications, we advertise on other Web sites and on
radio stations. We have advertised on leading Web sites, including Excite,
InfoSeek, Hotwired, Microsoft Network and Yahoo!, as well as popular consumer
sites like Wired's SUCK.COM and the Worldwide Wrestling Federation's WWF.COM. We
maintain an aggressive public relations program generating online, print and
broadcast press coverage, as well as speaking opportunities for Tunes.com
executives. Our direct marketing programs include email and traditional mail. We
create from five to ten sweepstakes and contests each month designed to generate
traffic on our Web sites and to promote user registrations. We also have an
active grassroots program that includes employees who interact directly with fan
sites and message boards, providing site news and promotions. In addition, we
distribute promotional materials at selected music and technology industry
events and on college campuses. We are involved in a variety of promotions where
links to our Web sites are bundled into software products distributed online or
through other retail channels. We utilize cross-promotional arrangements to
secure advertising, promotional considerations and increase traffic.
We have planned a major print and radio advertising campaign for the third
quarter of 1999 designed to drive traffic to and build awareness of the
TUNES.COM Web site and our genre-specific Web sites. The advertising is
primarily targeted to reach younger consumers in the 16-24 age group in order to
drive them to register for a major online sweepstakes during July and August of
this year.
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STRATEGIC RELATIONSHIPS
CONTENT PROVIDERS
We believe that our strategic relationships with the publishers of ROLLING
STONE, THE SOURCE and DOWN BEAT magazines will help establish our network of Web
sites as the premier destination for music content on the Web.
ROLLING STONE. In November 1997, we entered into an agreement with Straight
Arrow Publishers, the publisher and owner of ROLLING STONE magazine, which makes
us the exclusive licensee on the Internet of selected content of all domestic
editions of ROLLING STONE, including covers, photos, feature stories, reviews,
editorials and access to the archives of ROLLING STONE. We also sublicense this
content to third parties in conjunction with Straight Arrow. Our agreement with
Straight Arrow remains in effect until November 2005, and, at that time, will be
renewed automatically until November 2010 if our market capitalization is
greater than $150 million at the time of renewal. Straight Arrow may terminate
this agreement earlier if we do not fulfill our contractual obligations. See
"Risk Factors -- We depend on our exclusive relationships with the publishers of
ROLLING STONE, THE SOURCE and DOWN BEAT magazines for content and their brand
name recognition and may not be able to attract visitors to our Web sites if
these relationships terminate." We pay Straight Arrow an annual license fee of
$1.0 million, which increases to $1.25 million in 2001 and $1.5 million in 2006.
In June, we also made a one-time license fee payment of $1.5 million to Straight
Arrow, which was triggered by our May 1999 private placement of preferred stock.
Under the agreement, we also are required to purchase at least $1.1 million of
annual advertising in ROLLING STONE. In return, we receive recurring editorial
coverage in ROLLING STONE and the right to include in selected issues of the
magazine our "Connected CDs," which contain music, interviews and video material
as well as additional web-enabled and encrypted multimedia content. We generally
pay Straight Arrow 10% of advertising revenue from ROLLINGSTONE.COM. For
sublicensing of ROLLING STONE content and e-commerce, the party responsible for
originating the business receives 15% of the revenue, and we split the remaining
85% with Straight Arrow evenly. In connection with the agreement, we also
granted Straight Arrow a warrant to purchase 10% of our common stock outstanding
immediately prior to this offering, assuming the exercise and conversion of all
options, warrants, including the Straight Arrow warrant, and convertible
securities. Straight Arrow also has the right to appoint one member of our board
of directors during the term of the agreement.
THE SOURCE. In January 1999, we entered into an agreement with Source
Enterprises, the owner and publisher of THE SOURCE, a leading hip-hop music
magazine. Our agreement with Source Enterprises makes us the exclusive licensee
on the Internet of selected content of THE SOURCE, including covers, photos,
feature stories, reviews, editorials and access to the archives of THE SOURCE.
We also sublicense this content to third parties in conjunction with Source
Enterprises. Under the agreement, we also obtained the right to use
THESOURCE.COM domain name and the right to use the "The Source" and
"TheSource.com" trademarks and their derivatives in connection with the
Internet. Our agreement with Source Enterprises remains in effect until December
2003. Our annual license fee payments to Source Enterprises are capped at
$144,000 per year. Source Enterprises is required to promote THESOURCE.COM in
THE SOURCE magazine. The agreement requires us to pay Source Enterprises
approximately two-thirds of the advertising and merchandise revenue generated at
THESOURCE.COM Web site or on the Internet through the sublicensing of THE SOURCE
content or the sale of related merchandise. In connection with the agreement,
Source Enterprises also was granted a warrant to purchase 75,000 shares of our
common stock.
DOWN BEAT. In February 1999, we entered into an agreement with Maher
Publications, the owner and publisher of DOWN BEAT, one of the world's leading
and longest standing magazines featuring jazz and blues. Our agreement with
Maher Publications makes us the exclusive licensee on the Internet of selected
content of DOWN BEAT, including covers, photos, feature stories, reviews,
editorials and access to the archives of DOWN BEAT. We also sublicense this
content to third parties in conjunction with Maher Publications. Under this
agreement, we also obtained the right to use DOWNBEATJAZZ.COM domain
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name and the right to use the "DownBeat" and "DownBeat.com" trademarks and their
derivatives in connection with the Internet. Our agreement with Maher
Publications remains in effect until February 2001. Maher Publications is
required to promote DOWNBEATJAZZ.COM in DOWN BEAT magazine. We are not required
to pay any fixed licensing fees to Maher Publications. Rather, the agreement
provides for our payment of 50% percent commissions to Maher Publications with
respect to advertising revenue generated at DOWNBEATJAZZ.COM Web site or on the
Internet through the sublicensing of DOWN BEAT content or the sale of related
merchandise.
We also license data from other parties which permits us to add features and
information on our Web sites that we believe enhance and improve our user's
experience. The following are examples of these types of arrangements:
ALL-MUSIC GUIDE. Under an agreement with AEC One Stop Group, Inc., we
license for use on the TUNES.COM Web site the All-Music Guide Database which
includes numerous artist biographies and extensive album and track information.
As part of this licensing arrangement, we are required to use AEC as the
exclusive supplier of music CDs sold on the TUNES.COM Web site. We pay AEC a
license fee based on the number of CDs sold on the TUNES.COM Web site, subject
to a guaranteed monthly fee. This agreement expires in July 2001.
CDDB DATABASE. To enhance our support of the Microsoft Deluxe CD Player, we
license the CDDB database from Escient, LLC. The CDDB database is an arrangement
of music CD-related information including table of contents and track title
information for CDs. We pay Escient a license fee and a percentage of net
revenues from music sales on the TUNES.COM site. This agreement expires in
October 2001.
POLLSTAR. In June 1999, we entered into a six-month agreement with
Promoters On-Line Listings, which conducts business as Pollstar, extending our
license of Pollstar's database of live music event information. Using
information from Pollstar's database, visitors to our Web sites can search by
artist, city and venue to find a list of events, or they can find contextual
links on artist-specific pages. We pay Pollstar a license fee for use of its
database.
DISTRIBUTION NETWORK
A key element of our strategy is to generate consumer awareness of our Web
sites and brand names and to increase traffic to our Web sites. One way that we
are seeking to accomplish these goals is, in part, by establishing contractual
relationships through which our content is distributed on the Web by third
parties. Some of these relationships provide for links from third party Web
sites to our Web sites. During the second quarter of 1999, traffic from our five
largest distribution channels accounted for approximately 10% of traffic to our
sites and no single distribution channel accounted for more than 6% of traffic
to our sites. In most cases, our relationship is not exclusive and our
competitors may also distribute their content through these parties. In
addition, these distribution outlets compete with us for traffic. See "Business
- -- Competition."
AMERICA ONLINE. In October 1998, we entered into an agreement with America
Online pursuant to which the ROLLINGSTONE.COM Web site became an anchor tenant
on America Online's Music Channel. We also have been assigned specific keywords
within the America Online service. America Online has guaranteed us a minimum
number of impressions generated from the America Online Music Channel. In
exchange, we pay America Online a web tenancy fee. Our agreement with America
Online expires in November 1999.
LYCOS. In April 1999, we entered into an agreement with Lycos to be a
featured music content provider to the LYCOS.COM Web site. Under the terms of
the agreement, we have developed with Lycos a co-branded music content site that
will be linked to various areas within the LYCOS.COM Web site. The co-branded
Web site was launched in July 1999. Users are able to search by artist for
related multimedia
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content and view daily music news and images from our photo gallery. Lycos will
also integrate the links to the co-branded site as part of their main search
engine, driving traffic from artist and music keyword searches to the co-branded
pages. The agreement provides that Lycos share a significant portion of
advertising revenue generated from the sale of advertising on the co-branded
pages with us. As of June 30, 1999, no revenue had been recognized from the
arrangement. The agreement has a one-year term, although it can be terminated
upon 90 days prior written notice by Lycos.
NETSCAPE COMMUNICATIONS. In October 1998, we entered into an agreement with
Netscape to be the exclusive provider of rock and pop content to the Music
Section on the NETSCAPE.COM Web site. In connection with the agreement, we
developed a co-branded music section available from the NETSCAPE.COM Web site
where we provide news headlines and introductory content from ROLLINGSTONE.COM
with links to the ROLLINGSTONE.COM Web site to obtain full access to the
content. The agreement provides that we share revenue generated from the sale of
advertising on the co-branded pages with Netscape although to date we have not
generated significant revenue under this agreement. In addition, as further
consideration for entering into the agreement, we are required to provide
Netscape with advertising space on ROLLINGSTONE.COM and in ROLLING STONE
magazine and provide other promotions which will focus on driving traffic to the
Music Section on the NETSCAPE.COM Web site. The agreement has a one-year term.
ONE ZERO MEDIA/ALTAVISTA. In August 1998, we entered into an agreement with
One Zero Media, Inc. to be a provider of music content to the entertainment
section of the ALTAVISTA.COM Web site. Pursuant to the agreement, we provide a
limited amount of news headlines and introductory content from ROLLINGSTONE.COM
to the music section of ALTAVISTA.COM. The ALTAVISTA.COM site contains links to
the ROLLINGSTONE.COM Web site where visitors obtain full access to our content.
One Zero has guaranteed us a minimum number of visitors from the ALTAVISTA.COM
Web site. Although we do not share revenue with One Zero, we pay One Zero a fee
based upon the amount of traffic generated to ROLLINGSTONE.COM. The agreement
expires in August 2001.
SNAP. In January 1999, we entered into an agreement with Snap, LLC to
provide Snap with music content for Snap's Project Cyclone, Snap's enhanced high
bandwidth version of its general Web service. Under the agreement, we provide
Snap with high bandwidth versions of our DAILY VIDEO NEWS, access to our news
feeds, as well as our high-bandwidth video content. We do not pay any fee to or
share any revenue with Snap under this agreement. The agreement automatically
renews on a monthly basis and may be terminated by either party on 15 days prior
written notice.
YAHOO!. In July 1998, we entered into an agreement with Yahoo! whereby we
provide news headlines and introductory content from ROLLINGSTONE.COM in the
Music section of Yahoo! with links to the ROLLINGSTONE.COM WEB site to obtain
full access to the content. We do not pay any fee to or share any revenue with
Yahoo! under this agreement. The agreement was extended until June 2000.
RADIO STATIONS. We have established distribution relationships with over
100 music format radio stations to provide them with selected content, including
our DAILY VIDEO NEWS, webcasts and artist archives for placement on their Web
sites. In return, the radio stations generally have agreed to make on-air
promotions of our content available on their Web sites. The radio station
arrangements typically are terminable at will by either party.
TECHNOLOGY AND E-COMMERCE RELATIONSHIPS
We plan to continue to deliver rich and interactive music content by using
the latest consumer accepted technologies. We have established relationships
with technology vendors to develop interactive media applications based upon
existing technologies and applications. We believe that by forming relationships
with technology providers with expertise in multimedia technologies we will be
able to concentrate our resources on generating and delivering music-based
content. In addition, we have
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established relationships with e-commerce companies to provide our users with
access to music-related products. Examples of our technology and e-commerce
relationships include:
MICROSOFT. In February 1999, we entered into a Windows Media Promotion
agreement with Microsoft to develop an enhanced broadband video section of
ROLLINGSTONE.COM. Under the terms of the agreement, Microsoft pays us fees and
provides us with software and support services relating to the development of
the broadband area. In addition, the agreement provides for Microsoft to pay
costs associated with hosting and streaming the broadband content. The agreement
has a one-year term. We also provide support for the Microsoft Deluxe CD Player,
which is capable of identifying the music CDs inserted in a user's PC CD-ROM
drive. Once a CD is played on the Player, the TUNES.COM Web site is accessed by
the Player and queried for detailed information about the CD and the artist, as
well as related artists, music and promotions. Simultaneously, the Player
communicates, with the user's permission, with the TUNES.COM Web site and
provides us with information about the inserted CD.
REALNETWORKS. In February 1998, we entered into an agreement with
RealNetworks to jointly produce and market an Internet-based music radio called
ROLLING STONE RADIO. ROLLING STONE RADIO also contains embedded links to drive
users to our ROLLINGSTONE.COM Web site for artist and album information. Revenue
generated from ROLLING STONE RADIO will be shared. The agreement expires in
February 2000, but may be terminated upon 30 days notice under limited
circumstances.
CDNOW. In April 1998, we entered into a multi-year agreement with CDnow,
Inc., a leading online retailer of recorded music. See "-- Competition." Under
the agreement, visitors to ROLLINGSTONE.COM have direct and immediate access to
the CDnow online music store and the ability to purchase over 250,000 items from
the CDnow store which has also been co-branded with and fully integrated into
ROLLINGSTONE.COM. CDnow also licenses some of our content from ROLLINGSTONE.COM
for its store. The agreement also provides, in part, that in exchange for
becoming the online CD store for ROLLINGSTONE.COM and being provided with access
to artist archives, photographs, editorials and other materials, CDnow will pay
us fees for content licensing, site advertising and advances on new member
origination. Advertising and other revenue from CDnow accounted for
approximately 33% of our total revenue in 1998 and 28% for the six months ended
June 30, 1999. We expect that revenue from CDnow will decline and will account
for a smaller percentage of our total revenue in the future.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
We have developed an operating infrastructure based upon an architecture
designed to be reliable, secure and scalable. We maintain ten active Web
application servers, four database servers and six application servers. Our
servers use a variety of Microsoft products, including the Microsoft Windows NT
4.0 operating system. We try to maximize the performance of our servers by
directing traffic to the least busy server. We also use third-party Web-based
applications to transmit content to, and provide services on, our Web sites.
Our primary Web servers are maintained at Exodus Communications, Inc. in
Jersey City, New Jersey. Exodus provides fire suppression systems,
earthquake-bracing systems, physical security, 24 hours a day, seven days a week
on-site systems monitoring and administration, and multi-level redundant power,
connectivity and backup systems. We depend upon Exodus's ability to protect our
systems against damage from fire, hurricanes, power loss, telecommunications
failure, break-ins, vandalism and other events. See "Risk Factors -- We may have
capacity constraints and may be subject to system disruptions, which could
reduce our revenue."
Our operations are also dependent upon timely installations of lines and
feeds and computer downloads from our webcast venues and content providers. See
"Risk Factors -- We depend upon timely installations of lines, feeds and
downloads, and their failures may result in disruptions in our services." We
also depend upon Web browsers, Internet service providers and online service
providers to provide users access to our Web sites. Any substantial increase in
the volume of traffic on our Web
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<PAGE>
sites or the number of simultaneous users will require us to expand and upgrade
our technology, systems and network infrastructure. See "Risk Factors -- We may
have capacity constraints and may be subject to system disruptions, which could
reduce our revenue."
We keep all of our back-up production and development servers, located in
Chicago, behind firewalls for security purposes and do not allow outside access
to our operating systems, except through special channels which we believe are
secure. We have implemented strict password management and physical security
measures. We also have a computer security response team to address security
risks and vulnerabilities and respond to security alerts.
COMPETITION
The market for online music content, communities and commerce is new,
rapidly changing and intensely competitive. The number of Web sites on the
Internet competing for consumers' attention and spending has proliferated. In
addition, the broader entertainment industry is intensely competitive. We expect
that competition will continue to intensify. We believe that the primary
competitive factors in building a network that is attractive to advertisers and
for e-commerce are functionality, brand recognition, quality and variety of
content, member loyalty, demographic focus, variety of value-added services,
ease-of-use, quality of service, reliability and critical mass. We compete,
directly and indirectly, for advertisers, viewers, members, customers and
content providers with the following categories of companies:
- publishers and distributors of traditional media, such as television,
radio and print, including MTV, VH1, CMT, SPIN and their Internet
affiliates;
- online services or Web sites targeted at music consumers, such as
SonicNet, ARTISTdirect/ Ultimate Band List and Launch;
- general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to music and
entertainment-related content and services;
- Web search and retrieval services and other online services such as
Excite, Infoseek, Lycos and Yahoo!;
- online music retailers such as CDnow and Amazon.com;
- Internet radio services such as Spinner Networks and NetRadio;
- traditional music companies, including BMG Entertainment, EMI Group, Sony
Music Entertainment, Time Warner and Universal Music Group;
- companies offering digital music compression formats, such as those of
IBM, Liquid Audio, Microsoft and RealNetworks;
- companies focused on digitally distributed music, including MP3.com,
eMusic, formerly Good Noise, and various private companies; and
- online services or Web sites targeted to enthusiasts of particular artists
or bands, including Web sites maintained by their labels.
We anticipate that the number of direct and indirect competitors will
increase in the future. This could result in greater and intensified competition
for users, price reductions for our advertising, reduced margins, greater
operating losses or loss of market share, any of which would materially
adversely affect our business, results of operations and financial condition.
We believe our programming and content compete favorably with our
competitors, as some of them lack brand recognition, depth and breadth of
content and quality entertainment experience. However, many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical and marketing resources, significantly greater name
recognition and
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<PAGE>
substantially larger user and/or membership bases than we do and, therefore,
have a significantly greater ability to attract advertisers and users. New
technologies and the expansion of existing technologies may increase the
competitive pressures on us. In addition, many of our competitors may be able to
respond more quickly than us to new or emerging technologies and changes in
Internet user requirements and to devote greater resources than we can to the
development, promotion and sale of their services. See "Risk Factors -- Our
market is highly competitive which may adversely affect our revenue and
business."
INTELLECTUAL PROPERTY
The music, music videos and live and archived webcasts featured on our sites
include copyrighted works of third parties, including record labels, artists and
songwriters. Each piece of music or music video content may have multiple
copyright owners, some with rights in the sound recording covering the
particular performance, others with rights in the musical composition covering
the lyrics and music, and in the case of music videos, others with rights to the
visual content. We have different licensing arrangements with these parties
depending on our use of the song or music video and the length of portion of the
song included. In some cases, we use content without a license because we do not
believe a license is required; however, this area of the law is uncertain. Our
arrangements range from binding written contracts to informal arrangements based
on the promotional nature of the content. In some cases we pay a fee to the
licensor for use of the music or music video and in other cases our use is free.
We also use other content, including images that are copyrighted works of
others. We rely on our working relationships with copyright owners to obtain
licenses on favorable terms. Any changes in the nature or terms of these
arrangements, including any requirement for us to pay significant fees for the
use of the content, could have a negative impact on the availability of content
for our business. See "Risk Factors -- We depend on the music industry and
others for content and we may not be able to attract visitors to our Web sites
if we cannot obtain that content," "--We do not have licenses for a substantial
amount of music and associated artwork available on our Web sites, which may
subject us to infringement damages and significant license fees or loss of
access to that content" and "-- We will be required to pay additional statutory
royalties for the broadcast of music on the Web which may significantly increase
our operating costs."
Pursuant to our respective agreements with our magazine content providers,
we license from ROLLING STONE, THE SOURCE and DOWN BEAT their names, trademarks
and content. These agreements could terminate and involve a number of other
risks. See "-- Strategic Relationships -- Content Providers" and "Risk Factors
- -- We depend on our exclusive relationships with the publishers of ROLLING
STONE, THE SOURCE and DOWN BEAT magazines for content and their brand name
recognition and may not be able to attract visitors to our Web sites if these
relationships terminate."
Copyrighted material that we develop internally, as well as trademarks and
domain names relating to the Tunes.com brands and the brands of ROLLING STONE,
THE SOURCE and DOWN BEAT and other proprietary rights are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate.
See "Risk Factors -- We may be unable to protect our trademarks and copyrights
which could result in the loss of our rights or increased costs" and " -- We may
not be able to prevent third parties from using our domain names which could
decrease the value of these domain names."
GOVERNMENT REGULATION
There is an increasing number of laws and regulations pertaining to the
Internet, including laws or regulations relating to user privacy, liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and domain name registration. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, patent, trademark,
trade secret, obscenity, libel employment and personal privacy is uncertain and
developing.
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<PAGE>
PRIVACY CONCERNS. Legislatures and government agencies have adopted and are
considering adopting laws and regulations restricting the collection and use of
personal information obtained from individuals when accessing Web sites, which
could limit our ability to use our databases to generate revenue. See "Risk
Factors -- We may be subject to liability for misuse of users' private
information."
INTERNET TAXATION. A number of legislative proposals would impose
additional taxes on the sale of goods and services over the Internet, which may
substantially impair the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from these
activities. See "Risk Factors -- We may be liable for sales and other taxes
which could adversely affect our ability to generate revenue from e-commerce."
DOMAIN NAMES. Domain names are addresses on the Internet, namely the World
Wide Web. The current system for registering, allocating and managing domain
names has been the subject of litigation and proposed regulatory reform.
Although we and our magazine content providers assert trademark rights in our
domain names, third parties may bring claims for infringement against us for the
use of these trademarks. There can be no assurance that these domain names will
not lose their value, or that we will not have to obtain entirely new domain
names in addition to or in lieu of our current domain names if reform efforts
result in a restructuring in the current system. See "Risk Factors -- We may not
be able to prevent third parties from using our domain names which could
decrease the value of these domain names."
JURISDICTION. Due to the global nature of the Internet, it is possible
that, although transmissions by us over the Internet originate primarily in New
Jersey and we principally operate our business in Illinois, the governments of
other states and foreign countries might attempt to regulate our business
activities. In addition, as our service is available over the Internet in
multiple states and foreign countries, these jurisdictions may require us to
qualify to do business as a foreign corporation in each of these states or
foreign countries, which could subject us to taxes and other regulations.
EMPLOYEES
As of June 30, 1999, we had 89 full-time employees, including 55 in
operations and development, 18 in sales and marketing and 16 in general and
administrative, as well as 10 part-time employees. We also hire independent
contractors and other temporary employees in our editorial, operations and
administrative functions. We have never had a work stoppage and none of our
personnel are represented under collective bargaining agreements. We consider
our employee relations to be good.
PROPERTIES
Our principal administrative, marketing and development facilities are
located in approximately 16,238 square feet of office space in Chicago,
Illinois. Our lease for our Chicago facilities expires in May 2002. We also
sublease approximately 3,350 square feet of office space in New York City for
use as our national sales office headquarters. The New York City sublease
expires in November 1999. We believe that additional space may be required as
our business expands and believe that we will be able to obtain suitable space
as needed.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this prospectus, we are not
engaged in any legal proceedings that are expected to have a material adverse
effect on our business, financial condition or results of operations.
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MANAGEMENT
The following table sets forth the name and age as of July 15, 1999 of our
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Howard A. Tullman.............................. 54 Chairman of the Board and Chief Executive Officer
Todd S. Anderman............................... 31 Vice President -- Sales
Stuart B. Frankel.............................. 33 Chief Financial Officer, Treasurer and Secretary
Andy V. Jonusaitis............................. 38 Vice President -- General Counsel
Howard J. Katz................................. 31 Vice President -- Operations
Scott P. Mitchell.............................. 28 Vice President -- Chief Information Officer
Jo Ann Sager................................... 43 Vice President -- Marketing
Robert R. Gheewalla............................ 33 Director
Joseph H. Gleberman(1)......................... 41 Director
Burton B. Goldstein, Jr.(1)(2)................. 51 Director
Matthew S. Kaplan(1)(2)........................ 42 Director
Scott Mednick.................................. 43 Director
Jann S. Wenner................................. 53 Director
</TABLE>
- -------------------
(1) Member of the compensation committee.
(2) Will become a member of audit committee upon the completion of the offering.
HOWARD A. TULLMAN has served as our Chairman since February 1999 and as our
Chief Executive Officer and a director since our June 1997 reorganization from
an Illinois limited liability company to a Delaware corporation. He also served
as a manager of the limited liability company from September 1996 to June 1997.
Mr. Tullman also serves as a director of UBID, Inc. and serves as the Chairman
of the board of directors of The Cobalt Group, Inc. From June 1993 to January
1998, Mr. Tullman served as Chief Executive Officer of Imagination Pilots, Inc.,
a developer and producer of interactive CD games and educational software. From
1990 to May 1993, Mr. Tullman served as Chief Executive Officer of Eager
Enterprises Inc., a venture capital firm concentrating in investments in the
information and computer industries. Mr. Tullman holds a B.A. and J.D. from
Northwestern University.
TODD S. ANDERMAN has served as our Vice President -- Sales since May 1999.
From 1990 to April 1999, Mr. Anderman was employed by Ziff Davis, a large
publisher, in various capacities. In his most recent position with Ziff Davis,
as National Associate Publisher, Mr. Anderman headed the sales and marketing
efforts of FAMILY PC magazine where he implemented brand recognition campaigns
and integrated marketing programs designed to generate consumer and
technology-based advertising for the magazine. Mr. Anderman, who holds a B.A.
from Brandeis University, also has consulted for Internet start-ups.
STUART B. FRANKEL has served as our Chief Financial Officer, Treasurer and
Secretary since April 1998. From May 1996 to April 1998, Mr. Frankel was
employed by Zaring National Corporation, a publicly-traded homebuilder, in
various capacities including Vice President of Acquisitions and Development and
Director of Information Technology. From August 1993 to May 1996, Mr. Frankel
was employed as a corporate attorney with Frost & Jacobs LLP in Cincinnati,
Ohio. Mr. Frankel holds a B.S. in Business from Miami University and a J.D. from
Vanderbilt University School of Law. Mr. Frankel is a Certified Public
Accountant.
ANDY V. JONUSAITIS has served as our Vice President -- General Counsel since
December 1998. From January 1998 to December 1998, Mr. Jonusaitis served as Vice
President and General Counsel of May & Speh, Inc., a publicly traded company
providing computer-based information management services. Prior to joining May &
Speh, Mr. Jonusaitis was a partner in the Chicago law firm of Freeborn & Peters
where he spent over 11 years in that firm's corporate and securities group. Mr.
Jonusaitis holds a B.A., M.A. and J.D. from Northwestern University.
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HOWARD J. KATZ has served as our Vice President -- Operations since June
1998 and as our Vice President -- Business Development from September 1996 to
June 1998. From September 1994 to August 1996, Mr. Katz attended the graduate
school of business of Northwestern University. From September 1990 to December
1995, Mr. Katz served as Vice President of Business Development for Neurocorp,
Inc., a publicly traded medical technology company specializing in database
profiling and telephonic medicine. Mr. Katz holds a B.A. from the University of
Michigan and an M.B.A. from Northwestern University.
SCOTT P. MITCHELL has served as our Vice President -- Chief Information
Officer since September 1998. From February 1996 to September 1998, Mr. Mitchell
served as Senior Manager of Systems Engineering at Arthur Andersen LLP. From May
1994 to January 1996, Mr. Mitchell served as a software engineer for Sunstone
Imports, Inc. Mr. Mitchell holds a B.S. and a B.A. from Illinois State
University and an M.S. in Management and Organizational Behavior, an M.B.A. and
M.S. in Management Information Systems from Benedictine University.
JO ANN SAGER has served as our Vice President -- Marketing since August
1998. From October 1996 to February 1998, Ms. Sager served as Director of
Corporate Strategy for BackWeb Technologies Ltd. From May 1994 to August 1996,
Ms. Sager worked in marketing at IBM Corporation, first as Public Relations
Director for IBM's Personal Software Products division and, then, as the first
Communications Director for IBM's Software Group. Prior to 1994, Ms. Sager
worked for 12 years in technology marketing and was an analyst at the Central
Intelligence Agency. She holds a B.A. from Wake Forest University.
ROBERT R. GHEEWALLA has served as a director since August 1998. Mr.
Gheewalla serves as a Vice President of Goldman, Sachs & Co. where he has worked
since June 1994. Mr. Gheewalla currently serves on the board of directors of
Recovery Engineering, Inc. Mr. Gheewalla holds a B.A. from Tufts University, an
M.S. from the London School of Economics and an M.B.A. from Harvard University.
JOSEPH H. GLEBERMAN has served as a director since August 1998. Since 1982,
Mr. Gleberman has served in various investment banking capacities for Goldman,
Sachs & Co. Mr. Gleberman became a partner of Goldman Sachs in 1990 and, since
1996, he has served as Managing Director. Mr. Gleberman currently serves on the
board of directors of Applied Analytical Industries, Inc., BackWeb Technologies
Ltd., Dade Behring Holdings, Inc. and Ticketmaster Online -- CitySearch, Inc. He
holds a B.A. and M.A. from Yale University and an M.B.A. from the Stanford
University Graduate School of Business.
BURTON B. GOLDSTEIN, JR. has served as a director since May 1999. Since
January 1999, Mr. Goldstein has served as President of netWorth Partners, L.P.,
an Internet investment fund advised by Mellon Ventures. In 1981, Mr. Goldstein
co-founded Information America, a provider of on-line information regarding
corporations, people and assets and related products and services, and served as
its Chairman and President until September 1998. Mr. Goldstein holds a B.A. and
J.D. from the University of North Carolina at Chapel Hill.
MATTHEW S. KAPLAN has served as a director since June 1997. For the past 20
years Mr. Kaplan held several senior management positions at Stone Container
Corporation before resigning his most recent position in March 1999 to pursue
other interests. From November 1998 until March 1999, Mr. Kaplan served as Vice
President and General Manager of Smurfit-Stone Container Corporation's
Corrugated Container Division. From April 1997 to November 1998, Mr. Kaplan
served as Senior Vice President for North American Operations of Stone Container
Corporation and from June 1993 until March 1997, he served as Senior Vice
President and General Manager of Stone's Corrugated Container Division. Mr.
Kaplan holds a B.S. from the Wharton School, University of Pennsylvania and an
M.B.A. from the University of Chicago.
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SCOTT MEDNICK has served as a director since July 1999. Since July 1998, Mr.
Mednick has served as Chairman and Chief Strategic Officer of Xceed Inc., an
integrated marketing and communications company. In 1982, Mr. Mednick founded
the predecessor of THINK New Ideas, Inc., a marketing and communications
company, and served as its Chairman and Chief Executive Officer until June 1998.
Mr. Mednick serves on the National Board of Directors of Arnold Schwarzenegger's
Inner City Games Foundation as well as the Board of Communications Advisors to
Children Now.
JANN S. WENNER has served as a director since June 1999. Mr. Wenner is the
founder of ROLLING STONE MAGAZINE and has served as Chairman of Wenner Media
Incorporated since 1993. In his capacity as Chairman of Wenner Media, Mr. Wenner
oversees the publication of ROLLING STONE MAGAZINE, US THE ENTERTAINMENT
MAGAZINE and MEN'S JOURNAL. In April 1997, Mr. Wenner was inducted to the
American Society of Magazine Editors' Hall of Fame. He currently serves as the
Vice Chariman of the Rock and Roll Hall of Fame.
BOARD COMPOSITION
Following this offering, the board of directors will be divided into three
classes with directors serving staggered three-year terms, except for the first
term of Class I directors, who initially will serve a one-year term, and Class
II directors, who initially will serve a two-year term. Messrs. Gleberman and
Kaplan will be Class I directors with a term expiring at our annual
stockholders' meeting in 2000; Messrs. Gheewalla, Goldstein and Mednick will be
Class II directors with a term expiring at our annual stockholders' meeting in
2001; and Messrs. Tullman and Wenner will be Class III with a term expiring at
our annual stockholders' meeting in 2002. Our bylaws will provide that the
authorized number of directors may be changed only by resolution of the board of
directors. Any additional directorships resulting form an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
This classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Tunes.com. See "Risk Factors --
Anti-takeover provisions in our charter, bylaws and Delaware law could make
third-party acquisition of us more difficult and could reduce the price
investors are willing to pay for our stock."
The board of directors selects our officers, who serve at the discretion of
the board. Each of our officers and directors, other than non-employee
directors, devotes his or her full time to our affairs. There are no family
relationships among our directors and executive officers.
Messrs. Tullman, Gheewalla, Gleberman, Goldstein, Kaplan, Mednick and Wenner
currently serve as directors in accordance with the terms of our certificate of
incorporation and a stockholders' agreement we have entered into with our
stockholders. Prior to the closing of this offering, the stockholders' agreement
will terminate and the certificate of incorporation will be amended to eliminate
these provisions. Mr. Wenner also serves as a director in accordance with our
agreement with Straight Arrow, which provides Straight Arrow with the right to
appoint one director during the term of the agreement. This provision will
continue to be in effect after this offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established a compensation committee and an audit
committee. The compensation committee makes determinations regarding salaries,
bonuses and other compensation for our executive officers, including stock
option grants to our directors, executive officers, employees and consultants
under the 1997 and 1999 stock option plans. The compensation committee consists
of Messrs. Gleberman, Goldstein and Kaplan. The audit committee of the board
will review our internal accounting practices, make recommendations to the board
regarding the selection of independent auditors and review the results and scope
of the audit and other services provided by our independent
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auditors. The audit committee will consist of Messrs. Goldstein and Kaplan after
the completion of this offering.
COMPENSATION OF DIRECTORS
Directors who are also employees are not separately compensated for serving
on our board of directors. However, they are eligible to receive options to
purchase common stock under our 1997 and 1999 stock option plans, as are our
other employees, non-employee directors and consultants. Employee directors are
also reimbursed for related travel expenses. Although our non-employee directors
do not receive cash compensation for their services, non-employee directors may
receive options through participation in our 1997 and 1999 stock option plans
and reimbursement for related travel expenses. In November 1997, we granted
Thomas Cohen, a former director, options to purchase 6,250 shares of common
stock at an exercise price of $4.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is an officer or employee
of Tunes.com. None of our executive officers serve as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on our compensation committee. For a description of certain
related party transactions between us and Messrs. Gleberman, Goldstein and
Kaplan, see "Related Party Transactions."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table summarizes the compensation paid
by us during 1998 to our Chief Executive Officer and our other most highly
compensated executive officers whose salary and bonus were in excess of
$100,000, and our former Chairman and former President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------------------------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Howard A. Tullman,........................................... $ 120,000 $ 25,000 75,000 $ --
Chairman of the Board of Directors and Chief Executive
Officer
Stuart B. Frankel,........................................... 82,250 37,500 93,750 --
Chief Financial Officer, Treasurer and Secretary
Howard J. Katz,.............................................. 93,125 25,000 15,625 --
Vice President -- Operations
Jerry Mickelson,............................................. 120,000 25,000 75,000(1) 115,000(2)
former Chairman
Patrick J. Blake,............................................ 120,000 25,000 75,000 166,249(3)
former President
</TABLE>
- ------------------------
(1) Pursuant to a severance agreement with Tunes.com, all of Mr. Mickelson's
stock options were transferred to Jam Enterprises Corp., of which Mr.
Mickelson is a principal shareholder, executive officer and director. See
"Related Party Transactions -- Transactions with our Stockholders, Executive
Officers and Directors -- Severance Agreements."
(2) Pursuant to a binding letter of intent entered into in December 1998, we
became obligated to make a severance payment to Mr. Mickelson. In accordance
with the definitive agreement entered
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into on January 15, 1999, we paid $115,000 to Mr. Mickelson. See "--
Employment Agreements" and "Related Party Transactions -- Transactions with
our Stockholders, Executive Officers and Directors -- Severance Agreements."
(3) Pursuant to a severance agreement with Tunes.com, Mr. Blake's employment
terminated on December 31, 1998. In accordance with this severance
agreement, Tunes.com paid $166,249 to Mr. Blake. See "-- Employment
Agreements" and "Related Party Transactions -- Transactions with our
Stockholders, Executive Officers and Directors -- Severance Agreements."
OPTION GRANTS DURING 1998
The following table sets forth information concerning grants of stock
options during 1998 to the individuals named in the Summary Compensation Table
above. We have never granted any stock appreciation rights. All options granted
in 1998 were granted under our 1997 stock option plan. In accordance with the
1997 stock option plan, each grant had an exercise price equal to the fair
market value of our common stock on the date of grant as determined by our board
of directors, and the options have a ten-year term. Upon the completion of this
offering, all of the options listed in the table below will automatically vest
and become immediately exercisable. See "-- Stock Incentive Plans" and "Risk
Factors -- Acceleration of vesting of options upon completion of this offering
may reduce the commitment of employees and key individuals."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(2)
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ----------------------
NAME GRANTED 1998(1) SHARE DATE 5% 10%
- -------------------------------------- ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Tullman..................... 62,500 10.7% $ 4.00 01/01/08 $ 157,224 $ 398,436
12,500 2.1 6.00 03/10/08 47,167 119,531
Stuart B. Frankel..................... 75,000 12.8 6.00 04/17/08 283,003 717,184
18,750 3.2 6.00 04/01/08 70,751 179,296
Howard J. Katz........................ 15,625 2.7 6.00 03/01/08 58,959 149,413
Jerry Mickelson(3).................... 62,500 10.7 4.00 01/01/08 157,224 398,436
12,500 2.1 6.00 03/10/08 47,167 119,531
Patrick J. Blake...................... 62,500 10.7 4.00 01/01/08 157,224 398,436
12,500 2.1 6.00 03/10/08 47,167 119,531
</TABLE>
- ------------------------
(1) Based on an aggregate of 584,713 options granted to employees in 1998,
including options granted to the individuals named in this table.
(2) This table presents the hypothetical gains or "option spreads" that would
exist for the respective options. These gains are based on assumed rates of
annual compounded stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. The SEC rules mandate the use
of 5% and 10% assumed rates of appreciation. These rates of appreciation do
not represent our estimate or projection of future increases in the price of
our common stock. Actual gains, if any, on stock option exercises and common
stock depend on the future performance of our common stock and the overall
stock market conditions. There is no assurance that we will achieve the
rates of appreciation in the table.
(3) Pursuant to a severance agreement with Tunes.com, Mr. Mickelson's stock
options were transferred to Jam Enterprises Corp., of which Mr. Mickelson is
a principal shareholder, executive officer and director. See "Related Party
Transactions -- Transactions with our Stockholders, Executive Officers and
Directors -- Severance Agreements."
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1998 FISCAL YEAR END OPTIONS
The following table shows the number of shares covered by both exercisable
and unexercisable stock options as of December 31, 1998 and the values of these
exercisable and unexercisable options. None of the individuals named in the
Summary Compensation Table above exercised stock options during 1998. The value
of unexercised in-the-money options at December 31, 1998 is based on the
difference between $8.00, which represents the fair market value of one share of
common stock on December 31, 1998 as determined by our board of directors, and
the exercise price for these options. An option is in-the-money if the fair
market value of the underlying securities is greater than the exercise price of
the option.
1998 FISCAL YEAR END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
1998 AT DECEMBER 31, 1998
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Howard A. Tullman(1).............................. 408,038 -- $ 2,195,050 $ --
Stuart B. Frankel................................. 56,250 37,500 112,500 75,000
Howard J. Katz.................................... 28,525 20,313 200,380 50,000
Jerry Mickelson(1)................................ 279,063 57,163 1,472,790 320,110
Patrick J. Blake(1)............................... 221,900 -- 1,152,680 --
</TABLE>
- ------------------------
(1) Pursuant to agreements with Tunes.com, the vesting of 132,163 stock options
held by each of Mr. Tullman and Mr. Mickelson and 75,000 stock options held
by Mr. Blake was accelerated and reflected as exercisable at December 31,
1998.
EMPLOYMENT AGREEMENTS
In June 1997, we entered into a three-year employment agreement with Howard
A. Tullman, our Chairman and Chief Executive Officer, which expires in June
2000. Mr. Tullman's current annual base salary is $175,000. The employment
agreement provides for an annual discretionary bonus, with a target bonus of at
least $25,000. The employment agreement prohibits Mr. Tullman from competing
with us and soliciting our customers and employees during the term of the
employment agreement and for the 12-month period after the date of his
termination. If we terminate the employment agreement, we are required to make
severance payments to Mr. Tullman over a six-month period in the aggregate
amount of $45,000.
On April 1, 1998, we entered into a two-year employment agreement with
Stuart B. Frankel, our Chief Financial Officer, Treasurer and Secretary. Mr.
Frankel's current annual base salary is $150,000. In addition, his employment
agreement provides for a guaranteed minimum annual bonus of $25,000. Upon
commencement of his employment, we granted Mr. Frankel options to purchase
75,000 shares of common stock at an exercise price of $6.00 per share, 37,500 of
which vested on December 31, 1998 and the remaining 37,500 of which will vest on
the completion of this offering, similar to other options granted under the 1997
stock option plan. The employment agreement prohibits Mr. Frankel from competing
with us and soliciting our customers and employees during the term of the
employment agreement and for the 12-month period commencing on the date of his
termination. If we terminate the employment agreement, we are required to pay
Mr. Frankel $50,000 over a six-month period following the date of his
termination, in addition to the pro rata portion of any guaranteed bonus earned
as of the date of his termination.
In June 1997, we entered into a three-year employment agreement with Jerry
Mickelson, our former Chairman, with terms similar to the employment agreement
with Mr. Tullman. Pursuant to a
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severance agreement effective January 15, 1999, Mr. Mickelson's employment with
us terminated on that date, and we paid him $115,000. This severance agreement
restricted Mr. Mickelson from competing with us and prohibited Mr. Mickelson
from soliciting our clients and employees until June 30, 1999. See "Related
Party Transactions -- Transactions with our Stockholders, Executive Officers and
Directors -- Severance Agreements."
In June 1997, we entered into a three-year employment agreement with Patrick
J. Blake, our former President, with terms similar to the employment agreement
with Mr. Tullman. Pursuant to a severance agreement effective December 31, 1998,
Mr. Blake's employment with us terminated on that date, and we paid Mr. Blake
$166,249. This severance agreement prohibits Mr. Blake from competing with us
and soliciting our clients and employees until December 31, 1999. See "Related
Party Transactions -- Transactions with our Stockholders, Executive Officers and
Directors -- Severance Agreements."
STOCK INCENTIVE PLANS
1997 STOCK OPTION PLAN. Tunes.com's 1997 stock option plan authorizes the
grant of options to purchase up to 1,937,500 shares of common stock. We may
grant incentive stock options only to employees, including officers, but can
grant non-qualified options to employees, consultants, officers and directors of
Tunes.com and our subsidiaries. The 1997 stock option plan may be administered
by the full board of directors or a compensation committee appointed by the
board of directors consisting of at least two members of the board. Currently,
the compensation committee administers the 1997 stock option plan. The
compensation committee has the authority to determine the material terms under
which options are granted, including the individuals to whom such options may be
granted, exercise prices and numbers of shares subject to options, and the time
or times during which options may be exercised. The compensation committee
consists of Messrs. Gleberman, Goldstein and Kaplan.
The exercise price of each option granted under the 1997 stock option plan
must be equal to or greater than the fair market value of our common stock on
the date of grant. Options may not be exercised later than ten years from the
date of grant. Upon the effectiveness of the registration statement of which
this prospectus forms a part, all but up to 78,144 unvested options which have
not previously expired will automatically accelerate and become immediately
exercisable.
Options granted under the 1997 stock option plan generally are not
transferable, except by will, by the laws of descent or distribution or pursuant
to a qualified domestic relations order. Options granted will, in general,
terminate three months, or 30 days if termination results from a violation of
the optionee's duties to us, after the holder ceases to be an employee, director
or consultant of Tunes.com or any subsidiary, except in the case of death or
disability, in which event the vested options generally may be exercised at any
time within six months following the date of death or disability. In no event
may an option be exercised later than the originally prescribed term of the
option.
As of June 30, 1999, options to purchase a total of 1,910,639 shares of
common stock at a weighted average exercise price of $4.16 per share were
outstanding. Of these options, options to purchase 1,832,495 shares of common
stock will be fully vested and exercisable upon the completion of this offering.
As of June 30, 1999, we had 21,524 shares of common stock available for future
grants under the 1997 stock option plan.
1999 STOCK OPTION PLAN. The number of shares of common stock subject to the
1999 stock option plan is 1,625,000 shares. An additional 312,500 shares will
become available for issuance under the 1999 plan in each of the years 2000,
2001 and 2002. Most of the material terms of the 1999 stock option plan are
similar to those of the 1997 stock option plan, although options under the 1999
plan do not vest as a result of this offering. As of June 30, 1999, options to
purchase 422,125 shares of common stock at a weighted average exercise price of
$8.00 were outstanding under the 1999 stock option plan.
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EMPLOYEE STOCK PURCHASE PLAN. The compensation committee has recommended to
our board of directors the approval of an employee stock purchase plan under
which a total of 250,000 shares of common stock will be made available for sale
to our employees. The purchase plan is intended to qualify as an employee stock
purchase plan meeting the requirements of Section 423 of the Internal Revenue
Code of 1986, and will be administered by our board of directors or a committee
appointed by it. Full-time employees are eligible to participate in the purchase
plan if they have been employed by us for at least 90 days. The purchase plan
permits eligible employees to purchase our common stock through payroll
deductions. However, these deductions may not exceed 15% of an employee's
compensation and are subject to other limitations.
The purchase plan's initial purchase period will be a three-month term
starting on October 1, 1999 and ending on December 31, 1999. The plan's
subsequent offering periods will consist of six-month terms beginning in each
calendar year on the first business day of the months of January and July and
ending on the last business day in the months of June and December,
respectively. Each participant will be entitled, through a payroll deduction
account, to accumulate funds to purchase common stock on the last day of each
purchase period. The purchase price for each share of common stock will be set
by the plan administrator. The price will be a fixed percentage, not less than
85%, of the fair market value of the common stock either on the beginning date
of the offering period or the ending date of the offering period, whichever is
lower. Employees may modify or terminate their participation in the purchase
plan at any time during a purchase period. Their participation in the plan will
immediately end upon the termination of their employment with us. The purchase
plan will terminate in 2004.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our certificate of incorporation authorizes us to indemnify each officer and
director against liabilities to the fullest extent permitted by Delaware law.
Our certificate of incorporation also eliminates the personal liability of our
directors to us and our stockholders for monetary damages incurred as a result
of a breach of their duty of care to the fullest extent permitted by Delaware
law. Delaware law currently provides that a director's liability for breach of
fiduciary duty to a corporation may be eliminated except for liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful dividends or unlawful stock repurchases or redemptions; and
- any transaction from which the director derives an improper personal
benefit.
Delaware law allows persons who serve on the board of directors of a
Delaware corporation to be protected from awards of monetary damages for
negligence in the performance of their duties as directors, but this section of
Delaware law does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. Any
amendment to these provisions of Delaware law will automatically be incorporated
by reference into our certificate of incorporation, without a vote of our
stockholders, unless otherwise required. In addition, we maintain a directors
and officers liability insurance policy which provides for indemnification of
our directors, officers and employees for particular liabilities.
The indemnification and limitation of liability provisions in our
certificate of incorporation and bylaws may discourage our stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty.
They may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholder's investment may be adversely affected to the extent that
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we pay the costs of settlement and damage awards against directors and officers
pursuant to these indemnification provisions.
We also intend to enter into agreements to indemnify our directors, in
addition to the indemnification provided for under Delaware law and in our
certificate of incorporation and bylaws. The agreements will indemnify our
directors for expenses, including attorneys' fees, judgments, fines and
settlement amounts they incur in any lawsuit arising out of their service as a
director. We believe that these provisions and agreements are important to
attract and retain qualified directors.
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RELATED PARTY TRANSACTIONS
FOUNDERS' TRANSACTIONS
In connection with the organization of our predecessor, Digital
Entertainment Network, L.L.C., Howard A. Tullman received a 5% equity interest
of Digital Entertainment Network, and Jam Enterprises Corp., of which Jerry
Mickelson, our former Chairman, is a principal shareholder, executive officer
and director, received a 13.97% equity interest. In addition, Red 5 Management,
Inc., of which Patrick J. Blake, our former President, is a principal
shareholder, executive officer and director, received a 2.33% equity interest.
Howard A. Tullman, Jam Enterprises and Red 5 Management served as managers of
Digital Entertainment Network until Digital Entertainment Network reorganized
into our company in June 1997.
TRANSACTIONS WITH OUR STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
REGISTRATION RIGHTS AGREEMENT. We entered into a registration rights
agreement with all purchasers of our preferred stock and several holders of our
warrants. See "Description of Capital Stock -- Registration Rights Agreement."
STOCKHOLDERS' AGREEMENT. In June 1997, we entered into a stockholders'
agreement with our then current stockholders. All other purchasers of our common
stock and preferred stock have also entered into this agreement. This agreement
will automatically terminate immediately prior to the completion of this
offering. This agreement provides as follows:
- The holders of the Series A preferred stock have the right to appoint the
number of directors based upon their percentage ownership of our capital
stock and the holders of the Series E preferred stock have the right to
appoint one director;
- At least one director appointed by the holders of the Series A preferred
stock and the director appointed by the holders of the Series E preferred
stock must be present at a board of directors meeting in order to
constitute a quorum; and
- At least one director appointed by the holders of the Series A preferred
stock and the director appointed by the holders of the Series E preferred
stock must approve material actions including the following:
-- amending our certificate of incorporation or bylaws;
-- issuing any shares of capital stock except in limited circumstances;
-- entering into any merger or other acquisition agreement;
-- making significant capital expenditures or changing our business; and
-- entering into any employment agreements with executive officers.
In addition, the agreement restricts each holder from transferring in excess of
250,000 shares of our capital stock unless the holder first offers the shares,
on the same terms and conditions, to Tunes.com and, then, to our other
stockholders.
ROLLING STONE AGREEMENT. Under our agreement with Straight Arrow, we are
required to pay an annual license fee of $1.0 million for the initial term and
purchase at least $1.1 million of advertising annually in ROLLING STONE magazine
in order to use trademarks, domain names and exclusive content of ROLLING STONE.
In addition, we issued Straight Arrow a warrant, exercisable at $2.40 per share,
to purchase the number of shares of our common stock which would provide
Straight Arrow with a 10% equity interest in Tunes.com. The warrant expires in
November 2007. As of June 30, 1999, the number of shares issuable under this
warrant was 1,277,379. Jann Wenner, a director of our company, is the
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Chief Executive Officer of Straight Arrow. See "Business -- Strategic
Relationships: Content Providers."
SEVERANCE AGREEMENTS. Mr. Mickelson's employment agreement with us
terminated and he resigned as Chairman and as a director effective January 15,
1999, in consideration for, among other things, a severance payment of $115,000.
In addition, we accelerated the vesting date of stock options to purchase
132,163 shares of common stock held by Mr. Mickelson and Jam Enterprises to
January 15, 1999. The severance agreement also provided for the immediate
acceleration of vesting of stock options to purchase 132,163 shares of common
stock held by Mr. Tullman. Jam Enterprises has agreed to serve as our consultant
without further cash compensation until June 2, 2000.
Mr. Blake's employment agreement with us terminated and he resigned as
President and as a director effective December 31, 1998, in consideration for,
among other things, a severance payment of $166,249. In addition, we accelerated
the vesting of all stock options held by Mr. Blake that had not yet vested,
representing options to purchase 75,000 shares of common stock, to December 31,
1998. Mr. Blake has agreed to serve as our consultant without further cash
compensation until June 2, 2000. See "Management -- Employment Agreements."
JAM PRODUCTIONS AGREEMENTS. As of February 28, 1997, we entered into a
trademark license agreement with Jam Productions, Ltd., of which Jerry
Mickelson, our former Chairman, is an executive officer and director. The Jam
Productions license agreement provides us with an exclusive license to use the
JAMTV.COM domain name and an exclusive license to use JAMTV, JAMTV.COM and
related trademarks in connection with the Internet. In addition, as of March 31,
1997, we entered into a multimedia content agreement with Jam Productions where
it agreed to first offer to us opportunities to acquire or license multimedia
content from third parties. The license and rights under the multimedia content
agreement were granted to us in consideration for the goodwill accruing to Jam
Productions through our use of the domain name and the related JAMtv trademarks.
In connection with Mr. Mickelson's severance agreement with us, the multimedia
content agreement was terminated and the trademark license agreement was amended
to provide for its termination on the earlier of December 31, 1999 and 180 days
after we cease using the trademarks. However, our license to use the JAMTV.COM
domain will in no event terminate before December 31, 1999. Prior to the first
anniversary of the termination of the trademark license agreement, we may
request that Jam Productions transfer to us all of the existing or pending
registrations and applications for registration for the above-named trademarks
if we comply with the requests of Jam Productions to pay the applicable filing,
maintenance and attorneys' fees for the marks so transferred.
MANAGEMENT FEES. During 1997, we paid Jam Enterprises an aggregate of
$56,250 for managerial services provided to us during 1996 and 1997. Mr.
Mickelson, our former Chairman, is a principal shareholder, executive officer
and director of Jam Enterprises.
JAM PRODUCTIONS OPERATING EXPENSES. We reimbursed Jam Productions $65,000
in 1998 and $90,000 in 1997 for operating expenses incurred by it on our behalf.
Jerry Mickelson, our former Chairman, is the Chairman, Executive Vice President
and director of Jam Productions.
PURCHASE OF TECHNOLOGY FROM IMAGINATION PILOTS ENTITIES. In March 1997 and
in June 1997, we acquired from Imagination Pilots, Inc. CD-ROM technology, an
asset management system and a defect tracking system for an aggregate of
$310,000. Howard A. Tullman, our Chairman and Chief Executive Officer, was a
principal shareholder of Imagination Pilots, and served as chief executive
officer and director of Imagination Pilots until it began winding up its
business in January 1998.
In addition, on November 1, 1997, JAMtv Interactive Services Corporation,
our wholly-owned subsidiary, purchased substantially all of the assets of
Imagination Pilots Entertainment, Inc. for aggregate cash payments of $60,000.
Mr. Tullman is a principal shareholder of Imagination Pilots Entertainment and
has served as its chief executive officer and director since September 1997.
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IMAGINATION PILOTS ENTERTAINMENT SERVICES. In 1996 and 1997, we paid
Imagination Pilots Entertainment approximately $75,000 and $95,000,
respectively, for various services, including rent of office facilities, use of
personnel and other operating activities. Howard A. Tullman, our Chairman and
Chief Executive Officer, is a principal shareholder of Imagination Pilots
Entertainment and has served as its Chief Executive Officer and director since
September 1997.
LEASE. Our lease agreement with MAC Management Co., Inc., as agent for 640
LaSalle Partners Limited Partnership, provides us with 16,238 square feet of
office space at 640 North LaSalle Street in Chicago, Illinois. The lease expires
in May 2002. Howard A. Tullman, our Chairman and Chief Executive Officer is a
limited partner of 640 LaSalle Partners. Currently, our monthly lease payments
are approximately $24,000 and increase approximately 3% per year. In June 1997,
we subleased 20% of our office space to Imagination Pilots, Inc. in exchange for
Imagination Pilots' agreement to pay its proportionate share of the rental
payments. Mr. Tullman was a principal shareholder and served as Chief Executive
Officer of Imagination Pilots. The sublease terminated in May 1998, after
Imagination Pilots wound up its business.
ISSUANCE OF SECURITIES
ISSUANCE OF NOTES. Digital Entertainment Network issued an aggregate of
$500,000 principal amount of notes as of March 31, 1997, which accrued interest
at 5.5% per annum. Digital Entertainment Network sold the notes for an aggregate
of $500,000 of cash to members of Digital Entertainment Network.
REORGANIZATION. On June 2, 1997, our predecessor, Digital Entertainment
Network, was reorganized into our company. In conjunction with the
reorganization, each member's percentage ownership interest in Digital
Entertainment Network was exchanged for the same percentage ownership interest
in the 1,438,163 shares of common stock issued by us. Howard A. Tullman received
71,913 shares of common stock, Jam Enterprises received 200,888 shares of common
stock and Red 5 Management received 33,488 shares of common stock.
ISSUANCE OF PREFERRED STOCK AND CONVERTIBLE NOTES. Concurrently with the
reorganization in June 1997, we issued 1,500,000 shares of Series A-I preferred
stock to affiliates of The Goldman, Sachs Group, Inc. for $4.5 million of cash.
All shares of the Series A-I preferred stock were sold at $3.00 per share and
166,666 shares of Series A-I preferred stock to the holders of Digital
Entertainment Network's notes which were issued as of March 31, 1997.
In October 1997, we issued 200,000 shares of Series A-II preferred stock for
$5.00 per share to affiliates of The Goldman Sachs Group for a cash payment of
$1.0 million.
Between October 31, 1997 and December 1997, we issued an aggregate of
472,000 shares of Series B preferred stock for $2.3 million of cash and $20,000
of professional fees. Doerge-Internet, L.P., which owned approximately 10.8% of
our outstanding capital stock as of the date of this prospectus, purchased
200,000 shares of Series B preferred stock for a cash payment of $1.0 million.
The purchase price for the Series B preferred stock was $5.00 per share.
During February and March 1998, we issued an aggregate of 533,334 shares of
Series C preferred stock for $4.0 million of cash. Doerge-Internet purchased
66,667 shares of Series C preferred stock for a cash payment of $500,000. The
purchase price for the Series C preferred stock was $7.50 per share.
During May and June 1998, we issued 150,000 shares of Series A-III preferred
stock and 666,136 shares of Series D preferred stock for an aggregate of $8.2
million of cash. We sold 150,000 shares of Series A-III preferred stock to
affiliates of The Goldman Sachs Group and 150,000 shares of Series D preferred
stock to Doerge-Internet. The purchase price for the Series A-III and Series D
preferred stock was $10.00 per share.
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During March and April 1999, we issued an aggregate of $4.0 million
principal amount of convertible promissory notes and warrants to purchase an
aggregate of 49,938 shares of common stock for $4.0 million of cash. The notes
accrued interest at 8% per annum. The warrants have an exercise price of $8.00
per share and expire upon the closing of this offering. We issued to affiliates
of The Goldman Sachs Group $750,000 in principal amount of convertible
promissory notes and warrants to purchase 9,375 shares of common stock. The
principal of these notes, plus accrued interest, automatically converted into
our Series A-IV and Series E preferred stock upon the closing of the Series A-IV
and Series E preferred stock in May 1999.
During May 1999, we issued 76,165 shares of Series A-IV preferred stock and
1,955,661 shares of Series E preferred stock for an aggregate of $15.3 million
of cash and the conversion of all $4.0 million of outstanding convertible
promissory notes that we issued in March and April 1999. We sold all 76,165 of
the shares of Series A-IV preferred stock to affiliates of The Goldman Sachs
Group and 750,000 shares of Series E preferred stock to netWorth Partners I,
LLC. Burton Goldstein, Jr., a director of our company, serves as President of
netWorth. In addition, Scott Mednick, a director of our company, purchased
10,000 shares of Series E preferred stock. The purchase price of the Series A-IV
and Series E preferred stock was $10.00 per share.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information with respect to the beneficial
ownership of our common stock as of July 15, 1999, and as adjusted to reflect
the sale of the shares in this offering, by: (1) each person who we know
beneficially owns more than 5% of our common stock, (2) each director, (3) each
individual named in the Summary Compensation table above, and (4) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
NUMBER OF BENEFICIALLY OWNED (2)
SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- -------------------------------------------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Robert R. Gheewalla(3).............................................. 2,417,081 26.6% 18.5%
Joseph H. Gleberman(3).............................................. 2,417,081 26.6 18.5
The Goldman Sachs Group, Inc.(3).................................... 2,417,081 26.6 18.5
85 Broad Street,
New York, NY
Jann S. Wenner(4)................................................... 1,277,379 12.3 8.9
Straight Arrow Publishers Company, L.P.(4).......................... 1,277,379 12.3 8.9
1290 Avenue of the Americas
New York, New York
Doerge-Internet, L.P................................................ 968,714 10.7 7.4
30 S. Wacker Drive, Suite 2112
Chicago, Illinois
Burton B. Goldstein, Jr.(5)......................................... 937,500 10.3 7.2
netWorth Partners I, LLC(5)......................................... 937,500 10.3 7.2
One Buckhead Plaza, Suite 780
3060 Peachtree Road
Atlanta, Georgia
Jerry Mickelson(6).................................................. 508,971 5.4 3.8
207 West Goethe Street
Chicago, Illinois
Jam Enterprises Corp.(6)............................................ 508,971 5.4 3.8
207 West Goethe Street
Chicago, Illinois
SBIC Partners II, L.P............................................... 500,000 5.5 3.8
840 Newport Center Drive, Suite 840
Newport Beach, California 92660
Howard A. Tullman(7)................................................ 479,950 5.1 3.6
Patrick J. Blake(8)................................................. 255,388 2.7 1.9
Stuart B. Frankel(9)................................................ 112,500 1.2 *
Howard J. Katz(10).................................................. 111,338 1.2 *
Matthew S. Kaplan................................................... 30,035 * *
Scott Mednick....................................................... 12,500 * *
All directors and executive officers as a group (13 persons)........ 5,628,283 49.8 36.8
</TABLE>
- ------------------------
* Less than one percent
(1) Unless otherwise indicated, (a) the persons in the table above have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, and (b) the address for
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each beneficial owner of more than 5% of our common stock is c/o Tunes.com
Inc., 640 North LaSalle Street, Suite 560, Chicago, Illinois 60610.
(2) The number of shares includes common stock to be issued upon conversion of
preferred stock prior to the completion of this offering, and common stock
that may be issued upon exercise of options and warrants that are currently
exercisable or that may become exercisable within 60 days of July 15, 1999.
The number of outstanding shares used in calculating percentage ownership
for each person includes shares underlying options and warrants that they
hold, but excludes shares underlying options and warrants held by others.
The number of outstanding shares used in calculating percentage ownership
after the offering also includes an assumed 125,000 additional shares that
may be issued shortly following this offering in connection with our July
1998 acquisition of Tunes Network. All share amounts have been adjusted to
reflect a 1.25-for-1 stock split to be effected prior to the offering.
(3) Consists of 9,375 shares issuable upon exercise of warrants and 2,407,706
shares owned by the following investment partnerships, of which affiliates
of The Goldman Sachs Group are the general partner, managing general
partner or investment manager:
- 78,694 shares and warrants to purchase 306 shares held of record by
Bridge Street Fund 1997, L.P.;
- 55,712 shares and warrants to purchase 216 shares held of record by
Goldman Sachs & Co. Verwaltungs GmbH;
- 1,510,669 shares and warrants to purchase 5,883 shares held of record
by GS Capital Partners II, L.P.;
- 600,555 shares and warrants to purchase 2,339 shares held of record by
GS Capital Partners II Offshore, L.P.; and
- 162,076 shares and warrants to purchase 631 shares held of record by
Stone Street Fund 1997, L.P.
The Goldman Sachs Group disclaims beneficial ownership of the shares owned
by such investment partnerships to the extent attributable to partnership
interests therein held by persons other than The Goldman Sachs Group and
its affiliates. Each of such investment partnerships shares voting and
investment power with its respective affiliates.
Mr. Gleberman is a managing director and Mr. Gheewalla is a Vice President
of Goldman, Sachs & Co., a wholly owned subsidiary of The Goldman Sachs
Group. Mr. Gleberman and Mr. Gheewalla disclaim beneficial ownership of the
shares owned by The Goldman Sachs Group, except to the extent of their
pecuniary interests therein.
(4) Consists of shares issuable upon exercise of warrants held by Straight
Arrow Publishers Company, L.P. Mr. Wenner serves as Chief Executive Officer
of Wenner Media, the general partner of Straight Arrow. Mr. Wenner
disclaims beneficial ownership of all securities held by Straight Arrow.
(5) Represents shares held by netWorth Partners I, LLC. Mr. Goldstein serves as
President of netWorth Partners, L.P., the managing partner of netWorth
Partners I, LLC, and disclaims beneficial ownership of these shares.
(6) Consists of 200,888 shares held by Jam Enterprises Corp. and options to
acquire 308,083 shares held by Jam Enterprises. Mr. Mickelson is a
principal shareholder, executive officer and director of Jam Enterprises.
Mr. Mickelson is our former Chairman. The options to acquire 308,083 shares
include options to purchase 29,020 shares, which will automatically vest
upon the closing of this offering based on an assumed initial public
offering price of $14.00.
(7) Consists of 71,912 shares and options to purchase 408,038 shares.
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(8) Includes options to purchase 221,900 shares held by Mr. Blake and 33,488
shares held by Red 5 Management, Inc., of which Mr. Blake is a principal
shareholder, executive officer and director. Mr. Blake is our former
President.
(9) Represents options to purchase 112,500 shares held by Mr. Frankel.
(10) Represents options to purchase 111,338 shares held by Mr. Katz.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 50 million shares of common stock, $0.01 par value per share, and 5 million
shares of preferred stock, $0.01 par value per share. The following description
is a summary of the material provisions of our common and preferred stock which
will be applicable upon completion of this offering and is qualified in its
entirety by our certificate of incorporation and bylaws.
COMMON STOCK
As of July 15, 1999, we had 9,080,953 shares of common stock outstanding,
held by approximately 120 stockholders, which gives effect to our 1.25-for-1
stock split, assumes the conversion of all outstanding shares of preferred stock
into 7,149,953 shares of common stock, and excludes all outstanding warrants and
options under our stock option plans. Holders of common stock are entitled to
one vote per share in all matters to be voted upon by stockholders. Cumulative
voting for the election of directors is not permitted. Holders of common stock
do not have preemptive rights, other subscription rights or conversion rights.
There are no redemption provisions with respect to common stock. All outstanding
shares of common stock are subordinate to, and may be adversely affected by, the
shares of any series of preferred stock which we may issue in the future. The
common stock does not include any sinking fund provisions. Holders of the common
stock are not required to make additional capital contributions, nor subject to
capital calls or other assessments. Subject to the rights of holders of any
preferred stock that may be outstanding, each share of common stock is entitled
to share in any distribution of capital assets remaining after payment of
liabilities. Subject to the rights of holders of any preferred stock that may be
outstanding, holders of common stock are entitled to receive dividends when and
as declared by our board of directors out of funds legally available for that
purpose. Any such dividends may be paid in cash, property or additional shares
of common stock. All of our issued and outstanding shares of common stock are,
and all shares of our common stock sold in this offering will be, when issued,
fully paid and nonassessable.
PREFERRED STOCK
Upon completion of this offering, there will not be any outstanding
preferred stock. Under our certificate of incorporation, our board of directors
may issue up to 5 million shares of preferred stock in one or more series with
such designations, rights and preferences as may be determined from time to time
by the board of directors. Accordingly, the board of directors is empowered
under our certificate of incorporation, without further stockholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights that may adversely affect the voting power or other rights of the holders
of our common stock. In the event of issuance, preferred stock could be utilized
to discourage, delay or prevent an acquisition or change in control. We do not
have any present plans to issue any shares of preferred stock.
WARRANTS
On November 10, 1997, we issued to Straight Arrow a warrant to purchase
shares of common stock at an exercise price of $2.40 per share. As of June 30,
1999, the warrant was exercisable into approximately 1,277,379 shares of common
stock. The warrant expires on November 2007.
On January 1, 1999, we issued to Source Enterprises a warrant to purchase up
to 93,750 shares of our common stock at an exercise price of $8.00 per share.
The warrant expires on the earliest to occur of:
- the termination of our agreement with Source Enterprises during the
initial term,
- the expiration of our agreement if the agreement is not renewed and a
public or private offering generating net proceeds to us of at least $15
million has not occurred within six months of such expiration, and
73
<PAGE>
- December 31, 2008.
During March and April 1999, we issued warrants to purchase an aggregate of
49,938 shares of common stock in connection with our issuance of $4.0 million of
convertible promissory notes. The warrants have an exercise price of $8.00 per
share and expire upon the closing of this offering.
In connection with our preferred stock financing in May 1999, we issued to
SG Cowen, placement agent for the offering, a warrant to purchase 101,644 shares
of common stock exercisable at $8.00 per share. The warrants expire in June
2004.
REGISTRATION RIGHTS AGREEMENT
We have granted registration rights to the holders of all 7,149,953
outstanding shares of preferred stock and to holders of warrants to purchase
151,582 shares. Following this offering and the conversion of the preferred
stock into 7,149,953 shares of common stock, and assuming exercise of these
warrants, holders of 7,301,535 shares of our common stock, or 56% of the
outstanding common stock, will have registration rights. These registration
rights may permit these stockholders to resell their shares of Tunes.com common
stock in the public market earlier than they otherwise could. The market price
for our common stock could fall if stockholders sell large amounts of common
stock in the public market after this offering. See "Risk Factors -- Shares
eligible for future sale by our current stockholders in the public market could
cause our stock price to decline."
The registration rights are set forth in a registration rights agreement
between Tunes.com and the holders of all of our outstanding preferred stock and
the holders of the warrants described above. The following summary of the
registration rights agreement does not purport to be complete and is subject to,
and qualified in its entirety by, the registration rights agreement, a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
DEMAND REGISTRATION RIGHTS. At any time after this offering, stockholders
owning at least 30% of the number of shares that are subject to registration
rights may require us to file a registration statement with the SEC to register
their shares under the Securities Act. The other stockholders who have
registration rights may also include their shares in that registration
statement. We have the right to delay filing a registration statement for up to
180 days, if it would adversely affect a material financing, acquisition or
other similar transaction or would require us to make public disclosure of
information that would have a material adverse effect on Tunes.com. However, we
can exercise this right only once during any 12-month period.
There is no limit on the number of times the stockholders may require us to
register their shares. However, we are not required to register shares if:
- the aggregate offering price for the shares is less than $30.0 million in
the case of an underwritten offering or a registration to be effected on
Form S-1, the SEC's long-form registration statement;
- the aggregate offering price for the shares is less than $7.5 million in
the case of a non-underwritten offering on Form S-3, the SEC's short-form
registration statement; or
- the demand for registration is less than 180 days after the effective date
of a prior demand registration.
Although we have the right to reject a demand for registration if we plan to
sell shares ourselves in an underwritten public offering, we may be required to
include shares to be sold by stockholders under the piggyback registration
rights described below. We may also sell shares in connection with a demand
registration. However, if the offering is to be underwritten and the
underwriters advise us that the number of shares to be registered should be
reduced, the stockholders with registration rights are entitled to have their
shares registered before the shares to be sold by Tunes.com.
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<PAGE>
We are required to pay all expenses, including the fees of one counsel
representing the stockholders, in connection with the first two demand
registrations on Form S-1 and the first two demand registrations on any form
other than Form S-1. However, we are not required to pay the underwriting
discounts and commissions for those offerings. The expenses of each subsequent
demand registration will be paid by the persons who are selling shares.
PIGGYBACK REGISTRATION RIGHTS. Stockholders with registration rights can
request to have their shares registered under the Securities Act any time we
file a registration statement to register our equity securities for our own
account or for the account of any of our stockholders. There is no limit on the
number of times stockholders may exercise these piggyback registration rights.
We will pay all expenses, other than underwriting discounts and commissions for
selling stockholders, in connection with each piggyback registration.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
The following provisions of Delaware law and our certificate of
incorporation and bylaws could discourage third parties from seeking to acquire
control of our company or make it more difficult for them to do so. These
provisions also may limit the price that investors might be willing to pay in
the future for shares of our common stock. See "Risk Factors -- Anti-takeover
provisions of our charter, bylaws and Delaware law could make a third-party
acquisition of us more difficult."
DELAWARE LAW. We are subject to Section 203 of the Delaware General
Corporation Law. This provision generally prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for three
years after the time that the stockholder became an interested stockholder,
unless:
- prior to that time the board of directors approved the business
combination or the transaction that resulted in the stockholder becoming
interested;
- immediately after becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock outstanding at the time
the transaction commenced, excluding for the purpose of determining the
number of shares outstanding the shares owned (a) by persons who are both
directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- at or after that time, the business combination is approved by the board
of directors and authorized at an annual or special meeting of the
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Written consent of the stockholders does not meet this requirement.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. In general, Section 203
defines an interested stockholder as any entity or person beneficially owning
15% or more of the outstanding voting stock and any entity or person affiliated
with, controlling or controlled by such entity or person.
CERTIFICATE OF INCORPORATION AND BYLAWS. Our certificate of incorporation
and bylaws contain a number of provisions relating to corporate governance and
the rights of stockholders. Several of these provisions may be deemed to have a
potential anti-takeover effect in that such provisions may delay or prevent a
change of control of Tunes.com. These provisions include:
- the classification of our board of directors into three classes, with each
class serving for staggered three year terms;
75
<PAGE>
- restrictions on the removal of our directors;
- the authority of our board to issue series of preferred stock with such
voting rights and other provisions as our board of directors may
determine;
- a requirement that a vote of greater than 66 2/3% of the holders of shares
entitled to vote for the election of our directors is required to amend
the provisions of our certificate of incorporation and bylaws relating to
the classification of our board and removal of directors unless at least
80% of the members of our board of directors approve such action;
- the requirement that stockholder action can be taken only at an annual or
special meeting of our stockholders and prohibiting stockholder action by
written consent in lieu of a meeting;
- an advance notice procedure for our stockholders to nominate candidates
for election as directors or to propose other business to be considered at
a meeting of stockholders; and
- the requirement that a special stockholders meeting may only be called by
our chairman, our chief executive officer or majority of our board of
directors or a special committee of our board that has been delegated the
power to call special meetings. See "Management -- Board Composition."
The description set forth above is intended as a summary only and is
qualified in its entirety by reference to our certificate of incorporation and
bylaws which have been filed as exhibits to the registration statement filed in
connection with this offering.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank, Chicago, Illinois has been appointed as the
transfer agent and registrar for our common stock.
76
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of our
common stock and there can be no assurance that a significant public market for
our common stock will develop or be sustained after this offering. Future sales
of substantial amounts of our common stock in the public market could adversely
affect prevailing market prices and our ability to raise equity capital in the
future.
Upon completion of this offering and (1) assuming that no options or
warrants are exercised, and (2) assuming the issuance of an assumed 125,000
additional shares of our common stock arising from our acquisition of Tunes
Network, 13,080,953 shares of our common stock will be outstanding. Of this
amount, all 4,000,000 shares of our common stock offered by this prospectus will
be freely tradable in the public market without restriction or further
registration under the Securities Act, except for those shares purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining 9,080,953 shares of common stock were sold by us in reliance
upon exemptions from the registration requirements of the Securities Act. All
9,080,953 of these shares are subject to "lock-up" agreements described below
commencing on the date of this prospectus. Upon expiration of the 180-day
lock-up period, 4,361,495 shares will become immediately eligible for sale to
the public without restriction except in the case of our affiliates, and
4,719,458 shares will be "restricted securities" as that term is defined in Rule
144 under the Securities Act. Generally, restricted shares may be sold in the
public market only if registered under the Securities Act or if they qualify for
an exemption from registration under Rule 144 of the Securities Act. Sales of
either the shares which will be immediately eligible for sale to the public
after the expiration of the 180-day lock-up period or the restricted shares in
the public market, or the availability of those shares for sale, could adversely
affect the market price of our common stock.
The holders of 9,080,953 shares of our common stock have agreed not to
offer, sell or otherwise transfer any shares of our common stock for 180 days
after the date of this prospectus without the prior written consent of Salomon
Smith Barney Inc. As a result of these "lock-up" agreements, notwithstanding the
eligibility for resale of some of those shares under Rule 144, those shares
subject to the lock-up agreements cannot be sold until the 180-day period
expires. However, Salomon Smith Barney, in its sole discretion, may allow some
or all of the shares subject to the lock-up agreements to be sold prior to the
expiration of the 180-day period.
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate, who has
beneficially owned restricted shares for at least the one-year Rule 144 holding
period, including the holding period of any prior owner except affiliates, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (1) 1% of the number of shares of common stock then
outstanding and (2) the average weekly trading volume of the common stock during
the four calendar weeks preceding the filing of a Form 144 with respect to the
sale. Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. However, a person does not need to comply with those provisions if the
person both (a) is not our affiliate and has not been our affiliate at any time
during the 90 days preceding a sale and (b) has beneficially owned the shares
for at least two years, including the holding period of any prior owner except
affiliates.
Assuming the exercise of 151,582 shares issuable upon exercise of
outstanding warrants, upon the completion of this offering, the holders of
7,301,535 restricted shares will have rights with respect to the registration of
those shares under the Securities Act. See "Description of Capital Stock --
Registration Rights Agreement."
We intend to file a registration statement soon after the closing of this
offering on Form S-8 under the Securities Act. This registration statement will
cover all 4,750,000 shares of common stock reserved for issuance for options
granted under our 1997 stock option plan, 1999 stock option plan and employee
stock purchase plan. This registration statement will automatically become
effective upon filing. Accordingly, shares of our common stock registered under
Form S-8 will be available for sale in the open market soon after the date of
this prospectus, unless those options are subject to vesting restrictions or the
lock-up agreements described above.
77
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Tunes.com has agreed to sell to such underwriter, the number of
shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Smith Barney Inc.......................................................
SG Cowen Securities Corporation................................................
U.S. Bancorp Piper Jaffray Inc.................................................
-------------
Total..................................................................
-------------
-------------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., SG Cowen Securities
Corporation and U.S. Bancorp Piper Jaffray Inc. are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to selected securities dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share on sales to
other securities dealers. If all of the shares are not sold at the initial
offering price, the representatives may change the public offering price and the
other selling terms. The representatives have advised us that the underwriters
do not intend to confirm any sales to any accounts over which they exercise
discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of common
stock at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to the
conditions set forth in the underwriting agreement, to purchase a number of
additional shares approximately proportionate to such underwriter's initial
purchase commitment.
All of our officers, directors and substantially all of our stockholders and
option holders have agreed that, for a period of 180 days from the date of this
prospectus, they will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of our common stock or any
securities convertible into or exchangeable for our common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
At the request of Tunes.com, the underwriters have reserved for sale, at the
initial public offering price, up to 200,000 shares of common stock for
directors, officers, employees and business associates of Tunes.com. There can
be no assurance that any of the reserved shares will be so purchased. The number
of shares available for sale to the general public in the offering will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares will be
determined by negotiations between us and the representatives. Among the factors
to be considered in determining the initial public offering price will be our
record of operations, our current financial condition, our future prospects, our
markets, the
78
<PAGE>
economic conditions in and future prospects for the industry in which we
compete, our management and currently prevailing general conditions in the
equity securities markets, including current market valuations of publicly
traded companies considered comparable to Tunes.com. We cannot assure you,
however, that the prices at which the shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in the common stock will
develop and continue after this offering.
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "TUNZ."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock. The underwriting fee is
equal to the public offering price per share of the common stock less the amount
paid by the underwriters to us per share of common stock.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- ------------
<S> <C> <C>
Per share.................................................................... $ $
Total........................................................................ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of bids or purchases
of common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member. These activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
We estimate that our portion of the total expenses of this offering will be
$800,000.
The representatives have performed investment banking and advisory services
for us from time to time for which they have received customary fees and
expenses. SG Cowen Securities Corporation served as our exclusive placement
agent in connection with the private placement of our preferred stock in May
1999 for which SG Cowen Securities Corporation received customary fees and
warrants to purchase 101,644 shares of our common stock at an exercise price of
$8.00 per share. The representatives may, from time to time, engage in
transactions with and perform services for us in the ordinary course of our
business.
We have agreed to indemnify the underwriters against specific liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
79
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of our common stock offered
hereby will be passed upon for us by Freeborn & Peters, Chicago, Illinois. Other
legal matters in connection with this offering will be passed upon for the
underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and related financial statement schedule as of December 31,
1997 and 1998 and for the years then ended and for the period from July 2, 1996,
inception, to December 31, 1996, and the financial statements of Tunes Network,
Inc. as of December 31, 1996 and 1997 and for the years then ended as set forth
in their reports. We have included these financial statements in the prospectus
and elsewhere in the registration statement in reliance upon Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Our fiscal year ends on December 31. We intend to furnish our stockholders
with annual reports containing audited financial statements and other
appropriate reports. In addition, we intend to become a "reporting company" and
file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the SEC's Public Reference Room, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the SEC's Regional Offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplicating fee, by writing the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the Public Reference Room. Our SEC filings are also available to
the public on the SEC Web site at http://www.sec.gov.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TUNES.COM INC.
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited)............... F-3
Consolidated Statements of Operations for the period from July 2, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(Unaudited)............................................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from July 2, 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 and the six months ended June 30,
1999 (Unaudited)....................................................................................... F-5
Consolidated Statements of Cash Flows for the period from July 2, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(Unaudited)............................................................................................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
PRO FORMA COMBINED FINANCIAL INFORMATION
Overview................................................................................................. F-19
Pro Forma Combined Statement of Operations for the year ended December 31, 1998 (Unaudited).............. F-20
Pro Forma Combined Statement of Operations for the six months ended June 30, 1999 (Unaudited)............ F-21
Pro Forma Combined Balance Sheet as of June 30, 1999 (Unaudited)......................................... F-22
Notes to Pro Forma Combined Financial Information (Unaudited)............................................ F-23
TUNES NETWORK, INC.
Report of Independent Auditors........................................................................... F-24
Balance Sheets as of December 31, 1996 and 1997.......................................................... F-25
Statements of Operations for the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998................................................................................................... F-26
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1998...................................... F-27
Statements of Cash Flows for the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998................................................................................................... F-28
Notes to Financial Statements............................................................................ F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tunes.com Inc.
We have audited the accompanying consolidated balance sheets of Tunes.com
Inc. as of December 31, 1997 and 1998 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the period from
July 2, 1996 (inception) to December 31, 1996 and the years ended December 31,
1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tunes.com Inc.
at December 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for the years ended December 31, 1997 and 1998 and for the
period from July 2, 1996 (inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 26, 1999
F-2
<PAGE>
TUNES.COM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
------------- -------------- JUNE 30,
1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,674,236 $ 4,251,082 $ 14,229,074
Accounts receivable, net of allowance of $17,000 in 1998 and
1999............................................................ 130,016 368,720 374,424
Prepaid expenses and other current assets......................... 88,156 374,195 1,494,043
Restricted investment............................................. 1,000,000 1,000,000 500,000
------------- -------------- --------------
Total current assets.............................................. 3,892,408 5,993,997 16,597,541
Equipment and leasehold improvements.............................. 840,430 1,712,802 1,824,452
Less: Accumulated depreciation.................................... (131,185) (498,636) (638,420)
------------- -------------- --------------
709,245 1,214,166 1,186,032
Restricted investment, less current portion....................... 1,000,000 -- --
Goodwill, net..................................................... -- 3,488,570 2,325,710
Other intangibles, net............................................ -- 682,498 399,992
License agreement, net............................................ -- -- 1,480,769
Other............................................................. -- 33,941 37,969
------------- -------------- --------------
Total assets...................................................... $ 5,601,653 $ 11,413,172 $ 22,028,013
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable................................................ $ 186,084 $ 743,344 $ 1,069,643
Accrued compensation............................................ 34,690 410,331 352,000
Acquisition liability........................................... -- 404,000 --
Deferred revenue................................................ 110,831 541,246 178,683
Other accrued expenses and current liabilities.................. 181,895 655,271 1,251,375
------------- -------------- --------------
Total current liabilities......................................... 513,500 2,754,192 2,851,701
Long-term obligations............................................. -- 160,507 121,193
Redeemable convertible preferred stock............................ 8,430,108 22,116,439 42,186,358
Stockholders' deficit:
Common stock, par value $0.01; 11,500,000 shares authorized;
issued and outstanding: 1,806,000 in 1999, 1,675,663 in 1998
and 1,438,163 in 1997......................................... 14,382 16,757 18,060
Additional paid-in capital...................................... 745,318 4,017,482 9,290,708
Common stock to be issued....................................... -- 1,055,420 55,420
Accumulated deficit............................................. (4,101,655) (18,707,625) (32,495,427)
------------- -------------- --------------
Total stockholders' deficit....................................... (3,341,955) (13,617,966) (23,131,239)
------------- -------------- --------------
Total liabilities and stockholders' deficit....................... $ 5,601,653 $ 11,413,172 $ 22,028,013
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
TUNES.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 2, 1996
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER YEAR ENDED DECEMBER 31 JUNE 30
31, ----------------------------- ------------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising.......................... $ $ 283,807 $ 970,189 $ 270,966 $ 1,371,867
Other................................ -- 280,887 1,514,466 860,528 626,122
------------- ------------- -------------- -------------- --------------
Total revenue.......................... -- 564,694 2,484,655 1,131,494 1,997,989
Cost of revenue........................ -- 1,267,521 4,045,056 2,039,816 2,002,632
------------- ------------- -------------- -------------- --------------
Gross deficit.......................... -- (702,827) (1,560,401) (908,322) (4,643)
Operating expenses:
Operations and development........... 32,003 458,381 1,880,480 408,089 1,781,313
Sales and marketing.................. 36,769 1,064,502 4,034,115 1,122,982 3,143,753
General and administrative........... 152,859 1,244,676 2,836,678 1,085,922 2,003,617
Depreciation and amortization........ 2,319 156,529 1,777,931 136,651 1,726,121
Stock compensation................... -- 9,700 1,374,539 152,281 3,853,663
------------- ------------- -------------- -------------- --------------
Total operating expenses............... 223,950 2,933,788 11,903,743 2,905,925 12,508,467
------------- ------------- -------------- -------------- --------------
Loss from operations................... (223,950) (3,636,615) (13,464,144) (3,814,247) (12,513,110)
Other income (expense):
Interest income...................... 7,353 99,540 432,566 191,363 156,623
Interest expense..................... -- -- (9,438) (336) (72,166)
Other income (expense)............... -- 15,040 4,568 3,193 (37,784)
------------- ------------- -------------- -------------- --------------
Net loss............................... (216,597) (3,522,035) (13,036,448) (3,620,027) (12,466,437)
Accretion of redeemable convertible
preferred stock...................... -- (363,023) (1,569,522) (541,378) (1,321,365)
------------- ------------- -------------- -------------- --------------
Net loss attributable to common
stockholders......................... $ (216,597) $ (3,885,058) $ (14,605,970) $ (4,161,405) $ (13,787,802)
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
Basic and diluted net loss per common
share................................ $ (0.31) $ (2.70) $ (9.88) $ (2.89) $ (8.23)
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
Weighted average shares used in per
share calculation.................... 704,525 1,438,163 1,477,964 1,438,163 1,676,243
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
Pro forma basic and diluted net loss
per common share..................... $ (2.33) $ (1.73)
-------------- --------------
-------------- --------------
Weighted average shares used in pro
forma per share calculation.......... 5,590,119 7,217,671
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
TUNES.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
MEMBERS' UNITS COMMON STOCK ADDITIONAL
--------------------- ----------------------- COMMON STOCK PAID-IN ACCUMULATED
UNITS AMOUNT SHARES PAR VALUE TO BE ISSUED CAPITAL DEFICIT
--------- ---------- ---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization, July 2,
1996:................................ 115,053 $ 750,000 -- $ -- $ -- $ -- $ --
Net loss for the period from July 2,
1996 to December 31, 1996............ -- -- -- -- -- -- (216,597)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at December 31, 1996.......... 115,053 750,000 -- -- -- -- (216,597)
Conversion of Members' units to shares
of common stock...................... (115,053) (750,000) 1,438,163 14,382 -- 735,618 --
Stock compensation expense............ -- -- -- -- -- 9,700 --
Accretion of redeemable convertible
preferred stock...................... -- -- -- -- -- -- (363,023)
Net loss.............................. -- -- -- -- -- -- (3,522,035)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at December 31, 1997.......... -- -- 1,438,163 14,382 -- 745,318 (4,101,655)
Common stock to be issued............. -- -- -- -- 2,955,420 -- --
Common stock issued in connection with
acquisition.......................... -- -- 237,500 2,375 (1,900,000) 1,897,625 --
Stock compensation expense............ -- -- -- -- -- 1,374,539 --
Accretion of redeemable convertible
preferred stock...................... -- -- -- -- -- -- (1,569,522)
Net loss.............................. -- -- -- -- -- -- (13,036,448)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at December 31, 1998.......... -- -- 1,675,663 16,757 1,055,420 4,017,482 (18,707,625)
Issuance of warrants (unaudited)...... -- -- -- -- -- 409,706 --
Stock compensation expense
(unaudited).......................... -- -- -- -- -- 3,853,663 --
Accretion of redeemable convertible
preferred stock (unaudited).......... -- -- -- -- -- -- (1,321,365)
Exercise of stock options
(unaudited).......................... -- -- 5,337 53 -- 11,107 --
Common stock issued in connection with
acquisition (unaudited).............. -- -- 125,000 1,250 (1,000,000) 998,750 --
Net loss (unaudited).................. -- -- -- -- -- -- (12,466,437)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at June 30, 1999 (unaudited).. -- $ -- 1,806,000 $ 18,060 $ 55,420 $ 9,290,708 $ (32,495,427)
--------- ---------- ---------- ----------- -------------- ----------- -------------
--------- ---------- ---------- ----------- -------------- ----------- -------------
<CAPTION>
TOTAL
-------------
<S> <C>
Initial capitalization, July 2,
1996:................................ $ 750,000
Net loss for the period from July 2,
1996 to December 31, 1996............ (216,597)
-------------
Balance at December 31, 1996.......... 533,403
Conversion of Members' units to shares
of common stock...................... --
Stock compensation expense............ 9,700
Accretion of redeemable convertible
preferred stock...................... (363,023)
Net loss.............................. (3,522,035)
-------------
Balance at December 31, 1997.......... (3,341,955)
Common stock to be issued............. 2,955,420
Common stock issued in connection with
acquisition.......................... --
Stock compensation expense............ 1,374,539
Accretion of redeemable convertible
preferred stock...................... (1,569,522)
Net loss.............................. (13,036,448)
-------------
Balance at December 31, 1998.......... (13,617,966)
Issuance of warrants (unaudited)...... 409,706
Stock compensation expense
(unaudited).......................... 3,853,663
Accretion of redeemable convertible
preferred stock (unaudited).......... (1,321,365)
Exercise of stock options
(unaudited).......................... 11,160
Common stock issued in connection with
acquisition (unaudited).............. --
Net loss (unaudited).................. (12,466,437)
-------------
Balance at June 30, 1999 (unaudited).. $ (23,131,239)
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
TUNES.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 2, 1996 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, JUNE 30,
TO DECEMBER -------------------------- ---------------------------
31, 1996 1997 1998 1998 1999
------------ ----------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $ (216,597) $(3,522,035) $ (13,036,448) $ (3,620,027) $ (12,466,437)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 2,319 156,529 1,777,931 136,651 1,745,352
Stock compensation expense..................... -- 9,700 1,374,539 152,281 3,853,663
Other noncash items............................ -- (82,500) 100,000 -- 37,785
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable.......................... -- (130,016) (234,864) (5,053) (5,704)
Prepaid expenses and other current assets.... (17,458) (70,698) (292,486) (636,601) (700,566)
Accounts payable............................. 49,980 136,104 172,035 68,202 326,299
Accrued compensation......................... 4,827 29,863 58,520 154,389 (58,330)
Deferred revenue............................. -- 110,831 430,415 151,339 (362,563)
Other accrued expenses and current
liabilities................................ 45,856 136,039 353,598 249,379 660,967
------------ ----------- ------------- ------------ -------------
Net cash used in operating activities............ (131,073) (3,226,183) (9,296,760) (3,349,440) (6,969,534)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements.................................... (29,857) (708,073) (584,761) (397,057) (290,406)
Payment of license fee........................... -- -- -- -- (1,500,000)
Decrease (increase) in restricted investment..... -- (2,000,000) 1,000,000 500,000 500,000
Acquisitions, net of cash acquired (Note 4)...... (27,663) -- (507,783) (420,398) (404,000)
------------ ----------- ------------- ------------ -------------
Net cash used in investing activities............ (57,520) (2,708,073) (92,544) (317,455) (1,694,406)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable...................... -- 500,000 -- -- 3,995,000
Payments on notes payable and capital leases..... -- -- (1,150,659) -- (43,917)
Proceeds from issuance of members' units......... 750,000 -- -- -- --
Proceeds from issuance of preferred stock, net of
issue costs..................................... -- 7,547,085 12,116,809 12,116,809 15,103,000
Proceeds from exercise of stock options.......... -- -- -- -- 11,160
Payment of deferred financing costs.............. -- -- -- -- (423,311)
------------ ----------- ------------- ------------ -------------
Net cash provided by financing activities........ 750,000 8,047,085 10,966,150 12,116,809 18,641,932
------------ ----------- ------------- ------------ -------------
Net increase in cash and cash equivalents........ 561,407 2,112,829 1,576,846 8,449,914 9,977,992
Cash and cash equivalents, beginning of period... -- 561,407 2,674,236 2,674,236 4,251,082
------------ ----------- ------------- ------------ -------------
Cash and cash equivalents, end of period......... $ 561,407 $ 2,674,236 $ 4,251,082 $ 11,124,150 $ 14,229,074
------------ ----------- ------------- ------------ -------------
------------ ----------- ------------- ------------ -------------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES
Common stock issued or to be issued in
acquisition..................................... $ -- $ -- $ 2,955,420 $ -- $ --
Liabilities assumed in acquisition............... $ -- $ -- $ 1,940,000 $ -- $ --
Notes payable exchanged for shares of preferred
stock........................................... $ -- $ 500,000 $ -- $ -- $ 3,995,000
Capital leases for computer equipment............ $ -- $ -- $ 182,993 $ -- $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six-month periods ended
June 30, 1998 and 1999 is unaudited)
1. NATURE OF OPERATIONS
Tunes.com Inc. (the Company) is an Internet-based music media, marketing,
and promotion company that provides interactive music content, live and archived
music performances and interviews, current news and information, audio and video
samples and other programming, as well as the opportunity for music fans
worldwide to purchase music-related merchandise directly through the
www.tunes.com, www.rollingstone.com, www.thesource.com, www.downbeatjazz.com and
www.jamtv.com Web sites, and radio and Internet content affiliates.
Effective February 26, 1999, the Company changed its name from JAMtv
Corporation to Tunes.com Inc.
2. BASIS OF PRESENTATION
The financial statements of the Company as of June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999 contain all adjustments and
accruals (consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial position and
operating results of the interim periods presented.
As detailed in Note 6, on June 2, 1997, holders of members' units in Digital
Entertainment Network, L.L.C. (DEN), a limited liability company, exchanged such
units for shares of common stock of the Company, a newly formed Delaware
corporation. All of the assets and liabilities of DEN were transferred to the
Company at book value and DEN was dissolved. The accompanying financial
statements reflect the operations of DEN for the period prior to June 2, 1997,
and the Company thereafter.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions
of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances are eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash which is unrestricted as to use and
highly liquid investments having a maturity of three months or less at the time
of purchase.
RESTRICTED INVESTMENT
The restricted investment represents the future license payments held in
escrow pursuant to a third-party agreement (see Note 9).
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets, generally three to five years. Assets
F-7
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
under capital leases are amortized using the straight-line method over the
shorter of the estimated useful lives or the remaining lease terms, generally
three years.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over the fair market value of
tangible net assets acquired and primarily consist of purchased technology and
goodwill related to the acquisition of Tunes Network, Inc. (Tunes Network -- see
Note 4). Intangible assets are amortized on a straight-line basis over the
useful lives of the assets, currently two years. If there are indicators such
assets may be impaired, the Company assesses recoverability from future
operations using undiscounted cash flows of the related business as a measure.
Under this approach, the carrying value of the intangible would be reduced to
fair value if the Company's best estimate for expected undiscounted future cash
flows of the related business would be less than the carrying amount of the
intangible over its remaining amortization period.
Intangible assets consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
Goodwill........................................................ $4,651,430
<S> <C>
Developed technology............................................ 800,000
Assembled work force............................................ 110,000
----------
5,561,430
Less: Accumulated amortization.................................. (1,390,362)
----------
$4,171,068
----------
----------
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
ADVERTISING REVENUE
Advertising revenue is derived from the sale of banner advertisements and
sponsorships on the Company's Web sites as well as integrated marketing
campaigns sold by the Company and the Company's share of revenue on co-branded
Web sites of affiliates under certain agreements. Advertising revenue is
recognized in the period the advertisement is displayed or campaign is run,
provided no significant Company obligations remain and collection of the
resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of advertising impressions delivered or times
that any advertisement is viewed by users of the Company's Web sites. To the
extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until guaranteed levels are achieved.
F-8
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also recognizes advertising revenue as a result of barter
transactions with certain other internet-related companies. Such revenue is
recognized based on the fair value of the consideration received or provided,
whichever is more determinable. This primarily consists of advertising displayed
on other companies' Web sites in exchange for advertising on the Company's Web
site. Barter revenue and the corresponding expense is recognized in the period
the advertising is displayed. Advertising revenue from barter transactions
during 1997 and 1998 was $174,000 and $156,800, respectively.
OTHER REVENUE
Other revenue is derived from content licensing, commerce and product
development. Content license fee revenue is recognized over the period of the
license agreement under which the Company delivers its content. Commerce revenue
from the sale of CDs and other music-related merchandise is recognized when the
products are shipped to customers, net of allowances for returns. Product
development revenue is derived from the development of content for interactive
CDs under third-party contracts and the development of other Web based services.
Product development revenue is generally recognized when the product is
delivered, except for services provided under longer-term contracts where the
revenue is recognized on a percentage-of-completion basis over the life of the
project. Two customers accounted for 52% of total revenue in 1998 and three
customers accounted for 68% of total revenue in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accruals are a reasonable estimate of their fair value due to the
short-term nature of these instruments. The estimated fair value of long-term
obligations at December 31, 1997 and 1998 was approximately equal to the
carrying amounts at those dates.
ADVERTISING COSTS
The Company expenses advertising and promotion costs when the advertising
and promotion occurs. Advertising and promotion expense for 1996, 1997, and
1998, was $6,020, $460,132, and $2,454,366 respectively.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation," established a fair value method of
accounting for stock-based compensation. As permitted by SFAS No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related Interpretations
in accounting for its employee stock options. No compensation expense is
recognized under APB 25 if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the measurement date.
As required by SFAS No. 123, the Company discloses the pro forma effect of the
fair value method on operations in Note 7 to the financial statements. Stock
options and warrants held by non-employees are accounted for under the fair
value method of accounting.
F-9
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares outstanding during the period and diluted earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the redeemable
convertible preferred stock (using the if-converted method) and shares issuable
upon exercise of outstanding stock options and warrants, using the treasury
stock method. Common equivalent shares are excluded from the calculation if
their effect is anti-dilutive.
Diluted net loss per share for 1996, 1997 and 1998, does not include the
effect of stock options, warrants, redeemable convertible preferred stock, or
common shares to be issued as the effect of their inclusion is anti-dilutive.
The weighted average number of options and warrants to purchase common stock
using the treasury stock method for 1997 and 1998 were 180,964 and 1,325,629
shares, respectively. The weighted average number of shares of redeemable
convertible preferred stock using the if-converted method for 1997 and 1998 were
1,319,119 and 4,112,156 shares, respectively. The weighted-average number of
common shares to be issued was 65,964 for 1998.
Pro forma net loss per share for the year ended December 31, 1998, assumes
that the common stock issuable upon conversion of the outstanding redeemable
convertible preferred stock had been outstanding during the year or from the
date of issuance.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use," which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. SOP
No. 98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company has adopted the provisions of SOP 98-1 during the
six months ended June 30, 1999 with no material effect.
4. ACQUISITIONS
Effective July 1, 1998, the Company acquired all of the capital stock of
Tunes Network. The purchase consideration, including direct costs of acquisition
of $315,000, was $5,815,000, consisting of 369,428 shares of common stock with a
fair value of $8 per share, approximately $1,940,000 of assumed liabilities, and
$604,000 in cash of which $404,000 was paid subsequent to December 31, 1998. At
June 30, 1999, 6,928 shares of common stock have not been issued; such shares
will be issued in 1999. In addition up to an additional 125,000 shares of common
stock may be issuable based upon reaching minimum equity market capitalization
thresholds soon after the completion of an initial public offering by the
Company. The current fair value of these contingent shares will be recorded as
additional goodwill when the contingency is resolved and the shares become
issuable and will be amortized over the remaining estimated useful life of the
goodwill.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations have been included in the consolidated financial
statements from July 1, 1998, the effective date of the acquisition.
F-10
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming Tunes Network had
been consolidated since January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Revenue........................................................ $ 863,810 $ 2,725,641
Net loss attributable to common stockholders................... (8,392,892) (17,004,117)
Net loss per common share...................................... (5.01) (10.14)
</TABLE>
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition been made as of
January 1, 1997.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<CAPTION>
Cash............................................................ $ 7,217
<S> <C>
Accounts receivable and other assets............................ 21,616
Equipment....................................................... 124,737
Developed technology............................................ 800,000
In-process research and development............................. 100,000
Assembled work force............................................ 110,000
Goodwill........................................................ 4,651,430
----------
5,815,000
Less: Liabilities assumed....................................... (1,940,000)
----------
Cash and common stock purchase consideration.................... $3,875,000
----------
----------
</TABLE>
The acquired in-process research and development includes the value of
products in the development stage not considered to have reached technological
feasibility. In accordance with applicable accounting rules, the acquired
in-process research and development was expensed in the third quarter of 1998.
The capitalized intangible assets acquired in the acquisition of Tunes Network
including developed technology, assembled work force, and goodwill are being
amortized on a straight-line basis over the estimated useful life of two years.
In November 1997, the Company formed a wholly owned subsidiary, JAMtv
Interactive Services Corporation (JIS) and acquired certain assets from
Imagination Pilots Entertainment Inc. (IPEI) and assumed certain IPEI
liabilities (see Note 12).
F-11
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
Computer equipment..................................................................... $ 394,500 $ 1,014,741
Software............................................................................... 341,187 379,828
Furniture and equipment................................................................ 69,001 233,148
Leasehold improvements................................................................. 18,500 61,202
Other.................................................................................. 17,242 23,883
----------- ------------
840,430 1,712,802
Less: Accumulated depreciation......................................................... (131,185) (498,636)
----------- ------------
Net equipment and leasehold improvements............................................... $ 709,245 $ 1,214,166
----------- ------------
----------- ------------
</TABLE>
Depreciation expense was approximately $2,319, $156,529 and $387,569, for
the period from July 2, 1996 (inception) to December 31, 1996, and for the years
ended December 31, 1997 and 1998, respectively.
6. CAPITALIZATION
At June 30, 1999, the authorized capital stock of the Company consisted of
11,500,000 shares of common stock, $.01 par value per share, and 7,000,000
shares of preferred stock, $.01 par value per share. The Company is prohibited
from declaring or paying dividends for as long as there remains any outstanding
shares of preferred stock.
STOCK SPLIT
All common share and per share amounts in the financial statements and notes
to financial statements have been restated to reflect a 1.25-for-1 common stock
split effective prior to consummation of the Company's proposed public offering.
REORGANIZATION
On July 2, 1996, DEN was initially capitalized through the issuance of
115,053 Members' units for total proceeds of $750,000. In early 1997, the
Company adopted a Unit Option Plan and an aggregate of 28,760 options to
purchase Member units were granted at an option price of $10 per unit. In March
1997, the Company received $500,000 in bridge financing in the form of notes
payable from various investors.
On June 2, 1997, DEN was reorganized (Reorganization) into the Company,
whereby all of the Members of DEN received 10 shares of the Company's common
stock for each unit of DEN. Concurrent with the Reorganization, the $500,000
bridge financing notes payable were exchanged for 166,666 shares of Series A-I
preferred stock and each option granted under the Unit Option Plan was exchanged
for 10 stock options under the Company's 1997 Stock Option Plan.
F-12
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITALIZATION (CONTINUED)
PREFERRED STOCK
The Company's preferred stock is convertible at any time into common stock
on a 1.25-for-1 basis, subject to certain anti-dilution adjustments, and has the
same voting rights as common stock. On June 3, 2007, or the first date
thereafter that redemption is permitted under Delaware law, the Company is
required to redeem all of the outstanding shares of the preferred stock at the
following amounts: Series A-I (1,666,666 shares) at $6.00 per share; Series A-II
(200,000 shares) at $10.00 per share; Series A-III (150,000 shares) at $20.00
per share; Series A-IV (76,165 shares) at $20.00 per share; Series B (472,000
shares) at $10.00 per share; Series C (533,334 shares) at $15.00 per share; and
Series D (666,136 shares) at $20.00 per share and Series E shares (1,955,661
shares) at $20.00 per share. All shares of the preferred stock automatically
convert into shares of common stock in the event of a public offering of common
stock, which generates gross proceeds of at least $30,000,000 with a price per
share of at least $20.00. The aggregate redemption amount is approximately
$81,679,000.
In May 1999, the Company issued 76,165 shares of Series A-IV and 1,955,661
shares of Series E redeemable convertible preferred stock for aggregate
consideration of $20,318,260, including $3,995,000 of notes payable and related
accrued interest of $60,260.
The carrying amount of the preferred stock is being increased by periodic
accretions to adjust the amount recorded in the balance sheet to the mandatory
redemption amount at the redemption date.
In March and April 1999, the Company issued convertible promissory notes in
the amount of $3,995,000. The notes payable bear interest at 8% per annum and
were due March 2001. The notes payable automatically converted to 405,526 shares
of preferred stock upon the May 1999 issuance of preferred stock.
WARRANTS
In connection with a third-party agreement (the Agreement -- see Note 9),
the Company issued a warrant to purchase the Company's common stock at an
exercise price of $2.40 per share, the estimated fair value of the Company's
common stock at the date of the Agreement. The number of shares subject to the
warrant increases in the event of the occurrence of certain dilution criteria,
as defined in the Agreement. At December 31, 1997 and 1998 and June 30, 1999, a
warrant to purchase 524,030, 894,026 and 1,277,379 shares of the Company's
common stock was outstanding. The estimated fair value of the warrant, as
calculated using the minimum value method at each date of issuance, totaled
$1,811,509 at December 31, 1998 and $4,241,478 at June 30, 1999, and is being
amortized over the initial three-year term of the Agreement or earlier as the
warrant becomes exercisable. During 1997 and 1998, $9,700 and $461,929 was
included in stock compensation expense in the Company's statement of operations,
respectively. The warrant may be exercised at any time on or after certain
triggering events, including an initial public offering by the Company or the
closing of a private round of equity financing at a minimum amount as defined in
the Agreement, or upon the occurrence of certain change of control events. As a
result of the May 1999 issuance of redeemable convertible preferred stock, the
warrants became fully exercisable and the remaining fair value of the warrant
($3,779,849) was recorded as stock compensation expense in 1999.
On January 1, 1999, in connection with an affiliation agreement, the Company
issued a warrant to purchase up to 93,750 shares of common stock at an exercise
price of $8.00 per share. The warrant expires December 2008 and may be exercised
at any time on or after certain triggering events,
F-13
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITALIZATION (CONTINUED)
including an initial public offering by the Company or the closing of a private
round of equity financing at a minimum amount as defined, or December 2003. As a
result of the May 1999 issuance of redeemable convertible preferred stock, the
warrant became fully exercisable. The estimated fair value at the date of
issuance of $65,250, as calculated using the minimum value method, was recorded
as stock compensation expense in connection with this warrant during the six
months ended June 30, 1999.
In connection with the convertible promissory notes issued in 1999, warrants
to purchase 49,938 shares of common stock at an exercise price of $8.00 per
share were issued. These warrants expire upon the earlier of an initial public
offering or March 2001. The estimated fair value of the warrants, as calculated
using the present value method, is $230,000 and has been recorded in 1999 as a
reduction to the carrying value of the notes payable and an increase to
additional paid-in capital.
In May 1999, in connection with the issuance of the redeemable convertible
preferred stock, a warrant to purchase 101,644 shares of common stock at an
exercise price of $8.00 per share was issued. The estimated fair value of the
warrant, as calculated using the minimum value method at the date of issuance,
was $179,706 and was recorded as a reduction to the redeemable convertible
preferred stock and an increase to additional paid-in capital. The warrant is
exercisable until May 2004.
7. STOCK OPTION PLAN
Under the Company's 1997 Stock Option Plan (the 1997 Plan), 1,937,500 shares
of common stock are authorized for granting of options to employees, directors
and consultants of the Company as determined by the Compensation Committee of
the Board of Directors.
At December 31, 1998, 280,275 shares were available for future grants.
Options granted generally vest over four years. All options expire 10 years from
date of grant. Vesting generally accelerates upon the Company's initial public
company.
The following table summarizes activity under the 1997 Plan during the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year......................... -- $ -- 1,079,575 $ 2.11
Granted................................................ 1,079,575 $ 2.11 600,025 $ 5.85
Canceled............................................... -- $ -- 22,375 $ 5.00
---------- ----------
Outstanding, end of year............................... 1,079,575 $ 2.11 1,657,225 $ 3.42
---------- ----------
---------- ----------
Exercisable, end of year............................... 488,475 $ 1.22 1,023,829 $ 2.55
---------- ----------
---------- ----------
</TABLE>
F-14
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISABLE
- --------------- ----------- --------------- ----------------
<S> <C> <C> <C>
$ .80 359,500 8.4 359,500
2.40 556,763 8.5 315,841
4.00 346,250 8.9 260,988
6.00 246,775 9.2 87,500
8.00 147,937 9.8 --
----------- ----------------
1,657,225 8.8 1,023,829
----------- ----------------
----------- ----------------
</TABLE>
For the six months ended June 30, 1999, 315,375 options were granted under
the 1997 Plan.
Pursuant to a severance agreement at December 31, 1998, 57,163 stock options
were transferred to a company controlled by a former employee and are accounted
for under the fair value method.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options. During 1998 compensation expense of
$912,610 for the accelerated vesting of stock options held by terminated
employees was included in stock compensation expense. Had the provisions of SFAS
123 been used in accounting for employee stock options (calculated using the
minimum value method for nonpublic companies), pro forma net loss attributable
to common stockholders and pro forma net loss per common share (basic and
dilutive) would have been approximately $4,132,000 and $2.87 and $15,026,000 and
$10.17 for the years ended December 31, 1997 and 1998, respectively.
The weighted-average fair value of options granted during 1997 and 1998 is
estimated at $.49 and $1.33, respectively. The pro forma 1997 and 1998 net loss
impact and the weighted-average fair value of options granted during 1997 and
1998 was estimated using the minimum value option pricing model with a risk-free
interest rate of 6%, an expected life of 4.5 years (5 years in 1997), and
assuming no dividends.
In February 1999 the Company adopted the 1999 Stock Option Plan (the 1999
Plan). The number of shares of common stock subject to the 1999 Plan is 625,000
shares. As of June 30, 1999 there were 422,125 options outstanding under the
1999 Plan.
8. RETIREMENT PLAN
Effective June 1, 1998, the Company established a defined contribution plan
that includes an employee 401(k) contribution provision covering substantially
all employees. The plan permits eligible employees to make voluntary
contributions on a pretax basis up to a certain limit. The Company does not
currently make contributions to the plan.
F-15
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
OPERATING LEASES
The Company leases certain office facilities and equipment under various
operating leases. The future minimum lease payments under noncancelable
operating leases having an initial term longer than one year at December 31,
1998, are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 281,233
2000.............................................. 223,582
2001.............................................. 227,131
2002.............................................. 96,035
2003.............................................. --
Thereafter........................................ --
---------
$ 827,981
---------
---------
</TABLE>
Rent expense for the period July 2, 1996 (inception) to December 31, 1996
and the years ended December 31, 1997 and 1998, was approximately $5,000,
$121,469, and $245,904, respectively.
LICENSE AGREEMENT
In 1997, the Company entered into an agreement with a third party (the
Agreement) pursuant to which the Company was granted certain rights with respect
to brand name, trademarks, URL, historical, current and future content,
advertising and promotion services, and other services. Under the terms of the
Agreement, the Company granted warrants (see Note 6) and is required to pay an
annual license fee of $1,000,000 (paid quarterly in equal installments) for a
period of three years. Upon a first and second renewal term as defined in the
Agreement, the Company would have to pay an annual license fee of $1,250,000 and
$1,500,000, respectively. In addition to the license fee, the Company was also
required to pay a $1,500,000 Trigger License Fee as a result of the May 1999
issuance of redeemable convertible preferred stock.
The rights granted to the Company under the terms of the Agreement extend
for an additional five years upon the successful completion of either a public
or private offering of the Company's securities (trigger events) in which the
amount raised is no less than $15,000,000. The Agreement extends for a further
period of five years based on the Company or its acquirer having publicly traded
securities with a market capitalization of no less than $150,000,000. The
ultimate number of shares issued pursuant to the warrant (see Note 6) will be
determined by: (a) the extent of intervening equity financings prior to either
of the trigger events, and (b) the mutual further agreement of the parties.
OTHER
The Company has entered into various Web site tenancy agreements that
provide for the Company to make payments of at least $1,500,000 during 1999.
F-16
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL LEASES
Total office and computer equipment under capital leases was $240,193, less
accumulated amortization of $36,731, at December 31, 1998. Amortization is
included with depreciation expense. Future minimum lease payments for the assets
under capital leases are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 115,806
2000.............................................. 96,999
2001.............................................. 63,455
2002.............................................. 13,379
2003.............................................. 4,445
Thereafter........................................ --
---------
Total minimum lease payments...................... 294,084
Less: Amount representing interest................ (39,912)
---------
Present value of net minimum lease payments....... $ 254,172
Current portion, included in other accrued
expenses........................................ (93,665)
---------
Long-term obligations at December 31, 1998........ $ 160,507
---------
---------
</TABLE>
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been provided for the net deferred tax asset because of uncertainty regarding
the Company's ability to generate taxable income prior to the expiration of the
carryforward period.
Significant components of the Company's deferred income tax assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 5,734,927 $ 941,300
Stock compensation expense...................................... 539,853 --
Research and development credit carryforward.................... 80,000 --
Accrued compensation............................................ 28,863 8,000
Other........................................................... 38,740 45,700
------------- -----------
Gross deferred tax assets....................................... 6,422,383 995,000
Deferred tax liability:
Intangible amortization (266,174) --
------------- -----------
Net deferred tax assets........................................... 6,156,209 995,000
------------- -----------
Less: Valuation allowance......................................... (6,156,209) (995,000)
------------- -----------
$ -- $ --
------------- -----------
------------- -----------
</TABLE>
F-17
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The valuation allowance for net deferred tax assets increased $5,161,209 as
a result of the net changes in temporary differences including a $529,554
increase related to the acquisition of Tunes Network.
At December 31, 1998, the Company had net operating loss carryforwards
totaling approximately $14,705,000, which expire beginning in 2011. Based on the
Internal Revenue Code regulations relating to changes in the ownership of the
Company, utilization of the net operating loss carryforwards may be subject to
annual limitations. Because the Company operated as a limited liabilty company
until June 2, 1997, no income taxes were provided for as of December 31, 1996.
12. RELATED PARTY TRANSACTIONS
The Company incurred various operating expenses through JAM Productions Ltd.
(JPL). The Company reimbursed JPL for these expenses, which totaled
approximately $24,000, $90,000, and $65,000 in 1996, 1997 and 1998,
respectively. A stockholder of JPL was the Company's Chairman of the Board
through January 1999.
The Company leases office space from an entity in which the Company's chief
executive officer has an ownership interest. The monthly lease payments are
approximately $18,000 and increase approximately 3% per year.
Prior to 1998, the Company was charged for various services by Imagination
Pilots Entertainment Inc. (IPEI), whose majority stockholder is the Company's
chief executive officer. These services included rent of office facilities, use
of personnel, and other various operating activities. Expenses related to these
services were approximately $75,000 and $95,000 in 1996 and 1997, respectively.
During 1997, the Company purchased certain assets, primarily computer and
other equipment, software, certain intellectual property, and the rights to a
contract for the development of CD-ROM titles, from IPEI and Imagination Pilots,
Inc. (IPI), whose majority stockholder is the Company's chief executive officer,
and assumed certain IPEI and IPI liabilities, for a total cash purchase price of
$370,000. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Computer and other equipment and software......................... $ 309,000
In process research and development............................... 95,000
---------
404,000
Less: Liabilities assumed......................................... (34,000)
---------
Cash.............................................................. $ 370,000
---------
---------
</TABLE>
F-18
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
(UNAUDITED)
The following unaudited pro forma financial information (the "Unaudited Pro
Forma Combined Financial Information") has been derived from the application of
pro forma adjustments to the Company's historical consolidated financial
statements included elsewhere herein. The Unaudited Pro Forma Combined Financial
Information gives effect to (i) the acquisition of Tunes Network, Inc. which was
effective in July 1998; (ii) the conversion of all outstanding preferred stock
into common stock upon consummation of the Company's initial public offering;
(iii) the issuance of additional common stock related to the acquisition of
Tunes Network, Inc.; (iv) the 1.25-for-1 common stock split to become effective
prior to consummation of the Company's proposed public offering; and (v) the
amortization related to a license fee payment made as a result of the issuance
of preferred stock in May 1999, as if such events had occurred on June 30, 1999,
for purposes of the unaudited pro forma balance sheet and at the beginning of
the relevant period for purposes of the unaudited pro forma statements of
operations for the year ended December 31, 1998 and the six months ended June
30, 1999. The pro forma adjustments are described in the accompanying notes. The
Unaudited Pro Forma Financial Information is presented for information purposes
only and does not purport to present what the Company's financial position or
results of operations would actually have been if the aforementioned events had
occurred on the dates specified or to project the Company's financial position
or results of operations at any future date or for any future periods. The
Unaudited Pro Forma Financial Information should be used in conjunction with the
Company's historical consolidated financial statements and the notes thereto
included elsewhere herein.
F-19
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TUNES.COM (1) (2)
HISTORICAL TUNES NETWORK ADJUSTMENTS PRO FORMA
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Advertising...................................... $ 970,189 $ 13,273 $ 983,462
Other............................................ 1,514,466 227,713 1,742,179
-------------- ------------- ------------- --------------
Total revenue.................................... 2,484,655 240,986 -- 2,725,641
Cost of revenue.................................... 4,045,056 229,122 189,474(a) 4,463,652
-------------- ------------- ------------- --------------
Gross profit (deficit)............................. (1,560,401) 11,864 (189,474) (1,738,011)
Operating expenses:
Operations and development....................... 1,880,480 440,208 2,320,688
Sales and marketing.............................. 4,034,115 2,878 4,036,993
General and administrative....................... 2,836,678 238,530 3,075,208
Depreciation and amortization.................... 1,777,931 57,736 1,390,358(b)
875,000(c) 4,101,025
Stock compensation............................... 1,374,539 203,628 1,578,167
-------------- ------------- ------------- --------------
Total operating expenses........................... 11,903,743 942,980 2,265,358 15,112,081
-------------- ------------- ------------- --------------
Loss from operations............................... (13,464,144) (931,116) (2,454,832) (16,850,092)
Other income (expense)............................. 427,696 (76,673) -- 351,023
-------------- ------------- ------------- --------------
Net loss........................................... $ (13,036,448) $ (1,007,789) $ (2,454,832) $ (16,499,069)
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Basic and diluted net loss per common share........ $ (2.89)
--------------
--------------
Weighted average number shares used in per share
calculation...................................... 5,715,119
--------------
--------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-20
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
TUNES.COM (2)
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ----------- --------------
<S> <C> <C> <C>
Revenue:
Advertising................................................. $ 1,371,867 $ 1,371,867
Other....................................................... 626,122 626,122
-------------- ----------- --------------
Total revenue................................................. 1,997,989 1,997,989
Cost of revenue............................................... 2,002,632 89,202(a) 2,091,834
-------------- ----------- --------------
Gross deficit................................................. (4,643) (89,202) (93,845)
Operating expenses:
Operations and development.................................. 1,781,313 1,781,313
Sales and marketing......................................... 3,143,753 3,143,753
General and administrative.................................. 2,003,617 2,003,617
Depreciation and amortization............................... 1,726,121 583,333(c) 2,309,454
Stock compensation.......................................... 3,853,663 3,853,663
-------------- ----------- --------------
Total operating expenses...................................... 12,508,467 583,333 13,091,800
-------------- ----------- --------------
Loss from operations.......................................... (12,513,110) (672,535) (13,185,645)
Other income.................................................. 46,673 46,673
-------------- ----------- --------------
Net loss...................................................... $ (12,466,437) (672,535) $ (13,138,972)
-------------- ----------- --------------
-------------- ----------- --------------
Basic and diluted net loss per common share................... $ (1.79)
--------------
--------------
Weighted average number shares used in per share
calculation................................................. 7,342,671
--------------
--------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-21
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
TUNES.COM (1)
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 14,229,074 $ $ 14,229,074
Accounts receivable...................................... 374,424 374,424
Prepaid expenses and other current assets................ 1,494,043 1,494,043
Restricted investment.................................... 500,000 500,000
-------------- -------------- --------------
Total current assets................................... 16,597,541 16,597,541
Equipment and leasehold improvements....................... 1,824,452 1,824,452
Less: Accumulated depreciation............................. (638,420) (638,420)
-------------- -------------- --------------
1,186,032 1,186,032
Goodwill, net.............................................. 2,325,710 1,750,000(b) 4,075,710
Intangibles, net........................................... 399,992 399,992
License agreement, net..................................... 1,480,769 -- 1,480,769
Other...................................................... 37,969 37,969
-------------- -------------- --------------
Total assets............................................... $ 22,028,013 1,750,000 $ 23,778,013
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 1,069,643 $ -- $ 1,069,643
Accrued compensation..................................... 352,000 352,000
Deferred revenue......................................... 178,683 178,683
Other accrued expenses and current liabilities........... 1,251,375 1,251,375
-------------- -------------- --------------
Total current liabilities................................ 2,851,701 -- 2,851,701
Long term obligations...................................... 121,193 121,193
Redeemable convertible preferred stock..................... 42,186,358 (42,186,358 (a)
Stockholders' equity (deficit):
Common stock............................................. 18,060 71,500(a)
1,250(b) 90,810
Additional paid-in capital............................... 9,290,708 42,114,858(a)
1,748,750(b) 53,154,316
Common stock to be issued................................ 55,420 55,420
Accumulated deficit...................................... (32,495,427) (32,495,427)
-------------- -------------- --------------
Total stockholders' equity (deficit)....................... (23,131,239) 43,936,358 20,805,119
-------------- -------------- --------------
Total liabilities and stockholders' equity (deficit)....... $ 22,028,013 $ 1,750,000 $ 23,778,013
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-22
<PAGE>
TUNES.COM INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
A. Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1998, and the six months ended June 30, 1999. The Unaudited Pro
Forma Combined Statements of Operations assume all transactions had occurred
at the beginning of the periods presented.
(1) This column represents the 1998 historical results of operations for
Tunes Network from the beginning of the year until the effective date of
acquisition, July 1, 1998.
(2) This column represents the pro forma adjustments applied to the
Company's historical consolidated statements of operations for the year
ended December 31, 1998, and the six months ended June 30, 1999, and
includes the following:
(a) To record the amortization of a $1,500,000 license fee over the
remaining term of the license agreement, as extended. This payment
was triggered by the May 1999 issuance of preferred stock pursuant to
the license agreement.
(b) To record six months of amortization of goodwill ($4,651,430),
developed technology ($800,000), and assembled work force ($110,000)
intangibles, recorded in connection with the acquisition of Tunes
Network, over the estimated useful life of 24 months.
(c) To record amortization of additional goodwill ($1,750,000) recorded
in connection with the assumed issuance of 125,000 shares as
additional consideration for the acquisition of Tunes Network upon
reaching certain minimum equity market capitalization thresholds soon
after the completion of an initial public offering by the Company.
Additional goodwill has been calculated based on an assumed initial
public offering price of $14.00 per share. Actual goodwill will be
based on the trading price of the Company's common stock during the
three-month period following the Company's planned initial public
offering.
B. Unaudited Pro Forma Combined Balance Sheet as of June 30, 1999.
(1) This column represents the pro forma adjustments applied to the
Company's historical consolidated balance sheet as of June 30, 1999, and
includes the following as if it had occurred at that date:
(a) To record the conversion of 5,719,962 shares of preferred stock into
7,149,953 shares of common stock.
(b) To record as additional consideration for the acquisition of Tunes
Network, the issuance of 125,000 shares of common stock, which are
issuable upon reaching certain minimum equity market capitalization
thresholds soon after the completion of an initial public offering by
the Company.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tunes Network, Inc.
We have audited the accompanying balance sheets of Tunes Network, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tunes Network, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the years then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
June 22, 1998
F-24
<PAGE>
TUNES NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------ JUNE 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................. $ -- $ -- $ 7,217
Accounts receivable................................................... 791 13,852 3,841
Advances to shareholders.............................................. 10,220 -- --
Prepaids and other current assets..................................... 12,474 -- 922
----------- ------------ -------------
Total current assets.................................................... 23,485 13,852 11,980
Property and equipment, net............................................. 186,240 172,365 124,737
Other assets............................................................ 5,243 13,615 16,853
----------- ------------ -------------
Total assets............................................................ $ 214,968 $ 199,832 $ 153,570
----------- ------------ -------------
----------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft........................................................ $ 9,305 $ 3,309 $ --
Accounts payable...................................................... 169,639 251,177 371,799
Accrued compensation.................................................. 222,383 536,557 317,121
Other accrued expenses................................................ 6,586 119,969 129,158
Payables to officers.................................................. 97,816 271,376 275,146
Current obligations under capital leases.............................. 23,701 40,984 44,123
Current obligations under revolving line of credit with a related
party............................................................... -- 185,000 185,000
Convertible note payable to a related party........................... -- 50,000 505,000
Notes payable to related parties...................................... -- 33,465 33,465
Note payable.......................................................... -- 15,000 31,726
Advances from Tunes.com............................................... -- -- 260,366
----------- ------------ -------------
Total current liabilities............................................... 529,430 1,506,837 2,152,904
Obligations under capital leases, net of current portion................ 91,895 78,803 63,005
Obligations under revolving line of credit with a related party......... 135,000 -- --
Notes payable to related parties, net of current portion................ 11,490 -- --
Bridge financing........................................................ -- 465,000 --
Commitments
Stockholders' equity (deficit):
Common stock, no par value; 10,000,000 shares authorized; 1,884,000,
5,940,500 and 7,875,955 shares issued and outstanding at December
31, 1996 and 1997 and June 30, 1998, respectively................... 21,861 351,019 1,147,277
Accumulated deficit................................................... (574,708) (2,201,827) (3,209,616)
----------- ------------ -------------
Total stockholders' equity (deficit).................................... (552,847) (1,850,808) (2,062,339)
----------- ------------ -------------
Total liabilities and stockholders' equity (deficit).................... $ 214,968 $ 199,832 $ 153,570
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-25
<PAGE>
TUNES NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- ------------- SIX MONTHS
ENDED
JUNE 30,
1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue............................................................. $ 62,693 $ 299,116 $ 240,986
Cost of revenue..................................................... 12,048 247,798 229,122
----------- ------------- ---------------
50,645 51,318 11,864
Operating expenses:
Operating and development......................................... 267,257 737,873 440,208
Sales and marketing............................................... 203,336 344,155 2,878
General and administrative........................................ 190,966 597,033 499,894
----------- ------------- ---------------
661,559 1,679,061 942,980
----------- ------------- ---------------
Loss from operations................................................ (610,914) (1,627,743) (931,116)
Other income, net................................................... -- 10,000 (3,591)
Interest expense.................................................... (21,137) (41,661) (73,082)
----------- ------------- ---------------
Loss from continuing operations..................................... (632,051) (1,659,404) (1,007,789)
Income from discontinued operations (income from operations --
$213,773 and $5,464 in 1996 and 1997, respectively; income from
disposal -- $26,821 in 1997)....................................... 213,773 32,285 --
----------- ------------- ---------------
Net loss............................................................ $ (418,278) $ (1,627,119) $ (1,007,789)
----------- ------------- ---------------
----------- ------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-26
<PAGE>
TUNES NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK SHAREHOLDERS
------------------------ ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................... 1,771,000 $ 18,788 $ (156,430) $ (137,642)
Issuance of common stock to employees and third parties in
exchange for services...................................... 113,000 3,073 -- 3,073
Net loss..................................................... -- -- (418,278) (418,278)
---------- ------------ ------------- -------------
Balance at December 31, 1996................................... 1,884,000 21,861 (574,708) (552,847)
Issuance of common stock to employees and third parties in
exchange for services...................................... 4,056,500 329,158 -- 329,158
Net loss..................................................... -- -- (1,627,119) (1,627,119)
---------- ------------ ------------- -------------
Balance at December 31, 1997................................... 5,940,500 351,019 (2,201,827) (1,850,808)
Issuance of common stock to employees and third parties in
exchange for services (unaudited)............................. 989,713 433,810 -- 433,810
Exercise of stock options (unaudited).......................... 660,092 237,448 -- 237,448
Conversion of notes payable to common stock (unaudited)........ 285,650 125,000 125,000
Net loss (unaudited)........................................... -- -- (1,007,789) (1,007,789)
---------- ------------ ------------- -------------
Balance at June 30, 1998 (unaudited)........................... 7,875,955 $ 1,147,277 $ (3,209,616) $ (2,062,339)
---------- ------------ ------------- -------------
---------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-27
<PAGE>
TUNES NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- ------------ SIX MONTHS
ENDED
JUNE 30,
1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................................. $ (418,278) $ (1,627,119) $ (1,007,789)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 60,826 105,868 57,736
Common stock issued to employees and third parties in exchange for
services.......................................................... 3,073 329,158 433,810
Stock compensation expense.......................................... -- -- 203,628
Changes in operating assets and liabilities:
Accounts receivable............................................... (791) (13,061) 10,011
Advances to shareholders.......................................... (10,220) 10,220 --
Prepaids and other current assets................................. (8,536) 12,474 (922)
Other assets...................................................... (9,586) (8,372) (3,238)
Accounts payable.................................................. 106,074 81,538 120,622
Accrued compensation.............................................. 139,472 314,174 (219,436)
Other accrued expenses............................................ 2,322 113,383 9,189
---------- ------------ ---------------
Net cash used in operating activities................................. (135,644) (681,737) (396,389)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................................... (28,650) (66,014) (10,108)
---------- ------------ ---------------
Net cash used in investing activities................................. (28,650) (66,014) (10,108)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft........................................................ 7,985 (5,996) (3,309)
Proceeds from payables to officers.................................... 145,385 316,700 3,770
Repayment of payables to officers..................................... (47,569) (143,140) --
Proceeds from revolving line of credit with a related party........... 135,000 50,000 --
Proceeds from convertible note payable to a related party............. -- 50,000 115,000
Proceeds from notes payable to related parties........................ -- 25,000 --
Repayment of notes payable to related parties......................... (7,260) (3,025) 16,726
Proceeds from notes payable........................................... -- 15,000 --
Proceeds from bridge financing........................................ -- 465,000 --
Repayment of lease obligations........................................ (69,247) (21,788) (12,659)
Proceeds from exercise of stock options............................... -- -- 33,820
Advances from Tunes.com............................................... -- -- 260,366
---------- ------------ ---------------
Net cash provided by financing activities............................. 164,294 747,751 413,714
---------- ------------ ---------------
Net increase in cash and cash equivalents............................. -- -- 7,217
Cash and cash equivalents at beginning of period...................... -- -- --
---------- ------------ ---------------
Cash and cash equivalents at end of period............................ $ -- $ -- $ 7,217
---------- ------------ ---------------
---------- ------------ ---------------
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................................. $ 15,735 $ 24,571 $ 15,813
---------- ------------ ---------------
---------- ------------ ---------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment under capital lease
obligations....................................................... $ 112,934 $ 25,979 $ --
---------- ------------ ---------------
---------- ------------ ---------------
Notes payable converted to shares of common stock................... $ -- $ -- $ 125,000
---------- ------------ ---------------
---------- ------------ ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-28
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
1. NATURE OF BUSINESS
Tunes Network, Inc. (the "Company"), a California corporation, formerly Surf
Communications, Inc., was incorporated on April 19, 1994 as a provider of
Internet access services. In 1996, the Company expanded its strategy to include
music entertainment. The Company is currently a developer of music-related Web
site technology and content and an online retailer of CDs. The Company contracts
with outside warehouses for fulfillment services to deliver products to
customers and, therefore, the Company maintains no inventories. The Company
sells its products and services primarily to customers in the United States.
In December 1997, the Company discontinued its Internet access services
business and sold this business. The operations of the Internet access services
business have been accounted for as a discontinued operation.
2. BASIS OF PRESENTATION
The financial statements of the Company as of June 30, 1998 and for the
six-month period ended June 30, 1998 contain all adjustments and accruals
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial position and
operating results of the interim period presented.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets, generally
three years. Assets under capital leases are amortized using the straight-line
method over the shorter of the estimated useful lives or the remaining lease
terms, generally three years.
REVENUE RECOGNITION
Revenue from CD sales, which consists primarily of recorded music sold via
the Internet, includes outbound shipping and handling charges and are recognized
when the products are shipped. Allowances for credit losses and for estimated
returns are recorded upon recognition of revenue. Actual credit losses and
returns have been insignificant to date. Revenue from services, including music
encoding, and Web site development services is recognized after the services
have been performed and collection of the related receivable is considered
probable.
F-29
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from one customer accounted for 80% of revenues for the year ended
December 31, 1996. Revenue from a different customer accounted for 27% of
revenues for the year ended December 31, 1997.
The Company does not perform credit evaluations and does not require
collateral from customers.
OPERATING AND DEVELOPMENT
Costs to develop the Company's products are expensed as incurred in
accordance with Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," which established accounting and reporting
standards for research and development costs.
Operating and development expenses consist principally of payroll and
related expenses for development, editorial, and network operations personnel
and consultants and expenses for systems and telecommunications infrastructure.
INTERNALLY DEVELOPED SYSTEMS AND SOFTWARE
The costs to develop internal systems and software, primarily payroll and
related expenses for development and design of software, are charged to expense
as incurred.
DEPENDENCE ON SUPPLIERS
The Company's primary provider of order fulfillment for recorded music
titles is Valley Record Distributors ("Valley"). The Company has no fulfillment
operation or facility of its own and, accordingly, is dependent upon maintaining
its existing relationship with Valley or establishing a new fulfillment
relationship with one of the few other fulfillment operations. There can be no
assurance that the Company will maintain its relationship with Valley beyond the
term of its existing two-year agreement, which expires in September 1998, or
that it will be able to find an alternative, comparable vendor capable of
providing fulfillment services on terms satisfactory to the Company, should its
relationship with Valley terminate. Valley accounted for 79% of the cost of
sales for the years ended 1996 and 1997. The Company has the right to offset
accounts receivable from and accounts payable to Valley. As a result, the
accounts receivable were used to reduce the accounts payable in the accompanying
balance sheet.
4. DISCONTINUED OPERATION
In September 1997, the Company decided to discontinue the Internet access
services line of business and sold that line of business in December 1997 for
$25,000. Income on disposal included the $25,000 cash proceeds and operating
income from September 1997 through December 1997 of $1,821. Revenues from the
Internet access services line of business were $450,000 and $156,618 in 1996 and
1997, respectively. No assets or liabilities were sold as a result of this
disposition. The results of operations of the Internet access services line of
business is shown as a discontinued operation for all periods presented.
F-30
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Computer software and equipment...................................... $ 241,278 $ 324,172
Furniture and fixtures............................................... 8,915 18,014
---------- -----------
250,193 342,186
Less accumulated depreciation and amortization....................... (63,953) (169,821)
---------- -----------
Property and equipment, net.......................................... $ 186,240 $ 172,365
---------- -----------
---------- -----------
</TABLE>
Total property and equipment under capital leases was $186,877 and $212,856,
less accumulated amortization of $42,268 and $98,616, at December 31, 1996 and
1997, respectively.
6. DEBT
PAYABLES TO OFFICERS
Payables to officers represent amounts loaned to the Company by officers for
purposes of sustaining the Company's operations. Payables for $61,664 and
$218,474 at December 31, 1996 and 1997, respectively, bear interest at 15% per
annum. The remaining payables do not bear interest. Payables are repaid as
Company funds are available.
REVOLVING LINE OF CREDIT
In April 1996, the Company entered into a $50,000 revolving line-of-credit
agreement (the "Agreement") with an officer of the Company. This line of credit
was increased to $135,000 in October 1996, $185,000 in January 1997 and $200,000
in May 1997. The Agreement bears interest at 10.14% and 9.89% at December 31,
1996 and 1997, respectively, per annum. Interest is payable monthly. The
Agreement expires on June 20, 1998, at which time all outstanding interest and
principal under the Agreement will become due and payable. Additionally, should
the Company receive funding or achieve a significant income event before June
20, 1998, the balance outstanding under this Agreement shall become due and
payable. Borrowings outstanding under the Agreement are collateralized by
substantially all of the Company's assets not otherwise encumbered and are
personally guaranteed by an officer of the Company.
CONVERTIBLE NOTE PAYABLE TO A RELATED PARTY
In November 1997, the Company entered into an agreement with an investor,
who is an advisory board member of the Company, under which it borrowed $50,000
issued under a convertible promissory note, with interest at 12% per annum.
Under the terms of the agreement, principal and interest are due and payable on
the earlier of 12 months from the date of the agreement, or, in the event of a
default, amounts are declared due and payable by the investor, unless such
amounts are automatically converted into equity securities of the Company
pursuant to the terms of the agreement.
F-31
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
6. DEBT (CONTINUED)
The note will convert into equity upon the closing of the next equity
financing, completed before September 30, 1998, in which the Company receives
aggregate offering proceeds valued by the Company at more than $250,000. At such
time, the investor shall receive, in full satisfaction of amounts owing under
the note, a number of equity securities equal to the quotient of the amount of
the loan divided by 72.5% of the price per equity security paid by participants
in the next equity financing. The investor will be entitled to all rights
granted to participants in the next equity financing.
Additionally, upon the closing of the next equity financing, the investor
shall receive an option to purchase a certain number of shares of common stock
of the Company based on the pre-money valuation of the next equity financing. In
no event shall the number of shares of common stock under the option be less
than 50,000. The option will be fully vested upon the closing of the next equity
financing.
In the event of any liquidation, dissolution or winding up of the Company,
prior and in preference to any distribution of any of the assets of the Company
to any investor or to the holders of any equity security, the investors will be
entitled to, at the investors' election, either a repayment of all amounts due
under the loan, or to convert the principal amount into the most senior equity
securities then authorized by the Articles of Incorporation of the Company at a
price per share that would cause the Company to be valued at $3,500,000.
NOTES PAYABLE TO RELATED PARTIES
In December 1995, the Company entered into a promissory note (the "Note")
for $18,750 with the father of an officer of the Company. The Note bears
interest at 10% per annum. Interest and principal are due monthly in equal
monthly payments of $605 commencing on January 1, 1996. The balance of this
Note, including accrued interest, shall be due and payable in full on or before
December 1, 1998. Borrowings outstanding under the Note are collateralized by
substantially all of the Company's assets not otherwise encumbered (see Note
11).
In December 1997, the Company entered into a promissory note (the "Note")
for $25,000 with an investor. The Note bears interest at 6% per annum. Interest
and principal are due on or before May 22, 1998 (see Note 11).
NOTES PAYABLE
In November 1997, the Company entered into a promissory note (the "Note")
for $15,000 with a lender. The Note bears interest at the prime rate plus 2%
(10.5% at December 31, 1997) per annum. Interest and principal are due and
payable on the earlier of the date on which the lender shall purchase all or
substantially all of the assets of the borrower or January 30, 1998 (see Note
11).
BRIDGE FINANCING
In 1997, the Company entered into bridge financing agreements with certain
investors under which it borrowed $465,000. Under the terms of the agreements,
upon the closing of the next equity financing as defined in the agreements, in
which the Company receives aggregate offering proceeds valued by the Company at
more than $1,000,000, the investors shall receive a number of equity securities
equal to the quotient of the amount of the funds delivered by the investors
divided by 50% of the price per equity
F-32
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
6. DEBT (CONTINUED)
security paid by participants in the next equity financing. The investors will
be entitled to all rights granted to participants in the next equity financing.
In March 1998, the Company entered into bridge financing agreements with
certain investors under which it borrowed $115,000 issued under convertible
promissory notes, with interest at 6% per annum (see Note 11).
7. LEASE COMMITMENTS
If the investors have not received equity securities pursuant to this
agreement before the closing of a corporate sale transaction, as defined in the
agreement, the investors shall receive from the Company the most senior equity
securities then authorized by the Articles of Incorporation of the Company
valued at an amount equal to 200% of the amount of the funds delivered by the
investors.
The Company leases certain office facilities under noncancelable operating
leases. The Company leases equipment under capital leases. Interest rates on
capital leases range from 12% to 21%.
Future minimum lease payments under capital leases and noncancelable
operating leases with initial terms of one year or more at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1998.................................................................. $ 53,565 $ 28,200
1999.................................................................. 52,481 --
2000.................................................................. 34,416 --
2001.................................................................. 1,284 --
---------- -----------
Total minimum lease payments.......................................... 141,746 $ 28,200
-----------
-----------
Less amount representing interest..................................... 21,959
----------
Present value of net minimum lease payments........................... 119,787
Less current portion.................................................. 40,984
----------
$ 78,803
----------
----------
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $22,953 and
$56,468, respectively.
8. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
Common stock represents the deemed fair value of services contributed to the
Company by employees and third parties in 1996 and 1997. In November 1997, all
employee stockholders of the Company entered into restricted common stock
purchase agreements under which all common shares granted to such employee
stockholders through October 1997 were vested 25% on October 20, 1997 and vest
1/48 per month thereafter. Additionally, such shares will vest immediately upon
the sale of substantially all of the Company's assets. At December 31, 1997,
5,336,407 common shares were vested.
F-33
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
9. INCOME TAXES
The Company uses the liability method to account for income taxes as
required by Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards.................................................................. $ 94 $ 530
Research and development credit carryforwards..................................................... -- 80
Accrued compensation.............................................................................. -- 215
--- ---------
Total deferred tax assets......................................................................... 94 825
Valuation allowance............................................................................... (94) (825)
--- ---------
Net deferred tax assets........................................................................... $ -- $ --
--- ---------
--- ---------
</TABLE>
The valuation allowance increased by $94,000 and $731,000 in the years ended
1996 and 1997, respectively.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,300,000 which expire in the tax
years 2011 through 2012. The Company has federal tax credit carryforwards of
approximately $50,000 which expire in the year 2012.
Because of the "change in ownership" provisions of the Internal Revenue Code
of 1986, a portion of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce future income tax liabilities.
10. DISPUTE SETTLEMENT
In March 1998, a former consultant of the Company filed a suit against the
Company. In May 1998, the Company entered into a settlement agreement with the
former consultant. In connection with this settlement, the former consultant
received $31,989 for wages earned during employment with the Company from
January 1998 to March 1998, and an option, effective upon the time of the
acquisition of the Company by JAMtv, to purchase 445,834 shares of common stock
of the Company at $.10 per share which was, as required under the terms of the
agreement, automatically exercised in full upon the effective time of the
acquisition (see Note 11).
11. SUBSEQUENT EVENT
Effective July 1, 1998, substantially all of the Company's business was
merged with and into Tunes Acquisition Corp., a wholly owned subsidiary of
Tunes.com Inc, formerly JAMtv Corporation. In connection with this merger, all
outstanding debt was assumed by Tunes.com Inc. and repaid in 1998.
F-34
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
12. RISKS ASSOCIATED WITH THE YEAR 2000 (UNAUDITED)
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include
third-party software and hardware technology.
F-35
<PAGE>
[INSIDE BACK COVER]:
Call-outs for back insider cover, which has rollingstone.com logo and two screen
shots, one of Big Video section and another of Download This/MP3s & More:
1. WE WANT YOUR MP3
Aspiring rock stars can create their own artist or band home page on
rollingstone.com, complete with biographies, photos and artwork, news,
lyrics, links and up to five uploaded songs.
2. CHOOSE YOUR FORMAT
We support downloadable music formats, such as Windows Media, MP3, Liquid
Audio and a2b Music, and let undiscovered artists easily upload their
digital tracks.
3. FAME AND FORTUNE AWAIT
ROLLING STONE and THE SOURCE editors will listen to selected uploaded songs
and pick the best of them as featured downloads. This is where music fans
get an intelligent head start on sorting through vast collections of
downloadable tracks.
4. SEARCH FOR THE FAMOUS ONES, FIND THE UNDISCOVERED ONES
Fans can look for artists and bands they know by name or search for the ones
they don't know yet, either by genre or by music influences.
5. SCREAMIN', STREAMIN' VIDEOS
Users with a high-speed Internet connection can click on and watch Britney's
video.
6. VIDEO ON DEMAND
For users with a regular modem, we've got more than 1,000 music videos at
their speed, available when they want to watch them.
Ad copy for inside front cover, before fold out:
[Reserved.]
<PAGE>
- -----------------------------------
- -----------------------------------
4,000,000 SHARES
COMMON STOCK
[LOGO]
------
P R O S P E C T U S
, 1999
---------
SALOMON SMITH BARNEY
SG COWEN
U.S. BANCORP PIPER JAFFRAY
- -----------------------------------
- -----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses that are payable by us
in connection with the registration, sale and distribution of the common stock
being registered. Except for the SEC registration fee, NASD filing fee and
Nasdaq National Market listing fee, all of the amounts are estimates of our
costs. The table does not include underwriting discounts and commissions.
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
SEC registration fee.................................................................................. $ 19,182
NASD filing fee....................................................................................... 7,400
Nasdaq National Market listing fee.................................................................... 90,000
Printing expenses..................................................................................... 200,000
Legal fees and expenses............................................................................... 300,000
Accounting fees and expenses.......................................................................... 150,000
Blue Sky fees and expenses............................................................................ 10,000
Transfer agent and registrar fees..................................................................... 10,000
Miscellaneous expenses................................................................................ 13,418
----------
Total............................................................................................. $ 800,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of our certificate of incorporation is consistent with Section
102(b)(7) of the Delaware General Corporation Law, which generally permits a
company to include a provision limiting the personal liability of a director in
the company's certificate of incorporation. Subject to several limitations,
Article X eliminates the personal liability of our directors to us and our
stockholders for monetary damages for breaches of fiduciary duty as a director.
However, Article X does not eliminate director liability: (i) for breaches of
the duty of loyalty to us and our stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for transactions from which a director derives improper personal
benefit; and (iv) under Section 174 of the Delaware General Corporation Law.
Section 174 makes directors personally liable for unlawful dividends and stock
repurchases or redemptions and expressly sets forth a negligence standard with
respect to such liability. While Article X protects our directors from awards
for monetary damages for breaches of their duty of care, it does not eliminate
their duty of care. The limitations in Article X have no effect on claims
arising under the federal securities laws.
Article X also authorizes us to indemnify our directors to the fullest
extent permitted under Delaware General Corporation Law, which is described in
part below. In addition, with limitations, Section 6.1 of our bylaws provides
for indemnification of any of our past, present and future officers and
directors against liabilities and reasonable expenses incurred in any criminal
or civil action or administrative or investigative proceeding by reason of such
person's being or having been our officer or director or an officer or director
of any other corporation which such person serves as such at our request.
Pursuant to Delaware law, indemnification is limited to officers and directors
who have acted in good faith and in a manner they reasonably believed to be in
our best interests or not opposed to our best interests and, with respect to any
criminal proceeding, had no reasonable cause to believe their conduct was
illegal. Any questions regarding whether the current officer or director has met
the required standards of conduct are to be answered by: (i) a majority of our
disinterested directors; (ii) by a committee of disinterested directors
designated by a majority vote of the disinterested
II-1
<PAGE>
directors; (iii) if there are no disinterested directors or if the directors so
direct, a written opinion of independent legal counsel selected by our board of
directors or (iv) our stockholders. Section 6.1 requires us to pay the person's
expenses for the defense of any such proceeding before the final disposition,
provided such person undertakes to repay all advanced funds if the person is
ultimately determined to be liable. Indemnification rights under Article X are
non-exclusive. Rights under Section 6.1 are separable, and if any part of that
section is determined to be invalid for any reason, all other parts remain in
effect.
Under Delaware law, directors and officers, as well as other employees and
individuals, may be indemnified against expenses, attorneys' fees, judgments,
fines, amounts paid in settlement in connection with specified actions, suits,
or proceedings, whether civil, criminal, administrative, or investigative, other
than an action by or in the right of the corporation called a derivative action,
if they acted in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the corporation, and, with respect to
criminal actions or proceedings, had no reasonable cause to believe their
conduct was unlawful. A similar standard of care is applicable in the case of
derivative actions, except that indemnification only extends to expenses,
including attorneys' fees, incurred in connection with the defense or settlement
of such an action, and the Delaware General Corporation Law requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation.
We maintain a directors and officers liability insurance policy which
provides for indemnification of our directors, officers and specific employees
for specific liabilities.
We also intend to enter into agreements to indemnify our directors, in
addition to the indemnification provided for under Delaware law and in our
certificate of incorporation and bylaws. The agreements will indemnify our
directors for expenses, including attorneys' fees, judgments, fines and
settlement amounts they incur in any action or proceeding arising out of their
service as a director. We believe that these provisions and agreements are
important to attract and retain qualified directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities issued in the transactions described below were offered and
sold in reliance upon an exemption from registration under Section 4(2) and
Section 3(a)(9) of the Securities Act and Rule 701 and Regulation D relating to
transactions by an issuer not involving a public offering, transactions
involving an exchange of securities by an issuer with its security holders where
no commission or other remuneration is paid for soliciting such exchange, or
transactions pursuant to compensatory benefit plans and contracts for
compensation. The factors which made such exemptions available include the
accreditation and sophistication of the offerees and purchasers, their access to
our officers and directors and material information about us, the disclosures
which were actually made to them and the absence of any general solicitation or
advertising. In addition, the investors represented their intention to acquire
our securities for investment purposes and not with a view to, or for sale in
connection with, any distribution. Furthermore, legends were affixed to share
certificates or other instruments indicating that such securities are
"restricted securities." Share numbers and per share consideration for common
stock have been adjusted for the 1.25-for-1 stock split to be effected prior to
the completion of the offering.
Our predecessor, Digital Entertainment Network, issued a principal amount of
$500,000 of notes as of March 31, 1997 to its members. No underwriter was
involved and no selling commissions were paid. We issued these notes in reliance
upon an exemption from registration under Rule 504 of Regulation D.
On June 2, 1997, we issued 1,438,163 shares of common stock to the members
of Digital Entertainment Networks in exchange for all outstanding equity
interests of Digital Entertainment Network as part of our reorganization of
Digital Entertainment Network into our company. No
II-2
<PAGE>
underwriter was involved and no selling commissions were paid. We issued these
shares in reliance upon an exemption from registration under Section 3(a)(9) and
Section 4(2) of the Securities Act.
On June 2, 1997, we issued 1,500,000 shares of Series A-I preferred stock to
The Goldman Sachs Group for $4.5 million at $3.00 per share and 166,666 shares
of Series A-I preferred stock to the holders of Digital Entertainment Network's
notes which were issued as of March 31, 1997, as described above. The
noteholders received the stock in exchange for cancellation of the notes issued
by Digital Entertainment Network. No underwriter was involved in the offering
and no commissions were paid. We issued the shares to The Goldman Sachs Group,
an accredited investor, in reliance upon an exemption from registration under
Rule 506 of Regulation D. We issued shares to the noteholders in reliance upon
an exemption from registration under Section 3(a)(9) and Section 4(2) of the
Securities Act.
On October 31, 1997, we issued 200,000 shares of Series A-II preferred stock
to The Goldman Sachs Group for $1.0 million at $5.00 per share. In addition, in
November and December 1997, we issued 472,000 shares of Series B preferred stock
for an aggregate price of $2.3 million at $5.00 per share. No underwriter was
involved in the offering and no commissions were paid. We issued these shares of
Series A-II and Series B preferred stock to accredited investors in reliance
upon an exemption from registration under Rule 506 of Regulation D.
On November 10, 1997, we issued to Straight Arrow Publishers Company, L.P. a
warrant to purchase shares of common stock at an exercise price of $2.40 per
share. As of June 30, 1999, the warrant was exercisable into approximately
1,277,379 shares of common stock. The warrant was granted in connection with our
agreement to be the exclusive licensee of music content of ROLLING STONE
magazine. The warrant expires in November 2007. No underwriter was involved in
the offering and no commissions were paid. We issued this warrant to an
accredited investor in reliance upon an exemption from registration under
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
During February and March 1998, we issued 533,334 shares of Series C
preferred stock for $4.0 million at $7.50 per share. No underwriter was involved
in the offering and no selling commissions were paid. We issued these shares to
accredited investors in reliance upon an exemption from registration under Rule
506 of Regulation D.
During May and June 1998, we issued 150,000 shares of Series A-III preferred
stock to The Goldman Sachs Group for $1.5 million at $10.00 per share. In
addition, we issued 666,136 shares of Series D preferred stock for $6.7 million
at $10.00 per share. No underwriter was involved in the offering and no selling
commissions were paid. We issued these shares of Series A-III and Series D
preferred stock to accredited investors in reliance upon an exemption from
registration under Rule 506 of Regulation D.
In connection with our acquisition of Tunes Network in July 1998,
headquartered in Berkeley, California, we issued an aggregate of 237,500 shares
of common stock to the shareholders of Tunes Network. We have also issued an
additional 125,000 shares. In addition, we agreed to issue up to an additional
125,000 shares if we meet specific minimum equity market capitalization
thresholds at any time prior to three months after the date of our initial
public offering, determined by multiplying the number of shares outstanding
immediately prior to our initial public offering by the initial public offering
price per share or the trading price of our common stock during such three-month
period. No underwriter was involved in the offering and no commissions were
paid. We issued these shares in reliance upon an exemption from registration
under Rules 505 and 506 of Regulation D.
On January 1, 1999, we issued to Source Enterprises a warrant to purchase up
to 93,750 shares of our common stock at an exercise price of $8.00 per share.
The warrant was granted in connection with our agreement to be the exclusive
licensee of music content of THE SOURCE magazine. No underwriter was involved in
the offering and no commissions were paid. We issued this warrant to an
accredited
II-3
<PAGE>
investor in reliance upon an exemption from registration under Section 4(2) of
the Securities Act and Rule 506 of Regulation D.
During March and April 1999, we issued an aggregate of $4.0 million
principal amount of convertible promissory notes, which accrued interest at 8%
per annum. These notes automatically converted into Series A-IV and Series E
preferred stock in May 1999. Purchasers of the notes received a two-year warrant
to purchase one share of our common stock for each $100 of principal under the
notes at an exercise price of $8.00 per share. We issued these notes and
warrants to accredited investors in reliance upon an exemption from registration
under Rule 506 of Regulation D.
During May 1999, we issued 76,165 shares of Series A-IV preferred stock and
1,955,661 shares of Series E preferred stock for $15.3 million of cash and the
conversion of all of the $4.0 million principal amount of convertible promissory
notes, plus accrued interest, which we issued in March and April 1999. In
connection with this offering, we paid SG Cowen an aggregate of $907,000 of cash
and granted it a warrant to purchase 101,644 shares of our common stock
exercisable at $8.00 per share for serving as placement agent and we paid Keith
Ohnmies $23,000 for serving as a finder. We issued the shares of Series A-IV and
Series E preferred stock to accredited investors in reliance upon an exemption
from registration under Rule 506 of Regulation D. We issued the warrant to an
accredited investor in reliance upon an exemption from registration under
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
Since our inception and until June 30, 1999, we have granted options under
our 1997 and 1999 stock option plans to acquire an aggregate of 2,332,764 shares
of common stock. The exercise prices of those options range from $0.50 per share
for options issued in 1997 to $8.00 per share for options issued since June
1998. We have issued these options to our officers in reliance upon an exemption
from registration under Rule 701 and Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) See "Index to Exhibits" on Page E-1 hereof, immediately following
the signature pages.
(b) Financial Statement Schedules: The following financial statement
schedule is included in this registration statement. All other schedules for
which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
II-4
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TUNES.COM INC.
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO COSTS BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
- ------------------------------------------------ ------------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts............. $ -- $ 17,000 $ -- $ 17,000
------ ------- ----- -------------
------ ------- ----- -------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts............. $ -- $ -- $ -- $ --
------ ------- ----- -------------
------ ------- ----- -------------
Period from July 2, 1996 to December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts............. $ -- $ -- $ -- $ --
------ ------- ----- -------------
------ ------- ----- -------------
</TABLE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Tunes.com Inc. as
of December 31, 1997 and 1998, and for each of the years then ended and for the
period from July 2, 1996 (inception) to December 31, 1996, and have issued our
report thereon dated January 26, 1999 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
January 26, 1999
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
(3) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on July 20, 1999.
<TABLE>
<S> <C> <C>
TUNES.COM INC.
By: /s/ STUART B. FRANKEL
-----------------------------------------
Stuart B. Frankel
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on July 20, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ HOWARD A. TULLMAN*
------------------------------------------- Chairman of the Board and Chief Executive Officer
HOWARD A. TULLMAN (Principal Executive Officer)
/s/ STUART B. FRANKEL
------------------------------------------- Chief Financial Officer, Treasurer and Secretary
STUART B. FRANKEL (Principal Financial and Accounting Officer)
/s/ ROBERT R. GHEEWALLA*
------------------------------------------- Director
ROBERT R. GHEEWALLA
/s/ JOSEPH H. GLEBERMAN*
------------------------------------------- Director
JOSEPH H. GLEBERMAN
/s/ BURTON B. GOLDSTEIN, JR.*
------------------------------------------- Director
BURTON B. GOLDSTEIN, JR.
/s/ MATTHEW S. KAPLAN*
------------------------------------------- Director
MATTHEW S. KAPLAN
</TABLE>
* Signed by Stuart B. Frankel pursuant to a power of attorney that was
previously filed.
II-7
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Howard A. Tullman and Stuart B. Frankel,
and each of them acting individually, 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
(including post-effective amendments) to this Registration Statement (or any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all 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 and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof. This power of attorney may be executed
in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on July 20, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ SCOTT MEDNICK
------------------------------------------- Director
SCOTT MEDNICK
/s/ JANN S. WENNER
------------------------------------------- Director
JANN S. WENNER
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
**2.1 Form of Agreement of Reorganization by and between Digital Entertainment Networks, L.L.C., its members
and Registrant dated as of May 21, 1997
**2.2 Agreement of Merger by and among Registrant, Tunes Acquisition Corp. and Tunes Network, Inc. dated as
of June 9, 1998
3.1 Form of Fourth Restated Certificate of Incorporation of the Registrant
3.2 Form of Amended and Restated Bylaws of the Registrant
4.1 Form of Registrant's Common Stock Certificate
**4.2 Amended and Restated Stockholders' Agreement by and among Registrant and its stockholders
**4.3 Amended and Restated Registration Rights Agreement by and among Registrant and its preferred
stockholders
4.4 Form of Amended 1997 Stock Option Plan
4.5 Form of 1999 Stock Option Plan
4.6 Form of Option Agreement
**4.7 Warrant to Purchase Shares of Common Stock of Registrant dated November 10, 1997 and issued to Straight
Arrow Publishers Company, L.P.
**4.8 Warrant to Purchase Shares of Common Stock of Registrant dated January 1, 1999 and issued to Source
Enterprises, Inc.
4.9 Warrant to Purchase Shares of Common Stock of Registrant dated June 9, 1999 and issued to SG Cowen
Securities Corporation
**4.10 Preferred Stock Purchase Agreement dated as of June 2, 1997
**4.11 Form of Subscription Agreement for Series B Stock
**4.12 Form of Subscription Agreement for Series C Stock
**4.13 Form of Subscription Agreement for Series D Stock
**4.14 Form of Note and Warrant Purchase Agreement for Convertible Promissory Notes and Warrants issued in
March and April 1999
**4.15 Series E Convertible Preferred Stock Purchase Agreement dated as of May 5, 1999
4.16 Form of 1999 Stock Purchase Plan
5.1 Form of Opinion of Freeborn & Peters
10.1 Affiliation Agreement with Straight Arrow Publishers Company, L.P. dated as of November 10, 1997
10.2 Affiliation Agreement with Source Enterprises, Inc. dated as of January 1, 1999
10.3 Affiliation Agreement with Maher Publications, Inc. dated as of February 1, 1999
10.4 Internet Data Center Services Agreement with Exodus Communications, Inc. dated September 30, 1998
10.5 Employment Agreement with Howard A. Tullman dated as of June 2, 1997
10.6 Employment Agreement with Stuart B. Frankel dated as of April 1, 1998
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
+10.7 Linking, Content Licensing and Advertising Agreement with CDnow, Inc. dated as of April 8, 1998 and
First Amendment to the Linking, Content Licensing and Advertising Agreement with CDnow, Inc. dated June
30, 1999
*+10.8 ALL MUSIC GUIDE Database License and Consumer Direct Fulfillment Services Agreement (undated) and the
accompanying General Terms and Conditions for the All Music Guide Database License and Customer Direct
Fulfillment Services Agreement with AEC One Stop Group
10.9 Lease Agreement with MAC Management Co., Inc. dated as of July 2, 1999
*10.10 First Amendment to Employment Agreement with Howard A. Tullman
10.11 Form of Directorship Agreement
10.12 First Amendment to Lease with Amalgamated Trust & Savings Bank dated as of October 20, 1997
10.13 Lease Agreement with Amalgamated Trust & Savings Bank dated as of May 29, 1997
**21.1 List of Subsidiary Corporations
23.1 Consent of Ernst & Young LLP
23.2 Consent of Freeborn Peters (included in Exhibit 5.1)
24.1 Power of Attorney -- reference is made to II-8
27.1 Financial Disclosure Schedule
</TABLE>
- ------------------------
* To be filed by amendment
+ Confidential treatment has been requested.
** Previously filed
E-2
<PAGE>
EXHIBIT 1.1
DRAFT -- JULY 14, 1999
Tunes.com Inc.
_________Shares *
Common Stock
($0.01 par value)
Underwriting Agreement
New York, New York
August ___, 1999
Salomon Smith Barney Inc.
SG Cowen Securities Corporation
U.S. Bancorp Piper Jaffray Inc.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Tunes.com, a corporation organized under the laws of Delaware (the
"Company"), proposes to sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), for whom you (the "Representatives") are acting as
representatives, _________ shares of Common Stock, $0.01 par value ("Common
Stock") of the Company (said shares to be issued and sold by the Company being
hereinafter called the "Underwritten Securities"). The Company also proposes to
grant to the Underwriters an option to purchase up to __________ additional
shares of Common Stock to cover over-allotments (the "Option Securities"; the
Option Securities, together with the Underwritten Securities, being hereinafter
called the "Securities"). To the extent there are no additional Underwriters
listed on Schedule I other than you, the term Representatives as used herein
shall mean you, as Underwriters, and the terms Representatives and Underwriters
shall mean either the singular or plural as the context requires. Certain terms
used herein are defined in Section 17 hereof.
As part of the offering contemplated by this Agreement, Salomon Smith
Barney ("Salomon Smith Barney") has agreed to reserve out of the Shares set
forth opposite its name on the Schedule I to this Agreement, up to
__________shares for sale to the Company's employees, officers, and directors
and other parties associated with the Company (collectively, "Participants"), as
set forth in the Prospectus under the heading "Underwriting" (the "Directed
Share Program"). The Shares to be sold by Salomon Smith Barney pursuant to the
Directed Share Program (the "Directed Shares") will be sold by Salomon Smith
Barney
- --------
* Plus an option to purchase from the Company up to ___________ additional
Securities to cover over-allotments.
<PAGE>
pursuant to this Agreement at the public offering price. Any Directed Shares not
orally confirmed for purchase by any Participants by the end of the Business Day
on which this Agreement is executed will be offered to the public by Salomon
Smith Barney as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to, and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-80627) on Form S-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously been furnished to you. The Company will
next file with the Commission either (1) prior to the Effective Date of
such registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2), the
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules thereunder to be included in such
registration statement and the Prospectus. As filed, such amendment and
form of final prospectus, or such final prospectus, shall contain all
Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement
did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date and any settlement date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in
2
<PAGE>
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration
Statement, or the Prospectus (or any supplement thereto) in reliance
upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion in the Registration Statement or the
Prospectus (or any supplement thereto).
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its business
as described in the Prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification;
(d) All of the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of the Subsidiaries
are owned by the Company either directly or through wholly owned
subsidiaries free and clear of any perfected security interest or any
other security interests, claims, liens or encumbrances;
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of capital stock of the Company have
been duly and validly authorized and issued and are fully paid and
nonassessable; the outstanding shares of capital stock of the Company
were issued pursuant to valid exemptions from the registration
requirements of Section 5 of the Act and in accordance with applicable
state securities laws; the Securities have been duly and validly
authorized, and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the Securities are duly listed, and admitted and
authorized for trading, subject to official notice of issuance, on the
Nasdaq National Market; the certificates for the Securities are in
valid and sufficient form; the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive or other rights to
subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of capital
stock of or ownership interests in the Company are outstanding;
3
<PAGE>
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
under the caption "Business -- Strategic Relationships" fairly
summarize the matters therein described;
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms;
(h) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended;
(i) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus;
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, (i) the charter or by-laws of the Company or any of its
subsidiaries, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which its
or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any
of its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its
or their properties;
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement;
(l) The consolidated historical financial statements and
financial statement schedule of the Company and its consolidated
subsidiaries and the consolidated historical financial statements of
Tunes Network, Inc. included in the Prospectus and the Registration
Statement present fairly in all material respects the financial
condition,
4
<PAGE>
results of operations and cash flows of the Company and Tunes
Network, Inc., respectively as of the dates and for the periods
indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as otherwise noted
therein). The selected historical and pro forma financial data set
forth under the captions "Selected Consolidated Financial Data" and
"Selected Pro Forma Consolidated Financial Data" in the Prospectus
and Registration Statement fairly present, on the basis stated in
the Prospectus and the Registration Statement, the information
included therein. The pro forma financial statements included in the
Prospectus and the Registration Statement include assumptions that
provide a reasonable basis for presenting the significant effects
directly attributable to the transactions and events described
therein, the related pro forma adjustments give appropriate effect
to those assumptions, and the pro forma adjustments reflect the
proper application of those adjustments to the historical financial
statement amounts in the pro forma financial statements included in
the Prospectus and the Registration Statement. The pro forma
financial statements included in the Prospectus and the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act
and the pro forma adjustments have been properly applied to the
historical amounts in the compilation of those statements.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending
or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected
to have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto);
(n) Each of the Company and each of its subsidiaries owns or
leases all such properties as are necessary to the conduct of its
operations as presently conducted;
(o) Neither the Company nor any subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject, or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative
agency, governmental body,
5
<PAGE>
arbitrator or other authority having jurisdiction over the Company or
such subsidiary or any of its properties, as applicable;
(p) Ernst & Young LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and of
Tunes Network, Inc. and delivered their report with respect to the
audited consolidated financial statements and schedules included in the
Prospectus, are independent public accountants with respect to the
Company and Tunes Network, Inc., respectively, within the meaning of
the Act and the applicable published rules and regulations thereunder;
(q) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the
Company or sale by the Company of the Securities;
(r) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto)) and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties
of the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto);
(s) No labor problem or dispute with the employees of the
Company or any of its subsidiaries exists or is threatened or imminent,
and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or its subsidiaries'
principal suppliers, contractors or customers, that could have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto);
(t) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; all policies of
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insurance and fidelity or surety bonds insuring the Company or any
of its subsidiaries or their respective businesses, assets,
employees, officers and directors are in full force and effect; the
Company and its subsidiaries are in compliance with the terms of
such policies and instruments in all material respects; and there
are no claims by the Company or any of its subsidiaries under any
such policy or instrument as to which any insurance company is
denying liability or defending under a reservation of rights clause;
neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company
nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would
not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto);
(u) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company,
from making any other distribution on such subsidiary's capital
stock, from repaying to the Company any loans or advances to such
subsidiary from the Company or from transferring any of such
subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by
the Prospectus;
(v) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the
Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto);
(w) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded
accountability for assets is
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<PAGE>
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
(x) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities;
(y) The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals, or liability would not, individually or in the
aggregate, have a material adverse change in the condition
(financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto). Neither the Company nor any
of the subsidiaries has been named as a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended;
(z) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws, or any permit,
license or approval, any related constraints on operating activities
and any potential liabilities to third parties). On the basis of
such review, the Company has reasonably concluded that such
associated costs and liabilities would not, singly or in the
aggregate, have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business;
(aa) Each of the Company and its subsidiaries has fulfilled
its obligations, if any, under the minimum funding standards of
Section 302 of the United States Employee Retirement Income Security
Act of 1974 ("ERISA") and the regulations and
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published interpretations thereunder with respect to each "plan"
(as defined in Section 3(3) of ERISA and such regulations and
published interpretations) in which employees of the Company and its
subsidiaries are eligible to participate and each such plan is in
compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published
interpretations. The Company and its subsidiaries have not incurred
any unpaid liability to the Pension Benefit Guaranty Corporation
(other than for the payment of premiums in the ordinary course) or to
any such plan under Title IV of ERISA;
(bb) The Company and its subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, domain names, copyrights, licenses,
inventions, trade secrets, technology, know-how and other intellectual
property (collectively, the "Intellectual Property") necessary for the
conduct of the Company's business as now conducted or as proposed in
the Prospectus to be conducted. Except as set forth in the Prospectus
under the captions "Risk Factors -- We depend on the music industry and
others for content and we may not be able to attract visitors to our
Web sites if we cannot obtain that content," "-- We do not have
licenses for a substantial amount of music and associated artwork
available on our Web sites, which may subject us to infringement
damages and significant license fees or loss of access to that
content" and "-- We will be required to pay additional statutory
royalties for the broadcast of music on the Web which may significantly
increase our operating costs," (a) there are no rights of third parties
to any such Intellectual Property; (b) there is no material
infringement by third parties of any such Intellectual Property; (c)
there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the Company's rights in
or to any such Intellectual Property, and the Company is unaware of any
facts which would form a reasonable basis for any such claim; (d) there
is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (e) there is no
pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others that the Company infringes or otherwise
violates any patent, trademark, copyright, trade secret or other
proprietary rights of others, and the Company is unaware of any other
fact which would form a reasonable basis for any such claim; (f) there
is no U.S. patent or published U.S. patent application which contains
claims that dominate or may dominate any Intellectual Property
described in the Prospectus as being owned by or licensed to the
Company or that interferes with the issued or pending claims of any
such Intellectual Property; and (g) there is no prior act of which the
Company is aware that may render any U.S. patent held by the Company
invalid or any U.S. patent application held by the Company unpatentable
which has not been disclosed to the U.S. Patent and Trademark Office;
9
<PAGE>
(cc) The statements contained in the Prospectus under the
captions "Risk Factors -- We depend on the music industry and others
for content and we may not be able to attract visitors to our Web sites
if we cannot obtain that content," "-- We do not have licenses for a
substantial amount of music and associated artwork available on our Web
sites, which may subject us to infringement damages and significant
license fees or loss of access to that content," "-- We will be
required to pay additional statutory royalties for the broadcast of
music on the Web which may significantly increase our operating costs,"
"-- We may be unable to protect our trademarks and copyrights which
could result in the loss of our rights or increased costs" and
"Business -- Intellectual Property," insofar as such statements
summarize legal matters, agreements, documents or proceedings discussed
therein, are accurate and fair summaries of such legal matters,
agreements, documents or proceedings; and
(dd) The Company and its subsidiaries have implemented a
comprehensive, detailed program to analyze and address the risk that
the computer hardware and software used by them may be unable to
recognize and properly execute date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year
2000 Problem"), and has determined that such risk will be remedied on a
timely basis without material expense and will not have a material
adverse effect upon the financial condition and results of operations
of the Company and its subsidiaries, taken as a whole; and the Company
believes, after due inquiry, that each supplier, vendor, customer or
financial service organization used or serviced by the Company and its
subsidiaries has remedied or will remedy on a timely basis the Year
2000 Problem, except to the extent that a failure to remedy by any such
supplier, vendor, customer or financial service organization would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole. The Company is in compliance with the Commission's
staff legal bulletin No. 5 dated January 12, 1998 related to Year 2000
compliance, as amended to date.
(ee) The Company has not offered, or caused the Underwriters
to offer, Shares to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or
type of business with the Company, or (ii) a trade journalist or
publication to write or publish favorable information about the Company
or its products.
Furthermore, the Company represents and warrants to Salomon Smith
Barney that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or
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<PAGE>
qualification of or with any government, governmental instrumentality or court,
other than such as have been obtained, is necessary under the securities laws
and regulations of foreign jurisdictions in which the Directed shares are
offered outside the United States.
Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each Underwriter.
2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees
to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Company, at a purchase price of
$_____ per share, the amount of the Underwritten Securities set forth
opposite such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and
not jointly, up to __________ Option Securities at the same purchase
price per share as the Underwriters shall pay for the Underwritten
Securities. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Securities by the Underwriters. Said
option may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of the Prospectus
upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as
to which the several Underwriters are exercising the option and the
settlement date. The number of Option Securities to be purchased by
each Underwriter shall be the same percentage of the total number of
shares of the Option Securities to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on August ___,
1999, or at such time on such later date not more than three Business Days after
the foregoing date as the Representatives shall designate, which date and time
may be postponed by agreement between the Representatives and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the Securities
shall be made to the Representatives for the respective accounts of the several
Underwriters against payment
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<PAGE>
by the several Underwriters through the Representatives of the purchase price
thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. Delivery of the
Underwritten Securities and the Option Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) to the Representatives, at 388
Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto
to be filed with the Commission pursuant to the applicable paragraph
of Rule 424(b) within the time period prescribed and will provide
evidence satisfactory to the Representatives of such timely filing.
The Company will promptly advise the Representatives (1) when the
Registration Statement, if not effective at the Execution Time, shall
have become effective, (2) when the Prospectus, and any supplement
thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement
shall have been filed with the Commission, (3) when, prior to
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<PAGE>
termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4)
of any request by the Commission or its staff for any amendment of
the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectus or for any
additional information, (5) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
or the institution or threatening of any proceeding for that purpose
and (6) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any
such qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event, (2)
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto)
and, so long as delivery of a prospectus by an Underwriter or dealer
may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take
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<PAGE>
any action that would subject it to service of process in suits, other
than those arising out of the offering or sale of the Securities, in
any jurisdiction where it is not now so subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of 180 days
after the date of the Underwriting Agreement, PROVIDED, HOWEVER, that
the Company may issue and sell Common Stock pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan
of the Company in effect at the Execution Time and the Company may
issue Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the Securities under the Exchange Act and the listing
of the Securities
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<PAGE>
on the Nasdaq National Market; (vi) any registration or
qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii)
any filings required to be made with the National Association of
Securities Dealers, Inc. (including filing fees and the reasonable
fees and expenses of counsel for the Underwriters relating to such
filings); (viii) the transportation and other expenses incurred by
or on behalf of Company representatives in connection with
presentations to prospective purchasers of the Securities; (ix) the
fees and expenses of the Company's accountants and the fees and
expenses of counsel (including local and special counsel) for the
Company; and (x) all other costs and expenses incident to the
performance by the Company of its obligations hereunder.
(i) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Salomon Smith Barney will
notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer restrictions upon such
period of time.
(j) The Company agrees to pay all fees and disbursements of
counsel incurred by the Underwriters in connection with the Directed
Share Program and stamp duties, similar taxes or duties or other taxes,
if any, incurred by the Underwriters in connection with the Directed
Share Program.
Furthermore, the Company covenants with Salomon Smith Barney that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
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<PAGE>
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Freeborn &
Peters, counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
(i) each of the Company, Tunes Acquisition Corp. and
JAMtv Interactive Services Corporation (individually a
"Subsidiary" and collectively the "Subsidiaries") has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and
authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification;
(ii) all the outstanding shares of capital stock of
each Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Prospectus, all outstanding shares
of capital stock of the Subsidiaries are owned by the Company
either directly or through wholly owned subsidiaries free and
clear of any perfected security interest and, to the knowledge
of such counsel, after due inquiry, any other security
interest, claim, lien or encumbrance;
(iii) the Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
capital stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable;
the outstanding shares of capital stock of the Company were
issued pursuant to valid exemptions from the registration
requirements of Section 5 of the Act and in accordance with
applicable state securities laws; the Securities have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be fully paid and nonassessable; the Securities are duly
listed, and admitted and authorized for trading, subject to
official notice
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<PAGE>
of issuance, on the Nasdaq Stock Market; the certificates
for the Securities are in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company
are not entitled to preemptive or other rights to subscribe
for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in the
Company are outstanding;
(iv) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries or
its or their property of a character required to be disclosed
in the Registration Statement which is not adequately
disclosed in the Prospectus, and there is no franchise,
contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit thereto, which is not described or
filed as required; and the statements in the Prospectus under
the caption "Business -- Strategic Relationships" fairly
summarize the matters therein described;
(v) the Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or
threatened and the Registration Statement and the Prospectus
(other than the financial statements and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder; and such counsel has no reason to believe that on
the Effective Date or at the Execution Time the Registration
Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the Prospectus as of its date and on the
Closing Date included or includes any untrue statement of a
material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (in
each case, other than the financial statements and other
financial information contained therein, as to which such
counsel need express no opinion);
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
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(vii) the Company is not and, after giving effect to
the offering and sale of the Securities and the application of
the proceeds thereof as described in the Prospectus, will not
be, an "investment company" as defined in the Investment
Company Act of 1940, as amended;
(viii) no consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
other approvals (specified in such opinion) as have been
obtained;
(ix) neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or its subsidiaries pursuant
to, (i) the charter or by-laws of the Company or its
subsidiaries, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement
or other agreement, obligation, condition, covenant or
instrument to which the Company or its subsidiaries is a party
or bound or to which its or their property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or its subsidiaries of any
court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over
the Company or its subsidiaries or any of its or their
properties;
(x) no holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement; and
(xi) the statements contained in the Prospectus under
the captions "Risk Factors -- We depend on the music industry
and others for content and we may not be able to attract
visitors to our Web sites if we cannot obtain that content,"
"-- We do not have licenses for a substantial amount of music
and associated artwork available on our Web sites, which may
subject us to infringement damages and significant license
fees or loss of access to that content," "-- We will be
required to pay additional statutory royalties for the
broadcast of music on the Web which may significantly increase
our operating costs," "-- We may be unable to protect our
trademarks and copyrights which could result in the loss of
our rights or increased costs" and "Business -- Intellectual
Property," insofar
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as such statements summarize legal matters, agreements,
documents or proceedings discussed therein, are accurate and
fair summaries of such legal matters, agreements, documents
or proceedings.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of Delaware or the Federal laws of the United States, to
the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters and
(B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public
officials. References to the Prospectus in this paragraph (b) include
any supplements thereto at the Closing Date.
(c) The Representatives shall have received from Mayer, Brown
& Platt, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date and addressed to the Representatives, with respect to
the issuance and sale of the Securities, the Registration Statement,
the Prospectus (together with any supplement thereto) and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(d) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business,
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<PAGE>
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(e) The Company shall have requested and caused Ernst & Young
LLP to have furnished to the Representatives, at the Execution Time and
at the Closing Date, letters, dated respectively as of the Execution
Time and as of the Closing Date, in form and substance satisfactory
to the Representatives, confirming that they are independent
accountants within the meaning of the Act and the applicable rules and
regulations adopted by the Commission thereunder and that they have
performed a review of the unaudited interim financial information of
the Company for the six-month period ended June 30, 1999, and as at
June 30, 1999, in accordance with Statement on Auditing Standards No.
71 and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the related rules and
regulations adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company
and its subsidiaries; their limited review, in accordance with
standards established under Statement on Auditing Standards
No. 71, of the unaudited interim financial information for the
six-month period ended June 30, 1999, and as at June 30, 1999;
carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the
stockholders, the board of directors and the committees of the
board of directors of the Company and the Subsidiaries; and
inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company and its subsidiaries as to transactions and events
subsequent to December 31, 1998, nothing came to their
attention which caused them to believe that:
(1) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply as to form in all material
respects with applicable accounting requirements of
the Act and with the related rules and regulations
adopted by the Commission with respect to
registration statements on Form S-1; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that
20
<PAGE>
of the audited financial statements included in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent to
June 30, 1999, there were any changes, at a specified
date not more than five days prior to the date of the
letter, in the long-term obligations of the Company
and its subsidiaries or capital stock of the Company
or increases in the stockholders' deficit of the
Company or decreases in working capital of the
Company and its subsidiaries as compared with the
amounts shown on the June 30, 1999 consolidated
balance sheet included in the Registration
Statement and the Prospectus, or for the period from
July 1, 1999 to such specified date there were any
decreases, as compared with the corresponding period
in the preceding quarter, in advertising revenue or
total revenue or any increases in loss from
operations or in total or per share amounts of net
loss of the Company and its subsidiaries, except in
all instances for changes or decreases set forth in
such letter, in which case the letter shall be
accompanied by an explanation by the Company as to
the significance thereof unless said explanation is
not deemed necessary by the Representatives;
(3) the information included in the
Registration Statement and Prospectus in response to
Regulation S-K, Item 301 (Selected Financial Data),
Item 302 (Supplementary Financial Information) and
Item 402 (Executive Compensation) is not in
conformity with the applicable disclosure
requirements of Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration
Statement and the Prospectus, including the information set
forth under the captions "Prospectus Summary -- Summary
Financial Data," "Risk Factors," "Capitalization," "Dilution,"
Selected Consolidated Financial Data," "Selected Pro Forma
Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business," "Management -- Executive Compensation," "Certain
Transactions" and "Principal Stockholders" in the Prospectus,
agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation;
and
(iv) on the basis of a reading of the unaudited pro
forma financial statements included in the Registration
Statement and the Prospectus (the "pro
21
<PAGE>
forma financial statements"); carrying out certain specified
procedures; inquiries of certain officials of the Company and
Tunes Network, Inc. who have responsibility for financial and
accounting matters; and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical
amounts in the pro forma financial statements, nothing came to
their attention which caused them to believe that the pro
forma financial statements do not comply as to form in all
material respects with the applicable accounting requirements
of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
References to the Prospectus in this paragraph (e) include any
supplement thereto at the date of the letter.
The Company shall have received from Ernst & Young LLP (and
furnished to the Representatives) a report with respect to a review of
unaudited interim financial information of the Company for the six
quarters ended June 30, 1999, in accordance with Statement on Auditing
Standards No. 71.
The Company shall have received from Ernst & Young LLP (and
furnished to the Representatives) an examination report with respect to
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company for the period from inception (July 2,
1996) to December 31, 1996 and the two fiscal years ending December 31,
1998, and a review report with respect to Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company for the six-month period ending June 30, 1999 and the
corresponding period for the prior fiscal year, each in accordance with
Statement on Standards for Attestation Engagements No. 8 issued by the
Auditing Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the
Registration Statement.
(f) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change,
increase or decrease specified in the letter or letters referred to in
paragraph (e) of this Section 6 or (ii) any change, or any development
involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the
Company and its subsidiaries taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set
forth in or contemplated in the Prospectus (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the sole judgment of the Representatives, so
material and adverse as to make it impractical or inadvisable to
proceed with the offering or delivery of the Securities as contemplated
by the
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<PAGE>
Registration Statement (exclusive of any amendment thereof) and the
Prospectus (exclusive of any supplement thereto).
(g) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
(h) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory
evidence of such actions shall have been provided to the
Representatives.
(i) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company and from such
other security holders as requested by the Representatives, addressed
to the Representatives.
(j) Prior to the Closing Time, the outstanding preferred stock
of the Company shall have been converted into shares of Common Stock,
and the amended and restated stockholders agreement among the Company
and the stockholders named therein shall have terminated in accordance
with its terms, and satisfactory evidence of such actions shall have
been provided to the Representatives.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Mayer, Brown & Platt, counsel for the Underwriters,
at 190 South LaSalle Street, Chicago, Illinois, on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney on demand for all out-of-pocket expenses
(including reasonable fees and
23
<PAGE>
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the
meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as
originally filed or in any amendment thereof, or in any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and agrees
to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion therein. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) The Company agrees to indemnify and hold harmless Salomon
Smith Barney and each person, if any, who controls Salomon Smith Barney
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act ("Salomon Smith Barney Entities"), from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper
material prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed
Share Program attached to the Prospectus or any preliminary prospectus,
or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statement therein, when considered in conjunction with the Prospectus
or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the
shares
24
<PAGE>
which immediately following the effective of the Registration
Statement, were subject to a properly confirmed agreement to purchase;
or (iii) related to, arising out of, or in connection with the Directed
Share Program, provided that, the Company shall not be responsible
under this subparagraph (iii) for any losses, claim, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of
Salomon Smith Barney Entities.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signs the Registration Statement, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written
information relating to such Underwriter furnished to the Company by or
on behalf of such Underwriter through the Representatives specifically
for inclusion in the documents referred to in the foregoing indemnity.
This indemnity agreement will be in addition to any liability which any
Underwriter may otherwise have. The Company acknowledges that the
statements set forth in the last paragraph of the cover page regarding
delivery of the Securities and, under the caption "Underwriting," (i)
the list of Underwriters and their respective participation in the sale
of the Securities, (ii) the sentences related to concessions and
reallowances and (iii) the paragraph related to stabilization,
syndicate covering transactions and penalty bids in any Preliminary
Prospectus and the Prospectus constitute the only information furnished
in writing by or on behalf of the several Underwriters for inclusion in
any Preliminary Prospectus or the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a), (b) or (c) above unless and to the extent it did not
otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a), (b) or (c) above. The
indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to
represent the indemnified party in any action for which indemnification
is sought (in which case the indemnifying party shall not thereafter be
responsible for the fees and expenses of any separate counsel retained
by the indemnified party or parties except as set forth below);
PROVIDED, HOWEVER, that such counsel shall be satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ
25
<PAGE>
separate counsel (including local counsel), and the indemnifying
party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present
such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying
party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of
such action or (iv) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense of the
indemnifying party. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to
any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim,
action, suit or proceeding. Notwithstanding anything contained
herein to the contrary, if indemnity may be sought pursuant to
Section 8(b) hereof in respect of such action or proceeding, then in
addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any
local counsel) for Salomon Smith Barney for the defense of any
losses, claims, damages and liabilities arising out of the Directed
Share Program, and all persons, if any, who control Salomon Smith
Barney within the meaning of either Section 15 of the Act or Section
20 of the Exchange Act.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and the
Underwriters severally agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and by the Underwriters on the other from the offering of the
Securities; PROVIDED, HOWEVER, that in no case shall any Underwriter
(except as may be provided in any agreement among underwriters relating
to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Underwriters severally shall contribute in
such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of
26
<PAGE>
the Company on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the
total net proceeds from the offering (before deducting expenses)
received by it, and benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the
Prospectus. Relative fault shall be determined by reference to,
among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information provided by the Company
on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation or
any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (e), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section
8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer,
employee and agent of an Underwriter shall have the same rights to
contribution as such Underwriter, and each person who controls the
Company within the meaning of either the Act or the Exchange Act,
each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (e).
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in
27
<PAGE>
order that the required changes in the Registration Statement and the Prospectus
or in any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Company and any nondefaulting Underwriter for damages occasioned by
its default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on such
Exchange or the Nasdaq National Market, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Prospectus
(exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
the Company's General Counsel, Andy V. Jonusaitis (fax no.: (312) 654-____), and
confirmed to it at 640 North LaSalle Street, Suite 560, Chicago, Illinois 60610,
attention General Counsel.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
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<PAGE>
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
29
<PAGE>
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
[Intentionally left blank]
30
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
TUNES.COM INC.
By:_________________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
SALOMON SMITH BARNEY INC.
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
By: Salomon Smith Barney Inc.
By:________________________________
Name:
Title:
For themselves and the other several Underwriters named in Schedule I to the
foregoing Agreement.
31
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NUMBER OF
UNDERWRITTEN
SECURITIES TO BE
UNDERWRITER PURCHASED
- -------------------------------------------------------------------------------------------
<S> <C>
Salomon Smith Barney Inc............................................
- -------------------------------------------------------------------------------------------
SG Cowen Securities Corporation.....................................
- -------------------------------------------------------------------------------------------
U.S. Bancorp Piper Jaffray Inc......................................
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Total...........................................................
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
EXHIBIT A
[Letterhead of officer, director or major shareholder of Tunes.com Inc.]
PUBLIC OFFERING OF COMMON STOCK
August ___, 1999
Salomon Smith Barney Inc.
ASG Cowen Securities Corporation
U.S. Bancorp Piper Jaffray Inc.
As Representative of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Tunes.com Inc., a
Delaware corporation (the "Company"), and each of you as representatives of a
group of Underwriters named therein, relating to an underwritten public offering
of Common Stock, $0.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreement, other than shares of Common Stock disposed
of as bona fide gifts approved by Salomon Smith Barney Inc.
A-1
<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
A-2
<PAGE>
Exhibit 3.1
FOURTH RESTATED CERTIFICATE OF INCORPORATION
OF
TUNES.COM INC.
Tunes.com Inc., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Tunes.com Inc. The corporation was
originally incorporated under the name JAMtv Corporation and the
original Certificate of Incorporation of the corporation was filed
with the Secretary of State of the State of Delaware on May 13,
1997.
B. Pursuant to Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware (the "GCL"), this Fourth Restated
Certificate of Incorporation was duly proposed by the
Corporation's board of directors and adopted by its stockholders,
and it hereby restates and integrates and further amends the
provisions of the Certificate of Incorporation of this
Corporation.
C. The text of the Certificate of Incorporation as heretofore amended
or supplemented is hereby amended and restated in its entirety to
read as follows:
ARTICLE I
The name of this Corporation is Tunes.com Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Zip Code 19801. The name of its registered agent at such office is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
<PAGE>
ARTICLE IV
The total number of shares of stock which the Corporation has authority
to issue is Fifty-Five Million (55,000,000) consisting of Fifty Million
(50,000,000) shares of common stock, par value $0.01 per share (the "Common
Stock"), and Five Million (5,000,000) shares of preferred stock, par value $0.01
per share (the "Preferred Stock"). The designations and the powers, preferences,
rights, qualifications, limitations, and restrictions of the Preferred Stock and
Common Stock are as follows:
(a) PROVISIONS RELATING TO THE PREFERRED STOCK.
(i) The Preferred Stock may be issued from time to time in one
or more classes or series, the shares of each class or series to have
such designations and powers, preferences, and rights as are stated and
expressed herein and in the resolution or resolutions providing for the
issue of such class or series adopted by the board of directors of the
Corporation as hereafter prescribed.
(ii) Authority is hereby expressly granted to and vested in
the board of directors of the Corporation to authorize the issuance of
the Preferred Stock from time to time in one or more classes or series
and, with respect to each class or series of the Preferred Stock, to
fix and state by the resolution or resolutions from time to time
adopted providing for the issuance thereof the following:
(A) whether or not the class or series is to have
voting rights, full, special, or limited, or is to be without
voting rights, and whether or not such class or series is to
be entitled to vote as a separate class or series either alone
or together with the holders of one or more other classes or
series of stock;
(B) the number of shares to constitute the class or
series and the designations thereof;
(C) the preference, and relative participating,
optional, or other special rights, if any, and the
qualifications, limitations, or restrictions thereof, if any,
with respect to any class or series;
(D) whether or not the shares of any class or series
shall be redeemable at the option of the Corporation or the
holders thereof or upon the happening of any specified event,
and, if redeemable, the redemption price or prices (which may
be payable in the form of cash, notes, securities or other
property), and the time or times at which, and the terms and
conditions upon which, such shares shall be redeemable and the
manner of redemption;
(E) whether or not the shares of a class or series
shall be subject to the operation of retirement or sinking
funds to be applied to the purchase or
2
<PAGE>
redemption of such shares for retirement, and, if such
retirement or sinking fund or funds are to be established,
the annual amount thereof, and the terms and provisions
relative to the operation thereof;
(F) the dividend rate, whether dividends are payable
in cash, stock of the Corporation or other property, the
conditions upon which and the times when such dividends are
payable, the preference to or the relation to the payment of
dividends payable on any other class or classes or series of
stock, whether or not such dividends shall be cumulative or
noncumulative, and if cumulative, the date or dates from which
such dividends shall accumulate;
(G) the preferences, if any, and the amounts thereof
which the holders of any class or series thereof shall be
entitled to receive upon the voluntary or involuntary
liquidation, dissolution, or winding-up of, or upon any
distribution of the assets of, the Corporation;
(H) whether or not the shares of any class or series,
at the option of the Corporation or the holder thereof or upon
the happening of any specified event, shall be convertible
into or exchangeable for, the shares of any other class or
classes or of any other series of the same or any other class
or classes of stock, securities, or other property of the
Corporation and the conversion price or prices or ratio or
ratios or the rate or rates at which such exchange may be
made, with such adjustments, if any, as shall be stated and
expressed or provided for in such resolution or resolutions;
and
(I) such other special rights and protective
provisions with respect to any class or series as may to the
board of directors of the Corporation deem advisable.
(iii) The shares of each class or series of the Preferred
Stock may vary from the shares of any other class or series thereof in
any or all of the foregoing respects. The board of directors of the
Corporation may increase the number of shares of the Preferred Stock
designated for any existing class or series by a resolution adding to
such class or series authorized and unissued shares of the Preferred
Stock not designated for any other class or series. The board of
directors of the Corporation may decrease the number of shares of the
Preferred Stock designated for any existing class or series by a
resolution subtracting from such class or series authorized and
unissued shares of the Preferred Stock designated for such existing
class or series, and the shares so subtracted shall become authorized,
unissued and undesignated shares of the Preferred Stock.
(b) PROVISIONS RELATING TO THE COMMON STOCK.
(i) Each share of Common Stock of the Corporation shall have
identical rights and privileges in every respect. The holders of shares
of Common Stock shall be
3
<PAGE>
entitled to vote upon all matters submitted to a vote of the
stockholders of the Corporation and shall be entitled to
one vote for each share of Common Stock held.
(ii) Subject to the prior rights and preferences, if any,
applicable to shares of the Preferred Stock or any series thereof, the
holders of shares of the Common Stock shall be entitled to receive such
dividends (payable in cash, stock, or otherwise) as may be declared
thereon by the board of directors of the Corporation at any time and
from time to time out of any funds of the Corporation legally available
therefor.
(iii) In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of, or upon any distribution of
the assets of, the Corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of
shares of the Preferred Stock or any series thereof, the holders of
shares of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation available for distribution to its
stockholders ratably in proportion to the number of shares of the
Common Stock held by them. A liquidation, dissolution or winding-up of
the Corporation, as such terms are used in this Paragraph (iii), shall
not be deemed to be occasioned by or to include any consolidation or
merger of the Corporation with or into any other corporation or
corporations or other entity or a sale, lease, exchange, or conveyance
of all or a part of the assets of the Corporation.
(c) GENERAL.
(i) Subject to the foregoing provisions of this Certificate of
Incorporation, the Corporation may issue shares of its Preferred Stock
and Common Stock from time to time for such consideration (not less
than the par value thereof) as may be fixed by the board of directors
of the Corporation, which is expressly authorized to fix the same in
its absolute and uncontrolled discretion subject to the foregoing
conditions. Shares so issued for which the consideration shall have
been paid or delivered to the Corporation shall be deemed fully paid
stock and shall not be liable to any further call or assessment
thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares.
(ii) The Corporation shall have authority to create and issue
rights and options entitling their holders to purchase shares of the
Corporation's capital stock of any class or series or other securities
of the Corporation, and such rights and options shall be evidenced by
instrument(s) approved by the board of directors of the Corporation.
The board of directors of the Corporation shall be empowered to set the
exercise price, duration, times for exercise and other terms of such
options or rights; PROVIDED, HOWEVER, that the consideration to be
received for any shares of capital stock subject thereto shall not be
less than the par value thereof.
4
<PAGE>
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, except as otherwise provided in this Certificate of Incorporation, the
board of directors is expressly authorized to make, alter, amend, repeal or
rescind the Bylaws of the Corporation.
ARTICLE VI
The business and affairs of the Corporation shall be managed by the
board of directors, and the directors need not be elected by written ballot
unless the Bylaws so provide. The board of directors may increase or decrease
the size of the board. The directors shall be classified into three (3) classes
designated as Class I, Class II and Class III, with each class as nearly equal
in number as possible. The initial term of office of the Class I directors shall
expire at the 2000 annual meeting of stockholders of the Corporation; the
initial term of office of the Class II directors shall expire at the 2001 annual
meeting of stockholders of the Corporation; and the initial term of office of
the Class III directors shall expire at the 2002 annual meeting of stockholders
of the Corporation. Commencing with the 2000 annual meeting of stockholders of
the Corporation, directors elected to succeed those directors whose terms have
thereupon expired shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders of the Corporation after their
election, and upon the election and qualification of their successors. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain or attain, if possible, the equality of the
number of directors in each class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. If such equality is not
possible, the increase or decrease shall be apportioned among the classes in
such a way that the difference in the number of directors in any two (2) classes
shall not exceed one. Directors need not be stockholders.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept,
except to the extent otherwise required by law, outside the State of Delaware at
such place or places as may be designated from time to time by the board of
directors or in the Bylaws of the Corporation.
ARTICLE VIII
Holders of stock of any class or series of the Corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders.
5
<PAGE>
ARTICLE IX
No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws and no action shall be taken by the stockholders by written consent
in lieu of such a meeting.
ARTICLE X
To the fullest extent permitted by the GCL, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation is authorized to indemnify each of the Corporation's directors,
officers, employees and agents to the fullest extent permitted by law. Neither
any amendment or repeal of this Article X nor the adoption of any provision of
this Certificate of Incorporation inconsistent with this Article X, shall
eliminate or reduce the effect of this Article X with respect to any actual or
alleged act or omission occurring, or any actual or threatened cause of action,
suit or claim that would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
ARTICLE XI
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.
ARTICLE XII
The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in this Certificate, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation; provided, however, that the affirmative
vote of sixty-six and two-thirds percent (66 2/3%) of the then outstanding
voting securities of the Corporation, voting together as a single class, shall
be required for the amendment, repeal or modification of the provisions of this
Article XII or Articles VI, VII, IX or X or Sections 2.3, 2.5 and 3.2(b) of the
Corporation's Bylaws, unless such amendment, repeal or modification of any
provisions inconsistent with those Articles and Sections is declared advisable
by the affirmative vote of at least eighty percent (80%) of the entire board of
directors, notwithstanding that a lesser percentage may be specified by the GCL.
6
<PAGE>
IN WITNESS WHEREOF, Tunes.com Inc. has caused this Fourth Restated
Certificate to be duly executed by its Chief Executive Officer as of this __ day
of _______ 1999.
TUNES.COM INC.
By: ___________________________
Howard A. Tullman,
Chief Executive Officer
Attest:
- ---------------------------
Stuart B. Frankel,
Secretary
7
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
BYLAWS
OF
TUNES.COM INC.
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The initial registered office of the corporation shall be in the City
of Wilmington, County of New Castle, State of Delaware. The board of directors
may change the registered office.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
All meetings of the stockholders for the election of directors shall be
held at such place either within or without the State of Delaware as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Thursday in May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding day which is not a Saturday or Sunday or a legal holiday (a "Business
Day"). At the meeting, directors shall be elected, and any other proper business
may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, the chairman, the chief executive officer or by a committee
of the board of directors which has been duly designated by the board of
directors and whose power and authority, as expressly provided in a resolution
of the board of directors, include the power to call such meetings. No other
person or persons are permitted to call a special meeting.
If a special meeting is called by the chief executive officer or
chairman, then the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the secretary of the corporation. The officer
receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.6 of these bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time of the requested
meeting is not less than twenty (20) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days after
receipt of the request, then the person or persons requesting the meeting may
give the notice.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.6 of these bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Subject to the rights of holders of any class or series of stock having
a preference over the common stock as to dividends or upon liquidation, (a)
nominations for the election of directors, and (b) business proposed to be
brought before any stockholder meeting may be made by the board of directors or
proxy committee appointed by the board of directors or by any stockholder
entitled to vote in the election of directors generally if such nomination or
business proposed is otherwise proper business before such meeting. However, any
such stockholder may nominate one or more persons for election as directors at a
meeting or propose business to be brought before a meeting, or both, only if
such stockholder has given timely notice in proper written form of their intent
to make such nomination or nominations or to propose such business. To be
timely, such stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation addressed to the secretary of
the corporation not less than
2
<PAGE>
one hundred twenty (120) calendar days in advance of the date specified in
the corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting of stockholders; provided, however, that
if the date of the annual meeting has been changed by more than thirty (30)
days from the date contemplated at the time of the previous year's proxy
statement, notice by the stockholder to be timely must be so received a
reasonable time before the solicitation is made. To be in proper form, a
stockholder's notice to the corporation shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of
the person or persons to be nominated or of the business to be
proposed;
(ii) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the
notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the
stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required
to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had the nominee
been nominated, or intended to be nominated, or the matter been
proposed, or intended to be proposed by the board of directors;
and
(v) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedures.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been given
at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
3
<PAGE>
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by law or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.8 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum, unless a greater
vote is required.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.9 VOTING
Voting at any meeting of the stockholders need not be by ballot, unless
otherwise provided in the certificate of incorporation. The Corporation shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting pursuant to the requirements of Section 231 of the General
Corporation Law of Delaware and make a written report thereof.
4
<PAGE>
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
Any stockholder entitled to vote on any matter may vote part of the
shares in favor of the proposal and refrain from voting the remaining shares or,
except when the matter is the election of directors, may vote them against the
proposal; but if the stockholder fails to specify the number of shares which the
stockholder is voting, it will be conclusively presumed that the stockholder's
vote is with respect to all shares which the stockholder is entitled to vote.
2.10 NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING
Unless otherwise provided in the certificate of incorporation, no
action required or permitted to be taken at any annual or special meeting of
stockholders may be taken by written consent or without a meeting, without prior
notice of such meeting and without a vote at such meeting.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the Business Day
immediately preceding the day on which notice is given.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting. The record date for any other purpose shall be as provided in Section
8.1 of these bylaws.
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2.12 PROXIES
Every person entitled to vote shall have the right to do so either in
person or by one or more agents authorized by a written proxy signed by the
person and filed with the secretary of the corporation, but no such proxy shall
be voted or acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, telefacsimile or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
2.13 ORGANIZATION
The chief executive officer, or in the absence of the chief executive
officer, the chairman of the board, or, in the absence of the chief executive
officer and the chairman of the board, one of the corporation's vice presidents,
shall call the meeting of the stockholders to order, and shall act as chairman
of the meeting. In the absence of the chief executive officer, the chairman of
the board and all of the vice presidents, the stockholders shall appoint a
chairman for such meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and the conduct of
business. The secretary of the corporation shall act as secretary of all
meetings of the stockholders, but in the absence of the secretary at any meeting
of the stockholders, the chairman of the meeting may appoint any person to act
as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, or caused to be prepared and made, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2.15 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting
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is not lawfully called or convened. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the stockholders
need be specified in any written waiver of notice unless so required by the
certificate of incorporation or these bylaws.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and to any limitations in the certificate of incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
3.2 NUMBER OF DIRECTORS
(a) As of the adoption of these Second Amended and Restated Bylaws, the
board of directors shall consist of 7 members. The number of directors may be
changed by an amendment to this bylaw, duly adopted by the board of directors or
by the stockholders, or by a duly adopted amendment to the certificate of
incorporation.
(b) The directors shall be divided into three classes, with the term of
office of the first class, which class shall initially consist of [two]
directors, to expire at the first annual meeting of stockholders held in 2000;
the term of office of the second class, which class shall initially consist of
[two] directors, to expire at the second annual meeting of stockholders held in
2001; the term of office of the third class, which class shall initially consist
of [three] directors, to expire at the third annual meeting of stockholders held
in 2002; and thereafter for each such term to expire at each third succeeding
annual meeting of stockholders held after such election.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office as provided in
Section 3.2 of these bylaws. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the chief executive officer, the secretary or the board
of directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
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Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office for
a term expiring at the next annual meeting of the stockholders at which the term
of office of the class to which such director has been elected expires.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class
may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by
the provisions of the certificate of incorporation, vacancies
and newly created directorships of such class or classes or
series may be filled by a majority of the directors elected by
such class or classes or series thereof then in office, or by
a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
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3.5 REMOVAL OF DIRECTORS
Any director, or the entire board of directors, may be removed from
office at any time, by the affirmative vote of the holders of record of
outstanding shares representing at least eighty percent (80%) of the voting
power of all the shares of capital stock of the corporation then entitled to
vote generally in the election of directors, voting together as a single class,
and any director may be removed from office at any time, but only for cause, by
the affirmative vote of a majority of the entire board of directors. As used in
these bylaws, the term "entire board of directors" shall mean the total
authorized number of directors that the corporation would have if there were no
vacancies.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of Delaware that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting, and no notice of such meeting shall be necessary to the
newly elected directors in order to legally constitute the meeting so long as a
quorum is present at the first meeting of such newly elected board of directors.
In the event of the failure of the stockholders to fix the time or place of such
first meeting of the newly elected board of directors, or in the event such
meeting is not held at the time and place so fixed by the stockholders, the
meeting may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the board of directors, or
as shall be specified in a written waiver signed by all of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time as shall from time to time be determined by the board of directors.
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3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chief executive officer, the chairman of the
board, the chief financial officer or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid or electronic mail transmission, addressed
to each director at that director's address as it is shown on the records of the
corporation. If the notice is mailed, it shall be deposited in the United States
mail at least three (3) days before the time of the holding of the meeting. If
the notice is delivered personally or by telephone, electronic mail
transmission, telecopy or telegram, it shall be delivered personally or by
telephone, electronic mail transmission or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.12 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
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3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the
board need not be given unless the meeting is adjourned for more than
twenty-four (24) hours. If the meeting is adjourned for more than twenty-four
(24) hours, then notice of the time and place of the adjourned meeting shall be
given before the adjourned meeting takes place, in the manner specified in
Section 3.9 of these bylaws, to the directors who were not present at the time
of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.17 ORGANIZATION
Meetings of the board of directors shall be presided over by the
chairman of the board, if any, or in his or her absence by the vice chairman of
the board, if any, or in his or her absence by the chief executive officer, or
in their absence by a chairman chosen at the meeting. The secretary shall act as
secretary of the meeting, but in his or her absence the chairman of the meeting
may appoint any person to act as secretary of the meeting.
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ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two (2) or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section
3.13 (notice of adjournment) and Section 3.14 (board action by written consent
without a meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the
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committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The corporate officers of the corporation shall be a chief executive
officer, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents (however denominated), one or more assistant
secretaries, a treasurer and one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
In addition to the corporate officers of the corporation described
above, there may also be such administrative officers of the corporation as may
be designated and appointed from time to time by the chief executive officer of
the corporation in accordance with the provisions of Section 5.13 of these
bylaws.
5.2 ELECTION OF OFFICERS
The corporate officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the chief executive
officer to appoint, such other corporate officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such power and authority, and perform such duties as are provided in these
bylaws or as the board of directors may from time to time determine.
The chief executive officer may from time to time designate and appoint
administrative officers of the corporation in accordance with the provisions of
Section 5.13 of these bylaws.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a corporate officer under any
contract of employment, any corporate officer may be removed, either with or
without cause, by the board of directors at any regular or special meeting of
the board or, except in case of a corporate officer chosen by the board of
directors, by any corporate officer upon whom such power of removal may be
conferred by the board of directors.
Any corporate officer may resign at any time by giving written notice
to the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the corporate
officer is a party.
Any administrative officer designated and appointed by the chief
executive officer may be removed, either with or without cause, at any time by
the chief executive officer. Any administrative officer may resign at any time
by giving written notice to the chief executive officer or to the secretary of
the corporation.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. The chairman,
in his capacity as chairman, shall not have any authority with respect to the
business, financial affairs, or day-to-day operations of the Corporation. At the
request of the chairman, or in case of his absence or inability to act, unless
otherwise directed by the board of directors, the chief executive officer may
perform the duties of the chairman. If there is no chief executive officer, then
the chairman of the board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
The chief executive officer of the corporation shall, subject to the
control of the board of directors, have general supervision, direction, and
control of the business and the officers of the corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a chairman of the board, at all meetings of the board of directors. Subject
to the supervision of the board of directors, the chief executive officer shall
have all authority and
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power with respect to, and shall be responsible for, the general management
of the business, financial affairs, and day-to-day operations of the
Corporation, including, but not limited to, (i) the supervision and
management of all other officers; (ii) the development and implementation of
the Corporation's strategic and operating plans; (iii) human resources,
including the engagement, retention, and termination of employees and
independent contractors of the Company, the setting of the compensation and
other material terms of employment or engagement of employees and independent
contractors, and the establishment of work rules for employees; (iv) the
representation of the Corporation at or with respect to any meetings or
relations with stockholders, investors, lenders, affiliates, strategic or
joint venture partners, financial institutions, underwriters, analysts, legal
counsel, and any other party with which the Corporation does business; and
(v) the initiation, development, acquisition, and implementation of new
business, markets, and technologies. The chief executive officer shall see
that all orders and resolutions of the board of directors are carried into
effect and shall perform such other duties and have such other authority and
powers as the board of directors may from time to time prescribe. Except in
those instances in which the authority to execute is expressly delegated to
another officer or agent of the Corporation or a different mode of execution
is expressly prescribed by the board of directors or these by-laws, he shall
execute for the corporation certificates for its shares, and any contracts,
deeds, mortgages, bonds or other instruments which the board of directors has
authorized to be executed, and he may accomplish such execution either under
or without the seal of the corporation and either individually or with the
president, secretary, any assistant secretary, or any other officers
thereunto authorized by the board of directors, according to the requirements
of the form of the instrument. He may direct subordinate officers, including
but not limited to the chairman, the president, vice-presidents, the
treasurer, and the secretary, who report to him in the performance of their
duties and in the case of any conflict between the chief executive officer
and any such subordinate officer, the direction of the chief executive
officer shall prevail. The chief executive officer may vote all securities
which the Corporation is entitled to vote except as to the extent such
authority shall be vested in a different officer or agent of the corporation
by the board of directors.
5.8 PRESIDENT
The president may assume and perform the duties of the chief executive
officer in the absence or disability of the chief executive officer or whenever
the office of the chief executive officer is vacant. The president of the
corporation shall exercise and perform such powers and duties as may from time
to time be assigned to him or her by the board of directors or as may be
prescribed by these bylaws. In the absence or nonexistence of the chairman of
the board and chief executive officer, he or she shall preside at all meetings
of the stockholders and at all meetings of the board of directors and shall
perform such other duties as the board of directors may from time to time
determine.
5.9 VICE PRESIDENTS
In the absence or disability of the chief executive officer, and if
there is no chairman of the board, the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all
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the duties of the chief executive officer and when so acting shall have all
the powers of, and be subject to all the restrictions upon, the chief
executive officer and president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed
for them respectively by the board of directors, these bylaws, the chief
executive officer, the president or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of the board
of directors, committees of directors and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if special,
how authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director for a purpose reasonably related to his or
her position as a director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He or she shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his or her transactions as chief financial officer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these bylaws.
5.12 ASSISTANT SECRETARY
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The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.13 ADMINISTRATIVE OFFICERS
In addition to the corporate officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate corporate officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
administrative officers of the corporation as may be designated and appointed
from time to time by the chief executive officer of the corporation.
Administrative officers shall perform such duties and have such powers as from
time to time may be determined by the chief executive officer or the board of
directors in order to assist the corporate officers in the furtherance of their
duties. In the performance of such duties and the exercise of such powers,
however, such administrative officers shall have limited authority to act on
behalf of the corporation as the board of directors shall establish, including
but not limited to limitations on the dollar amount and on the scope of
agreements or commitments that may be made by such administrative officers on
behalf of the corporation, which limitations may not be exceeded by such
individuals or altered by the chief executive officer without further approval
by the board of directors.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers
of the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists or
may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, amounts paid in settlement and other
amounts, which are actually and reasonably incurred in connection with any
threatened, pending or completed action, suit or proceeding in which such person
was or is a party or is threatened to be made a party by reason of the fact that
such person is or was a director or officer of the corporation. For purposes of
this Section 6.1, a "director" or "officer" of
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the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was a director or
officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit or
proceeding (or part thereof) by the director or officer was authorized by the
board of directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit or proceeding,
in which such person was or is a party or is threatened to be made a party by
reason of the fact that such person is or was an employee or agent of the
corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) shall mean any person (i) who is
or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware. The corporation may create a trust
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fund, grant a security interest or use other means (including without
limitation a letter of credit) to ensure the payment of such funds as may
become necessary to effect the indemnification or advancement of expenses
provided herein.
6.4 NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the corporation's certificate of incorporation,
these bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
6.5 REPEAL OR MODIFICATION
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring or alleged to have occurred prior to
the time of such repeal or modification.
6.6 OTHER INDEMNIFICATION
The corporation's obligation, if any, to indemnify any person who was
or is serving at its request as a director or officer of another corporation,
partnership, joint venture, trust, enterprise or non-profit entity shall be
reduced by any amount such person may collect as indemnification from such other
corporation, partnership, joint venture, trust, enterprise or non-profit
enterprise.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
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7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies of)
the corporation's stock ledger, a list of its stockholders and its other books
and records for a purpose reasonably related to his or her position as a
director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chief executive officer, the chairman of the board, if any, the
president, any vice president, the chief financial officer, the secretary or any
assistant secretary of this corporation, or any other person authorized by the
board of directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of the stock of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
applicable resolution.
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8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws,
may authorize and empower any officer or officers, or agent or agents, to enter
into any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of uncertificated shares, upon request, shall be
entitled to have a certificate signed by, or in the name of the corporation by,
the chairman or vice-chairman of the board of directors, or the chief executive
officer, the president or vice president, and by the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
Certificates for shares shall be of such form and device as the board
of directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitation or restrictions of such preferences and/or rights, if
any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
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Upon compliance with applicable laws and surrender to the secretary or
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
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The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company, either domestic or foreign, who shall be
appointed at such times and places as the requirements of the corporation may
necessitate and the board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, as used in these bylaws, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both an
entity and a natural person.
ARTICLE IX
AMENDMENTS
The bylaws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote or by the board of directors of the
corporation. The fact that such power has been so conferred upon the directors
shall not divest the stockholders of the power, nor limit their power to adopt,
amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in
the book of bylaws with the original bylaws, in the appropriate place.
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EXHIBIT 4.1
<TABLE>
<S><C>
COMMON STOCK TUNES.COM COMMON STOCK
NUMBER INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SHARES
C-
CUSIP 89972K 10 7
SEE REVERSE FOR CERTAIN DEFINITIONS
- -------------------------------------------------------------------------------------------------------------
THIS CERTIFIES THAT
is the Record Holder of
- -------------------------------------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF
TUNES.COM INC.
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN
PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED AND
REGISTERED BY THE TRANSFER AGENT AND REGISTRAR. WITNESS THE FACSIMILE SEAL
OF SAID CORPORATION AND THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
DATED:
/s/ Stuart B. Frankel /s/ Howard A. Tullman
SECRETARY [CORPORATE SEAL] CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
HARRIS TRUST AND SAVINGS BANK
TRANSFER AGENT
AND REGISTRAR,
BY
AUTHORIZED OFFICER
<PAGE>
Keep this Certificate in a safe place. If it is lost, stolen, or
destroyed, the Corporation will require a bond of indemnity as a condition to
the issuance of a replacement certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -- ...... Custodian .......
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act .........................
(State)
UNIF TRF MIN ACT -- ...... Custodian (until age .......)
(Cust) (Minor)
...... under Uniform Transfers
(Minor)
to Minors Act ................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- ---------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- Shares
of the Common Stock represented by the within named Corporation, with full power of substitution in the premises.
Dated _______________________________ X ___________________________________
X ____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
BY _________________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
EXHIBIT 4.4
TUNES.COM INC.
1997 STOCK OPTION PLAN
(AS AMENDED AND RESTATED __________ 1999)
1. ESTABLISHMENT AND PURPOSE.
(a) ESTABLISHMENT. The Tunes.com Inc. 1997 Stock Option Plan,
initially adopted and effective on May 19, 1997, is amended and restated
in its entirety hereby and is renamed the Tunes.com Inc. 1997 Stock
Option Plan (As Amended and Restated __________ 1999). Options granted
under the Plan may be Incentive Stock Options (as defined under Section
422 of the Code) or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant.
(b) PURPOSE. The purposes of this Plan are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors
and Consultants and to promote the success of the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board and/or any Committee
appointed by the Board pursuant to Section 4 of the Plan.
(b) "Affiliate" means a parent or subsidiary corporation as
defined in the applicable provisions (currently Section 424(e) and (f),
respectively) of the Code.
(c) "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
(d) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any other country or jurisdiction where Options are
granted under the Plan.
(e) "Board" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means a committee appointed by the Board to
administer the Plan in accordance with Section 4 hereof, and to perform
the functions set forth herein.
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(h) "Common Stock" means the Common Stock of the Company.
(i) "Company" means Tunes.com Inc., a Delaware corporation.
(j) "Consultant" means any person or entity, including an
advisor, who is engaged by the Company or any Affiliate to render
consulting or advisory services and is compensated for such services.
(k) "Director" means a member of the Board of Directors of the
Company or any of its Affiliates.
(l) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and
Directors, employed by the Company or any Affiliate designated by the
Administrator as eligible to receive Options subject to the conditions
set forth herein. For purposes hereof, "Employee" shall also include
individuals who have not commenced employment with the Company but have
received an offer of employment with the Company. A person shall not
cease to be an Employee in the case of (i) any leave approved by the
Company or (ii) transfers between locations of the Company or between the
Company and its Affiliates. For purposes of ISOs, no such leave may
exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence as provided by the Company is not so
guaranteed, on the 181st day of such leave any ISO held by the Optionee
shall cease to be treated as an ISO and shall be treated for tax purposes
as a NSO. Neither service as a Director nor payment of a director's fee
by the Company shall be sufficient to constitute "employment" by the
Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(o) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without
limitation the National Market or SmallCap Market of The Nasdaq
Stock Market, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange for the last market
trading day prior to the time of determination, as reported in THE
WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported,
its Fair Market Value shall be the mean
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between the high bid and low asked prices for the Common Stock on
the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in
good faith by the Administrator.
(p) "Incentive Stock Option" or "ISO" means an Option
satisfying the requirements of Section 422 of the Code and designated by
the Administrator as an Incentive Stock Option.
(q) "Nonstatutory Stock Option" or "NSO" means an Option that
is not an Incentive Stock Option.
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means an agreement between the Company
and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions
of the Plan.
(u) "Optioned Stock" means the Common Stock subject to an
Option.
(v) "Optionee" means a person or entity to whom an Option has
been granted under the Plan.
(w) "Parent" means a "parent corporation" within the meaning of
Section 424(e) of the Code, whether now or hereafter existing.
(x) "Plan" means the Tunes.com Inc.1997 Stock Option Plan, as
amended and restated hereby.
(y) "Plan Year" shall be a calendar year.
(z) "Section 16(b)" means Section 16(b) of the Exchange Act.
(aa) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
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<PAGE>
(bb) "Stock Exchange" means any stock exchange or stock market
included in a consolidated stock price reporting system on which prices for the
Common Stock are quoted at any given time.
(cc) "Subsidiary" means a "subsidiary corporation" within the
meaning of Section 424(f) of the Code, whether now or hereafter existing.
(dd) "Ten-Percent Stockholder" means an Employee, who, at the
time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b) (6) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company, or any Affiliate.
3. STOCK SUBJECT TO THE PLAN. Subject to Section 11 of the Plan, the
maximum aggregate number of Shares that may be optioned and sold under the Plan
is 1,550,000. The Shares may be authorized, but unissued or reacquired Common
Stock. If an Option expires, is canceled, surrendered (without exercise) or
otherwise become unexercisable for any reason, the Shares allocable to the
canceled, surrendered or otherwise terminated Option may again be the subject of
Options granted hereunder (unless the Plan has terminated). However, Shares
that have actually been issued under the Plan, upon exercise of an Option, shall
not be returned to the Plan and shall not become available for future
distribution under the Plan. Shares that are retained by the Company upon
exercise of an Option in order to satisfy the exercise price for such Option or
any withholding taxes due with respect to such exercise shall be treated as not
issued and shall continue to be available under the Plan.
4. ADMINISTRATION.
(a) ADMINISTRATOR. The Plan shall be administered by the Board
and/or by a duly appointed Committee of the Board having such powers as
shall be specified by the Board. A majority of a quorum of the Board or
Committee, as the case may be, may authorize any action in connection
with the Plan or any Agreement issued in respect thereof.
(b) COMPLIANCE WITH SECTION 162(m) OF THE CODE. In the event
that the Company is a "publicly held corporation" as defined in
paragraph (2) of section 162(m) of the Code, as amended, and the
regulations promulgated thereunder ("Section 162(m)"), the Company may
establish a committee of outside directors meeting the requirements of
Section 162(m) to approve the grant of Options which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income
tax purposes pursuant to Section 162(m).
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by
the Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its
discretion:
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<PAGE>
(i) to determine the Fair Market Value;
(ii) to select Employees, Directors and/or Consultants to
whom Options may from time to time be granted hereunder;
(iii) to determine the terms and conditions of any Option
granted hereunder, including, without limitation, the exercise
price, the time when Options may be exercised, any vesting
acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or the Common Stock
relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(iv) to determine the number of shares of Common Stock to
be covered by each such Option granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted
hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(e) instead of Common
Stock;
(viii) in order to fulfill the purposes of the Plan
and without amending the Plan, 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;
(ix) to allow Optionees to satisfy withholding tax
obligations as contemplated by Section 10 hereof;
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan and to establish, amend and
revoke rules and regulations for the administration of the Plan,
including, but without limitation, correcting any defect or
supplying any omission, or reconciling any inconsistency in the
Plan or in any Agreement, in the manner and to the extent it shall
deem necessary or advisable to make the Plan fully effective;
(xi) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis
without constituting a termination of employment or service for
purposes of the Plan;
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<PAGE>
(xii) to exercise its discretion with respect to the
powers and rights granted to it as set forth in the Plan; and
(xiii) generally, to exercise such powers and to perform
such acts as are deemed necessary or advisable to promote the best
interests of the Company with respect to the Plan.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final,
binding and conclusive upon the Company and its Affiliates, the Optionees
and all other persons having any interest therein.
(e) INDEMNIFICATION. The Administrator shall not be liable for
any action, failure to act, determination or interpretation made in good
faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross
negligence or reckless disregard of his or her duties. The Company
hereby agrees to indemnity the Administrator for all costs and expenses
and, to the extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiation for the
settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in
administering this Plan or in authorizing or denying authorization to any
transaction hereunder.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees,
Directors or Consultants. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by the Optionee during
any calendar year (under all plans of the Company and any Affiliate)
exceeds $100,000, such Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted. The
Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
(c) The aggregate number of Options that may be granted to any
Optionee under the Plan shall not exceed fifty percent (50%) of the
aggregate number of Shares referred to in Section 3 hereof.
(d) Neither the Plan nor any Option shall confer upon any
Optionee any right with respect to continuing the Optionee's relationship
as an Employee, Director or
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Consultant with the Company, nor shall it interfere in any way with his
or her right or the Company's right to terminate such relationship at any
time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption
by the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated
in the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant (five (5) years in the case of an
Incentive Stock Option granted to a Ten-Percent Stockholder), or such shorter
term as the Administrator may, subsequent to the granting of any Option,
provide.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price
as is determined by the Administrator, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option
(aa) granted to an Employee who is a Ten-Percent
Stockholder, the exercise price shall be no less than 110%
of the Fair Market Value per Share on the date of grant.
(bb) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option granted
to an Employee, Director or Consultant, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price other than as required
above pursuant to a merger or other corporate transaction.
(b) PAYMENT OF OPTION PRICE. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method
of payment, shall be determined by the Administrator (and in the case of
an Incentive Stock Option, shall be determined at the time of grant).
Such consideration may consist of: (i) cash or check, (ii) promissory
note, (iii) other Shares owned by the Optionee which (A) in the case of
Shares acquired upon exercise of an Option have been owned by the
Optionee for more than six months on the date of surrender, or such other
period as may be required to avoid a charge to the Company's
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earnings, and (B) have a Fair Market Value on the date of surrender equal
to the aggregate exercise price of the Shares as to which such Option
shall be exercised, (iv) authorization for the Company to retain from the
total number of Shares as to which the Option is exercised that number of
Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, or (v) such other consideration and method of payment for the
issuance of Shares that may be permitted under Applicable Laws.
The Administrator shall have the authority to permit or
require the Optionee to secure any promissory note used to exercise an
Option with the Shares acquired on exercise of the Option and/or with
other collateral acceptable to the Company. In making its determination
as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected
to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any
Option granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator, including times and
conditions based performance criteria with respect to the Company and/or
the Optionee, and as shall be permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance
with the Option Agreement) from the person entitled to exercise the
Option and (ii) full payment for the Shares with respect to which the
Option is exercised. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment
allowable under Section 8(b) of the Plan. Until the Shares are issued
(as evidenced by the appropriate entry on the books of the Company or of
a duly authorized transfer agent of the Company), no right to vote or
receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section
11 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares thereafter available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS EMPLOYEE, DIRECTOR OR
CONSULTANT. If an Optionee ceases to be an Employee, Director or
Consultant, as the case may be, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement
to the extent that the Option is vested on the date of termination (but
in
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no event later than the expiration of the term of the Option as set forth
in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination, which period may be extended
for an additional three (3) months at the discretion of the
Administrator. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise an Option vested at the time of
termination within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall revert to
the Plan. No termination shall be deemed to occur if (i) the Optionee is
a Consultant or Director who becomes an Employee within the time
specified herein; or (ii) the Optionee is an Employee who becomes a
Consultant or Director who is not also an employee, within the time
specified herein. Notwithstanding the foregoing, if an Optionee ceases
to be an Employee, Director or Consultant because of such Optionee's
violation of his or her duties to the Company, as conclusively determined
by the Administrator in its sole discretion, all of such Optionee's
unexercised Options shall immediately terminate thirty (30) days after
the date of termination.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be an
Employee, Director or Consultant as a result of Optionee's Disability,
the Optionee may within six (6) months from the date of such termination
(but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise an Option to the
extent otherwise entitled to exercise it at the date of such termination.
To the extent that Optionee is not entitled to exercise the Option on the
date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while an Employee,
Director or Consultant, or within thirty (30) days following the
termination of the Optionee's employment, the Option may be exercised at
any time within six (6) months following the date of death (but in no
event later than the expiration date of the term of such Option as set
forth in the Option Agreement), to the extent the Optionee was vested on
the date of death. If, at the time of death, Optionee is not vested as
to the entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's will or
under the laws of descent and distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(e) 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 such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time that such offer is made.
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10. WITHHOLDING TO SATISFY TAX OBLIGATIONS.
(a) PERMITTED METHODS. At the discretion of the Administrator,
Optionees may satisfy withholding obligations as provided in this Section
10. When an Optionee incurs tax liability in connection with an Option,
which tax liability is subject to tax withholding under applicable tax
laws, and the Optionee is obligated to pay the Company an amount required
to be withheld under applicable tax laws, the Optionee may satisfy the
withholding tax obligation by one or some combination of the following
methods: (i) by cash payment; (ii) out of Optionee's current
compensation; (iii) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares that (A) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (B) have a Fair Market
Value on the date of surrender equal to or less than Optionee's marginal
tax rate times the ordinary income recognized; or (iv) by electing to
have the Company withhold from the Shares to be issued upon exercise of
the Option, if any, that number of Shares having a Fair Market Value
equal to the amount of withholding due. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined.
(b) PROCEDURES FOR STOCK WITHHOLDING. All elections by an
Optionee to have Shares withheld to satisfy tax withholding obligations
shall be made in writing in a form acceptable to the Administrator and
shall be subject to the following restrictions: (i) the election must be
made on or prior to the applicable tax withholding date; (ii) once made,
the election shall be irrevocable as to the particular Shares of the
Option as to which the election is made; (iii) all elections shall be
subject to the consent or disapproval of the Administrator; (iv) if the
Optionee is an Officer, Director or greater than Ten-Percent Stockholder
within the meaning of Rule 16a-2 under the Exchange Act ("Reporting
Person"), the election must comply with the applicable provisions of Rule
16b-3 and shall be subject to such additional conditions or restrictions
as may be required thereunder to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the stockholders of the Company, the number and class of shares of
Common Stock with respect to which Options may be granted under the Plan,
the number and class of Shares of Common Stock which are subject to
outstanding Options granted under the Plan, and the purchase price per
Share of Common Stock , if applicable, shall be proportionately adjusted
for any increase or decrease in the number of issued Shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or
any other increase or decrease in the number of issued Shares of Common
Stock effected without receipt of consideration by the Company. The
conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Any
such adjustment in the Shares subject to outstanding
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Incentive Stock Options (including any adjustments in the purchase price)
shall be made in such manner as not to constitute a modification as
defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code. Adjustments shall be made
by the Administrator, whose determination in that respect 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 adjustment by
reason thereof shall be made with respect to, the number or price of
Shares of Common Stock subject to an Option. If, by reason of a change
in Capitalization, an Optionee shall be entitled to exercise an Option
with respect to new, additional or different shares of stock, such new,
additional or different shares shall thereupon be subject to all of the
conditions which were applicable to the Shares subject to the Option, as
the case may be, prior to such Change in Capitalization.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee at least fifteen (15) days prior to the effective date of
such proposed action. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation
of such proposed action.
(c) MERGER OR SALE OF ASSETS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization (other than a merger or reorganization which constitutes a
"Change of Control," as defined in subparagraph (e) below) where the
successor corporation issues its securities to the Company's
stockholders, or in the event of a sale of all or substantially all of
the Company's assets or otherwise, then each outstanding Option shall be
assumed or an equivalent option or rights shall be substituted by such
successor corporation or a parent or subsidiary of such successor
corporation, unless the successor corporation does not agree to assume
the Option or to substitute an equivalent option, in which case such
Option shall terminate upon the consummation of the merger or sale of
assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other
assets (other than dividends payable in cash or stock of the Company)
without receipt of consideration by the Company, the Administrator may,
in its discretion, appropriately adjust the price per share of Common
Stock covered by each outstanding Option to reflect the effect of such
distribution.
(e) CHANGE OF CONTROL. Upon the occurrence of an event or
series of events by which any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), is
or becomes the "beneficial owner" (as defined in Rules 13d 3 and 13d 5
under the Securities Exchange Act of 1934), directly or indirectly, of
more than 50% of the combined voting power of the Company's capital stock
ordinarily having the right to vote at an election of directors (such
occurrence, a "Change of Control"), all or any part of the unexpired and
unexercised Options granted to an Employee, Director or
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Consultant may be exercised in full (whether or not such Options were
otherwise then exercisable).
12. NON-TRANSFERABILITY OF OPTIONS. Except as otherwise provided in
this Section, Options may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than (i) by will or by the laws
of descent or distribution, and (ii) pursuant to a domestic relations order
issued by a court with jurisdiction over the Optionee. In no event, however,
will an Option be transferable if such transfer is prohibited by the securities
laws or regulations of any state, including but not limited to the State of
California. Notwithstanding the foregoing, the Administrator may, in its
discretion, authorize all or a portion of the Options to be granted to an
Optionee to be transferred by such Optionee to (i) the spouse, children or
grandchildren of such Optionee ("Immediate Family Members"), (ii) a trust of
trusts for the benefit of an Immediate Family Member, or (iii) a partnership in
which Immediate Family Members are the only partners, provided, that (x) there
is no consideration for such transfer, (y) the Option Agreement expressly
provides for the transfer of the Options in accordance with this Section, and
(z) subsequent transfers of such Options are prohibited except by or in
accordance with the laws of descent or distribution, or (iv) such other persons
or entities as the Administrator permits.
In consideration for authorizing the transferability of an Option, the
Administrator may impose such restrictions on the sale of the Option Shares
underlying the transferred Option as it deems appropriate after considering the
facts and circumstances of the Option transfer.
Options which have been transferred shall continue to be subject to the
same terms and conditions as were applicable immediately prior to the transfer,
provided that for purposes of this Plan, the term "Optionee" shall be deemed to
refer to the transferee. The events of termination of employment of Section 9
hereof shall continue to be applied with respect to the original transferor,
following which the Options shall be exercisable by the transferee only to the
extent and for the periods specified in Section 9. In no event shall the
Company be obligated to provide notices to an Option transferee of any of the
events specified in Section 9 or of any other event or circumstance which may
relate to the transferred Option.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee, Director or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board or the Administrator
may at any time amend, alter, suspend or terminate the Plan.
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(b) STOCKHOLDER APPROVAL. To the extent necessary and
desirable to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment,
alteration, suspension or termination of the Plan shall impair the rights
of any Optionee, unless mutually agreed otherwise between the Optionee
and the Administrator, which agreement must be in writing and signed by
the Optionee and the Company. Termination of the Plan shall not affect
the Administrator's ability to exercise the powers granted to it
hereunder with respect to Options granted under the Plan prior to the
date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall 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, and the requirements of any Stock
Exchange.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise
of an Option, the Administrator may require the person exercising such
Option to (i) represent and warrant to the Company in writing at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a
representation is required by law, and (ii) if the Company is subject to
Section 12 of the Exchange Act as a "Reporting Company," that such Shares
will not be sold or transferred other than pursuant to an effective
registration thereof under the Exchange Act or pursuant to an exemption
applicable under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, or, if the Company is not subject to
Section 12 of the Exchange Act, execute a stock restriction agreement, in
such form as shall be approved by the Administrator, containing certain
restrictions on the transferability of the shares to be issued upon the
exercise of such Option, certain obligations with respect to the
repurchase of such shares by the Company and/or its stockholders upon the
occurrence of certain specified events, and such other terms and
conditions as the Administrator may determine are in the best interests
of the Company and its stockholders. In any event, the certificates
evidencing Shares shall be appropriately legended to reflect their status
as restricted securities.
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16. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
(a) This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the
State of Illinois.
(b) The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
Applicable Laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Administrator.
(c) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(d) The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Administrator shall interpret and
administer the provisions of the Plan or any Agreement in a manner
consistent therewith. Any provisions inconsistent with such Rule shall
be inoperative and shall not affect the validity of the Plan.
(e) The Administrator may make such changes as may be necessary
or appropriate to comply with the rules and regulations of any government
authority, or to obtain for Employees granted Incentive Stock Options the
tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. AGREEMENTS. Options shall be evidenced by written agreements in
such form as the Administrator shall approve from time to time.
19. STOCKHOLDER APPROVAL. The Plan, as amended and restated, shall be
subject to approval by the stockholders of the Company within twelve (12) months
after the date the Plan is so amended and restated. Such stockholder approval
shall be obtained in the degree and manner required under Applicable Law. All
Options issued under the Plan shall become void in the event such approval is
not obtained.
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EXHIBIT 4.5
TUNES.COM INC.
1999 STOCK OPTION PLAN
(AS AMENDED AND RESTATED __________ 1999)
1. ESTABLISHMENT AND PURPOSE.
(a) ESTABLISHMENT. The Tunes.com Inc. 1999 Stock Option Plan,
initially adopted and effective on February 26, 1999, is amended and
restated in its entirety hereby and is renamed the Tunes.com Inc. 1999
Stock Option Plan (As Amended and Restated __________ 1999). Options
granted under the Plan may be Incentive Stock Options (as defined under
Section 422 of the Code) or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant.
(b) PURPOSE. The purposes of this Plan are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors
and Consultants and to promote the success of the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board and/or any Committee
appointed by the Board pursuant to Section 4 of the Plan.
(b) "Affiliate" means a parent or subsidiary corporation as
defined in the applicable provisions (currently Section 424(e) and (f),
respectively) of the Code.
(c) "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.
(d) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any other country or jurisdiction where Options are
granted under the Plan.
(e) "Board" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
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(g) "Committee" means a committee appointed by the Board to
administer the Plan in accordance with Section 4 hereof, and to perform
the functions set forth herein.
(h) "Common Stock" means the Common Stock of the Company.
(i) "Company" means Tunes.com Inc., a Delaware corporation.
(j) "Consultant" means any person or entity, including an
advisor, who is engaged by the Company or any Affiliate to render
consulting or advisory services and is compensated for such services.
(k) "Director" means a member of the Board of Directors of the
Company or any of its Affiliates.
(l) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and
Directors, employed by the Company or any Affiliate designated by the
Administrator as eligible to receive Options subject to the conditions
set forth herein. For purposes hereof, "Employee" shall also include
individuals who have not commenced employment with the Company but have
received an offer of employment with the Company. A person shall not
cease to be an Employee in the case of (i) any leave approved by the
Company or (ii) transfers between locations of the Company or between the
Company and its Affiliates. For purposes of ISOs, no such leave may
exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence as provided by the Company is not so
guaranteed, on the 181st day of such leave any ISO held by the Optionee
shall cease to be treated as an ISO and shall be treated for tax purposes
as a NSO. Neither service as a Director nor payment of a director's fee
by the Company shall be sufficient to constitute "employment" by the
Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(o) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without
limitation the National Market or SmallCap Market of The Nasdaq
Stock Market, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange for the last market
trading day prior to the time of determination, as reported in THE
WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
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(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported,
its Fair Market Value shall be the mean between the high bid and
low asked prices for the Common Stock on the last market trading
day prior to the day of determination; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in
good faith by the Administrator.
(p) "Incentive Stock Option" or "ISO" means an Option
satisfying the requirements of Section 422 of the Code and designated by
the Administrator as an Incentive Stock Option.
(q) "Nonstatutory Stock Option" or "NSO" means an Option that
is not an Incentive Stock Option.
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means an agreement between the Company
and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions
of the Plan.
(u) "Optioned Stock" means the Common Stock subject to an
Option.
(v) "Optionee" means a person or entity to whom an Option has
been granted under the Plan.
(w) "Parent" means a "parent corporation" within the meaning of
Section 424(e) of the Code, whether now or hereafter existing.
(x) "Plan" means the Tunes.com Inc. 1999 Stock Option Plan, as
amended and restated hereby.
(y) "Plan Year" shall be a calendar year.
(z) "Section 16(b)" means Section 16(b) of the Exchange Act.
(aa) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
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(bb) "Stock Exchange" means any stock exchange or stock market
included in a consolidated stock price reporting system on which prices
for the Common Stock are quoted at any given time.
(cc) "Subsidiary" means a "subsidiary corporation" within the
meaning of Section 424(f) of the Code, whether now or hereafter existing.
(dd) "Ten-Percent Stockholder" means an Employee, who, at the
time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b) (6) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company, or any Affiliate.
3. STOCK SUBJECT TO THE PLAN. Subject to Section 11 of the Plan, the
number of Shares which may be subject to options and sold under the Plan as of
the effective date of the Plan shall not exceed 1,300,000 Shares. In addition,
the aggregate number of Shares subject to options under the Plan shall
automatically increase, without further action of the Administrator, the Company
or the stockholders of the Company, an additional 250,000 Shares on each of
January 1, 2000, January 1, 2001, and January 1, 2002, with an aggregate number
of 2,050,000 authorized and unissued Shares reserved under the Plan.
If an Option expires, is canceled, surrendered (without exercise)
or otherwise become unexercisable for any reason, the Shares allocable to the
canceled, surrendered or otherwise terminated Option may again be the subject of
Options granted hereunder (unless the Plan has terminated). However, Shares
that have actually been issued under the Plan, upon exercise of an Option, shall
not be returned to the Plan and shall not become available for future
distribution under the Plan. Shares that are retained by the Company upon
exercise of an Option in order to satisfy the exercise price for such Option or
any withholding taxes due with respect to such exercise shall be treated as not
issued and shall continue to be available under the Plan.
4. ADMINISTRATION.
(a) ADMINISTRATOR. The Plan shall be administered by the Board
and/or by a duly appointed Committee of the Board having such powers as
shall be specified by the Board. A majority of a quorum of the Board or
Committee, as the case may be, may authorize any action in connection
with the Plan or any Agreement issued in respect thereof.
(b) COMPLIANCE WITH SECTION 162(m) OF THE CODE. In the event
that the Company is a "publicly held corporation" as defined in
paragraph (2) of section 162(m) of the Code, as amended, and the
regulations promulgated thereunder ("Section 162(m)"), the Company may
establish a committee of outside directors meeting the requirements of
Section 162(m) to approve the grant of Options which might reasonably be
anticipated to result in the
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payment of employee remuneration that would otherwise exceed the limit on
employee remuneration deductible for income tax purposes pursuant to
Section 162(m).
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by
the Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select Employees, Directors and/or Consultants to
whom Options may from time to time be granted hereunder;
(iii) to determine the terms and conditions of any Option
granted hereunder, including, without limitation, the exercise
price, the time when Options may be exercised, any vesting
acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or the Common Stock
relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(iv) to determine the number of shares of Common Stock to
be covered by each such Option granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted
hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(e) instead of Common
Stock;
(viii) in order to fulfill the purposes of the Plan and
without amending the Plan, 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;
(ix) to allow Optionees to satisfy withholding tax
obligations as contemplated by Section 10 hereof;
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan and to establish, amend and
revoke rules and regulations for the administration of the Plan,
including, but without limitation, correcting any defect or
supplying any omission, or reconciling any inconsistency in the
Plan or in any
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Agreement, in the manner and to the extent it shall deem necessary
or advisable to make the Plan fully effective;
(xi) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis
without constituting a termination of employment or service for
purposes of the Plan;
(xii) to exercise its discretion with respect to the
powers and rights granted to it as set forth in the Plan; and
(xiii) generally, to exercise such powers and to perform
such acts as are deemed necessary or advisable to promote the best
interests of the Company with respect to the Plan.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final,
binding and conclusive upon the Company and its Affiliates, the Optionees
and all other persons having any interest therein.
(e) INDEMNIFICATION. The Administrator shall not be liable for
any action, failure to act, determination or interpretation made in good
faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross
negligence or reckless disregard of his or her duties. The Company
hereby agrees to indemnity the Administrator for all costs and expenses
and, to the extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiation for the
settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in
administering this Plan or in authorizing or denying authorization to any
transaction hereunder.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees,
Directors or Consultants. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by the Optionee during
any calendar year (under all plans of the Company and any Affiliate)
exceeds $100,000, such Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted. The
Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
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(c) The aggregate number of Options that may be granted to any
Optionee under the Plan shall not exceed fifty percent (50%) of the
aggregate number of Shares referred to in Section 3 hereof.
(d) Neither the Plan nor any Option shall confer upon any
Optionee any right with respect to continuing the Optionee's relationship
as an Employee, Director or Consultant with the Company, nor shall it
interfere in any way with his or her right or the Company's right to
terminate such relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption
by the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated
in the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant (five (5) years in the case of an
Incentive Stock Option granted to a Ten-Percent Stockholder), or such shorter
term as the Administrator may, subsequent to the granting of any Option,
provide.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price
as is determined by the Administrator, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option
(aa) granted to an Employee who is a Ten-Percent
Stockholder, the exercise price shall be no less than 110%
of the Fair Market Value per Share on the date of grant.
(bb) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option granted
to an Employee, Director or Consultant, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price other than as required
above pursuant to a merger or other corporate transaction.
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(b) PAYMENT OF OPTION PRICE. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method
of payment, shall be determined by the Administrator (and in the case of
an Incentive Stock Option, shall be determined at the time of grant).
Such consideration may consist of: (i) cash or check, (ii) promissory
note, (iii) other Shares owned by the Optionee which (A) in the case of
Shares acquired upon exercise of an Option have been owned by the
Optionee for more than six months on the date of surrender, or such other
period as may be required to avoid a charge to the Company's earnings,
and (B) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which such Option shall be
exercised, (iv) authorization for the Company to retain from the total
number of Shares as to which the Option is exercised that number of
Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, or (v) such other consideration and method of payment for the
issuance of Shares that may be permitted under Applicable Laws.
The Administrator shall have the authority to permit or
require the Optionee to secure any promissory note used to exercise an
Option with the Shares acquired on exercise of the Option and/or with
other collateral acceptable to the Company. In making its determination
as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected
to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any
Option granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator, including times and
conditions based on performance criteria with respect to the Company
and/or the Optionee, and as shall be permissible under the terms of the
Plan. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance
with the Option Agreement) from the person entitled to exercise the
Option and (ii) full payment for the Shares with respect to which the
Option is exercised. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment
allowable under Section 8(b) of the Plan. Until the Shares are issued
(as evidenced by the appropriate entry on the books of the Company or of
a duly authorized transfer agent of the Company), no right to vote or
receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section
11 of the Plan.
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Exercise of an Option in any manner shall result in a
decrease in the number of Shares thereafter available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS EMPLOYEE, DIRECTOR OR
CONSULTANT. If an Optionee ceases to be an Employee, Director or
Consultant, as the case may be, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement
to the extent that the Option is vested on the date of termination (but
in no event later than the expiration of the term of the Option as set
forth in the Option Agreement). In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination, which period may be extended
for an additional three (3) months at the discretion of the
Administrator. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise an Option vested at the time of
termination within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall revert to
the Plan. No termination shall be deemed to occur if (i) the Optionee is
a Consultant or Director who becomes an Employee within the time
specified herein; or (ii) the Optionee is an Employee who becomes a
Consultant or Director who is not also an employee, within the time
specified herein. Notwithstanding the foregoing, if an Optionee ceases
to be an Employee, Director or Consultant because of such Optionee's
violation of his or her duties to the Company, as conclusively determined
by the Administrator in its sole discretion, all of such Optionee's
unexercised Options shall immediately terminate thirty (30) days after
the date of termination.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be an
Employee, Director or Consultant as a result of Optionee's Disability,
the Optionee may within six (6) months from the date of such termination
(but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise an Option to the
extent otherwise entitled to exercise it at the date of such termination.
To the extent that Optionee is not entitled to exercise the Option on the
date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while an Employee,
Director or Consultant, or within thirty (30) days following the
termination of the Optionee's employment, the Option may be exercised at
any time within six (6) months following the date of death (but in no
event later than the expiration date of the term of such Option as set
forth in the Option Agreement), to the extent the Optionee was vested on
the date of death. If, at the time of death, Optionee is not vested as
to the entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's will or
under the laws of descent and
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distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(e) 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 such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time that such offer is made.
10. WITHHOLDING TO SATISFY TAX OBLIGATIONS.
(a) PERMITTED METHODS. At the discretion of the Administrator,
Optionees may satisfy withholding obligations as provided in this Section
10. When an Optionee incurs tax liability in connection with an Option,
which tax liability is subject to tax withholding under applicable tax
laws, and the Optionee is obligated to pay the Company an amount required
to be withheld under applicable tax laws, the Optionee may satisfy the
withholding tax obligation by one or some combination of the following
methods: (i) by cash payment; (ii) out of Optionee's current
compensation; (iii) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares that (A) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (B) have a Fair Market
Value on the date of surrender equal to or less than Optionee's marginal
tax rate times the ordinary income recognized; or (iv) by electing to
have the Company withhold from the Shares to be issued upon exercise of
the Option, if any, that number of Shares having a Fair Market Value
equal to the amount of withholding due. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined.
(b) PROCEDURES FOR STOCK WITHHOLDING. All elections by an
Optionee to have Shares withheld to satisfy tax withholding obligations
shall be made in writing in a form acceptable to the Administrator and
shall be subject to the following restrictions: (i) the election must be
made on or prior to the applicable tax withholding date; (ii) once made,
the election shall be irrevocable as to the particular Shares of the
Option as to which the election is made; (iii) all elections shall be
subject to the consent or disapproval of the Administrator; (iv) if the
Optionee is an Officer, Director or greater than Ten-Percent Stockholder
within the meaning of Rule 16a-2 under the Exchange Act ("Reporting
Person"), the election must comply with the applicable provisions of Rule
16b-3 and shall be subject to such additional conditions or restrictions
as may be required thereunder to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the stockholders of the Company, the number and class of shares of
Common Stock with respect to which Options may be granted under the Plan,
the number and class of Shares of Common Stock
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which are subject to outstanding Options granted under the Plan, and the
purchase price per Share of Common Stock , if applicable, shall be
proportionately adjusted for any increase or decrease in the number of
issued Shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination, recapitalization or reclassification
of the Common Stock, or any other increase or decrease in the number of
issued Shares of Common Stock effected without receipt of consideration
by the Company. The conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Any such adjustment in the Shares subject to outstanding
Incentive Stock Options (including any adjustments in the purchase price)
shall be made in such manner as not to constitute a modification as
defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code. Adjustments shall be made
by the Administrator, whose determination in that respect 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 adjustment by
reason thereof shall be made with respect to, the number or price of
Shares of Common Stock subject to an Option. If, by reason of a change
in Capitalization, an Optionee shall be entitled to exercise an Option
with respect to new, additional or different shares of stock, such new,
additional or different shares shall thereupon be subject to all of the
conditions which were applicable to the Shares subject to the Option, as
the case may be, prior to such Change in Capitalization.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee at least fifteen (15) days prior to the effective date of
such proposed action. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation
of such proposed action.
(c) MERGER OR SALE OF ASSETS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization (other than a merger or reorganization which constitutes a
"Change of Control," as defined in subparagraph (e) below) where the
successor corporation issues its securities to the Company's
stockholders, or in the event of a sale of all or substantially all of
the Company's assets or otherwise, then each outstanding Option shall be
assumed or an equivalent option or rights shall be substituted by such
successor corporation or a parent or subsidiary of such successor
corporation, unless the successor corporation does not agree to assume
the Option or to substitute an equivalent option, in which case such
Option shall terminate upon the consummation of the merger or sale of
assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other
assets (other than dividends payable in cash or stock of the Company)
without receipt of consideration by the Company, the Administrator may,
in its discretion, appropriately adjust the price per share of Common
Stock covered by each outstanding Option to reflect the effect of such
distribution.
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(e) CHANGE OF CONTROL. Upon the occurrence of an event or
series of events by which any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), is
or becomes the "beneficial owner" (as defined in Rules 13d 3 and 13d 5
under the Securities Exchange Act of 1934), directly or indirectly, of
more than 50% of the combined voting power of the Company's capital stock
ordinarily having the right to vote at an election of directors (such
occurrence being a "Change of Conrol"), all or any part of the unexpired
and unexercised Options granted to an Employee, Director or Consultant
may be exercised in full (whether or not such Options were otherwise then
exercisable).
12. NON-TRANSFERABILITY OF OPTIONS. Except as otherwise provided in
this Section, Options may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than (i) by will or by the laws
of descent or distribution, and (ii) pursuant to a domestic relations order
issued by a court with jurisdiction over the Optionee. In no event, however,
will an Option be transferable if such transfer is prohibited by the securities
laws or regulations of any state, including but not limited to the State of
California. Notwithstanding the foregoing, the Administrator may, in its
discretion, authorize all or a portion of the Options to be granted to an
Optionee to be transferred by such Optionee to (i) the spouse, children or
grandchildren of such Optionee ("Immediate Family Members"), (ii) a trust of
trusts for the benefit of an Immediate Family Member, or (iii) a partnership in
which Immediate Family Members are the only partners, provided, that (x) there
is no consideration for such transfer, (y) the Option Agreement expressly
provides for the transfer of the Options in accordance with this Section, and
(z) subsequent transfers of such Options are prohibited except by or in
accordance with the laws of descent or distribution, or (iv) such other persons
or entities as the Administrator permits.
In consideration for authorizing the transferability of an Option, the
Administrator may impose such restrictions on the sale of the Option Shares
underlying the transferred Option as it deems appropriate after considering the
facts and circumstances of the Option transfer.
Options which have been transferred shall continue to be subject to the
same terms and conditions as were applicable immediately prior to the transfer,
provided that for purposes of this Plan, the term "Optionee" shall be deemed to
refer to the transferee. The events of termination of employment of Section 9
hereof shall continue to be applied with respect to the original transferor,
following which the Options shall be exercisable by the transferee only to the
extent and for the periods specified in Section 9. In no event shall the
Company be obligated to provide notices to an Option transferee of any of the
events specified in Section 9 or of any other event or circumstance which may
relate to the transferred Option.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each
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Employee, Director or Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board or the Administrator
may at any time amend, alter, suspend or terminate the Plan.
(b) STOCKHOLDER APPROVAL. To the extent necessary and
desirable to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment,
alteration, suspension or termination of the Plan shall impair the rights
of any Optionee, unless mutually agreed otherwise between the Optionee
and the Administrator, which agreement must be in writing and signed by
the Optionee and the Company. Termination of the Plan shall not affect
the Administrator's ability to exercise the powers granted to it
hereunder with respect to Options granted under the Plan prior to the
date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall 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, and the requirements of any Stock
Exchange.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise
of an Option, the Administrator may require the person exercising such
Option to (i) represent and warrant to the Company in writing at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a
representation is required by law, and (ii) if the Company is subject to
Section 12 of the Exchange Act as a "Reporting Company," that such Shares
will not be sold or transferred other than pursuant to an effective
registration thereof under the Exchange Act or pursuant to an exemption
applicable under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, or, if the Company is not subject to
Section 12 of the Exchange Act, execute a stock restriction agreement, in
such form as shall be approved by the Administrator, containing certain
restrictions on the transferability of the shares to be issued upon the
exercise of such Option, certain obligations with respect to the
repurchase of such shares by the Company and/or its stockholders upon the
occurrence of certain specified events, and such other terms and
conditions as the Administrator may determine are in the best interests
of the Company and
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its stockholders. In any event, the certificates evidencing Shares shall
be appropriately legended to reflect their status as restricted
securities.
16. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
(a) This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the
State of Illinois.
(b) The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
Applicable Laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Administrator.
(c) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(d) The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Administrator shall interpret and
administer the provisions of the Plan or any Agreement in a manner
consistent therewith. Any provisions inconsistent with such Rule shall
be inoperative and shall not affect the validity of the Plan.
(e) The Administrator may make such changes as may be necessary
or appropriate to comply with the rules and regulations of any government
authority, or to obtain for Employees granted Incentive Stock Options the
tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. AGREEMENTS. Options shall be evidenced by written agreements in
such form as the Administrator shall approve from time to time.
19. STOCKHOLDER APPROVAL. The Plan, as amended and restated, shall be
subject to approval by the stockholders of the Company within twelve (12) months
after the date the Plan is so amended and restated. Such stockholder approval
shall be obtained in the degree and manner required under Applicable Law. All
Options issued under the Plan shall become void in the event such approval is
not obtained.
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Exhibit 4.6
TUNES.COM INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is made as of this ____day of
____, _____ (the "Issue Date"), between Tunes.com Inc., a Delaware corporation
(the "Corporation"), and __________, an employee of the Corporation
("Participant").
RECITALS:
A. The Corporation has adopted the Amended and Restated _____ Stock
Option Plan of Tunes.com Inc. (the "Plan"), a copy of which is attached as
EXHIBIT A and made a part of this Agreement.
B. The Corporation has granted to Employee additional options pursuant to
the terms and conditions of a separate agreement.^
AGREEMENTS:
In consideration of the mutual covenants hereinafter set forth and for
other good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. Certain capitalized terms used in this Agreement are
defined in this Agreement. All other capitalized terms that are used but not
defined in this Agreement have the meanings assigned to them in the Plan.
2. GRANT OF OPTION. The Corporation hereby grants to Participant the
right and option to purchase all or any part of _______(________) shares of
Common Stock on the terms and conditions set forth in the Plan (except as
expressly provided in Section 5(a) of this Agreement) and this Agreement, such
number being subject to adjustment as provided in the Plan (the "Option
Shares"). The Option shall be a nonqualified stock option within the meaning of
the Code.
3. PURCHASE PRICE. The purchase price of the Option Shares shall be
$______ per Option Share.
4. TERM OF OPTION. The term of the Option (the "Option Term") shall be
for a period of ten years from the Issue Date, subject to earlier termination as
provided in the Plan. In no event shall the Option be exercised after the
expiration of the Option Term.
5. RIGHT TO PURCHASE OPTION SHARES. Subject to the limitations provided
in the Plan and this Agreement, the Option shall vest and become exercisable as
provided in this Section 5.
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Participant shall exercise his or her right to purchase Option Shares by
delivering written notice to the Corporation in accordance with Section 6 of
this Agreement, together with payment for such shares in accordance with Section
8 of the Plan and applicable income tax withholding amounts in accordance with
Section 10 of the Plan.
(a) VESTING OF OPTION. Participant is not entitled to purchase
Option Shares until (and only to the extent) the Option vests and becomes
exercisable. The Option shall fully vest and become exercisable on ______ __,
______.
(b) REQUIRED REGISTRATIONS AND CONSENTS. If at any time the
Administrator shall determine, in its sole discretion, that (i) the listing,
registration, or qualification of the Option Shares upon any Stock Exchange or
under any state or federal law, or (ii) the consent or approval of any
governmental regulatory body, or (iii) obtaining an investment intent
representation or other undertaking from Participant is necessary or desirable
as a condition of, or in connection with, the exercise of the Option hereunder,
the Option may not be exercised in whole or in part unless and until such
listing, registration, qualification, consent, approval, representation or
undertaking shall have been effected or obtained free of any conditions not
acceptable by the Administrator.
6. METHOD OF EXERCISING OPTION.
(a) DELIVERY OF NOTICE. Subject to the terms and conditions of this
Agreement and the Plan, the Option must be exercised by delivering notice to the
Corporation, which notice must be in writing and personally delivered or sent by
registered or certified mail, return receipt requested, to the Secretary of the
Corporation at Tunes.com Inc., 640 North LaSalle Street, Suite 560, Chicago, IL
60610 (or to the address of the principal office of the Corporation, if
different from the address set forth herein). The notice shall be deemed to be
made when the Corporation or its successor in interest receives the letter or
within three days after it is sent by certified or registered mail, return
receipt requested, whichever is earlier.
(b) CONTENTS OF NOTICE. Such notice shall state the election to
exercise the Option, the number of Option Shares in respect of which it is being
exercised, and the name or names of the person or persons in whose name or names
the stock certificates are to be issued. The notice shall be signed by the
person or persons exercising the Option and shall include each such person's
address for receipt of a certificate representing such shares. The notice shall
be accompanied by a photocopy of this Agreement and payment of the full exercise
price of such shares (including payment of applicable withholding obligations).
(c) PROOF OF RIGHT TO EXERCISE. In the event the Option shall be
exercised by anyone other than Participant, such notice shall be accompanied by
appropriate proof, as determined by the Administrator in its sole discretion, of
the right of such person to exercise the Option.
(d) ADDITIONAL DELIVERIES. In addition to the notice provided for in
this Section 6 and payment of the exercise price, the Participant (or any other
person who is entitled to receive
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<PAGE>
Option Shares under the Option granted to the Participant) must execute and
deliver to the Corporation (i) written evidence of his or her agreement to be
bound by the Amended and Restated Stockholders' Agreement, dated as of May 4,
1999, as amended, by and between the Company and certain of its stockholders, a
copy of which is attached as EXHIBIT B and made a part of this Agreement, as the
same may be amended from time to time, with respect to the Option Shares, and
(ii) an investor's representation letter in such form as is acceptable to the
Administrator, each as provided in Section 15 of the Plan. No Option Shares
will be issued by the Company unless it first receives such deliveries.
7. INTERPRETATION OF PLAN AND AGREEMENT.
(a) ADMINISTRATOR'S DECISIONS. All determinations and
interpretations made by the Administrator, with regard to any questions arising
hereunder or under the Plan, shall be binding and conclusive on Participant, and
his or her successors, legal representatives and beneficiaries.
(b) PARTICIPANT BOUND BY PLAN. Except as otherwise provided in
Section 5(a) of this Agreement, the terms and conditions of the Plan are
incorporated into this Agreement by reference and made a part of this Agreement.
Participant acknowledges that he or she has received a copy of the Plan, and is
bound by its terms and conditions. Participant represents that he or she has
read the Plan and has had the opportunity to ask questions of the Company about
the Plan. Except as otherwise provided in Section 5(a) of this Agreement, the
Option is subject to all terms and conditions of the Plan and this Agreement,
each as is now in effect or later amended.
8. BINDING ON SUCCESSORS AND ASSIGNS; TRANSFERABILITY. This Agreement
shall bind and inure to the benefit of the successors and assigns of the
Corporation. Except to the extent permitted under the Plan, the rights of
Participant under this Agreement shall not be transferable.
9. COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and both of which constitute one and
the same document.
10. ASSIGNMENT. This Agreement shall not be assignable by Participant or
his executors, administrators, successors and heirs.
11. SECTION HEADINGS. The Section headings of this Agreement are inserted
for convenience of reference only and shall not be deemed to be a part thereof
or used in the construction or interpretation thereof.
12. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without violating the remainder of
this Agreement.
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13. GOVERNING LAW. The validity, meaning and effect of this Agreement
shall be determined in accordance with the laws of the State of Illinois.
14. FINAL AGREEMENT. This Agreement constitutes the final agreement of
the parties concerning the matters referred to herein and supersedes all prior
agreements and understandings.
IN WITNESS WHEREOF, the Corporation and Participant have executed this
Stock Option Agreement as of the day and year first above written.
TUNES.COM INC.
By:
------------------------------------
Its:
------------------------------------
PARTICIPANT
-----------------------------------------
[name of participant]
ATTACHMENTS:
EXHIBIT A - AMENDED AND RESTATED _____ STOCK OPTION PLAN OF TUNES.COM INC.
EXHIBIT B - AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
[signature page to Stock Option Agreement]
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<PAGE>
Exhibit 4.9
Warrant No. W--15
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK OF
TUNES.COM INC.
--------------------
(VOID AFTER THE DATE THAT IS FIVE (5) YEARS AFTER THE DATE HEREOF)
This certifies that SG Cowen Securities Corporation (the "Holder"), or its
assigns, for value received, is entitled to purchase from Tunes.com Inc., a
Delaware corporation (the "Company"), having a place of business at 640 N.
LaSalle Street, Suite 560, Chicago, IL 60614 up to 81,315 fully paid and
nonassessable shares of common stock, $.01 par value, of the Company (the
"Common Stock"), at a purchase price per share of $10.00 (the "Stock Purchase
Price"), at any time, and from time to time, on or after the date hereof through
5:00 p.m. (Central Time) on the date five (5) years after the date hereof (such
later date being referred to herein as the "Expiration Date").
The Stock Purchase Price and the number of shares purchasable hereunder
are subject to adjustment as provided in Section 3 of this Warrant.
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the Holder of
record hereof, at any time or from time to time, on or after the date hereof up
to the Expiration Date for all or any part of the shares of Common Stock (but
not for a fraction of a share) which may be purchased hereunder.
1.2 ISSUANCE OF CERTIFICATES. The Company agrees that the shares of
Common Stock purchased under this Warrant shall be and are deemed to be issued
to the Holder hereof as the record owner of such shares as of the close of
business on the date on which (i) this Warrant shall have been surrendered,
properly endorsed, to the Company, (ii) the Company shall have received the
completed Subscription Form (a copy of which is attached hereto as EXHIBIT A),
the Investment Representations Letter (a copy of which is attached hereto as
EXHIBIT B), and the Joinder Agreement (a copy of which is attached hereto as
EXHIBIT C) duly executed by the Holder, and (iii) the Holder shall have made
payment for such shares. Certificates for the shares of Common Stock so
purchased, together with any other securities or property to which the Holder
hereof is entitled upon such exercise, shall be delivered to the Holder hereof
by the
<PAGE>
Company at the Company's expense within a reasonable time after the rights
represented by this Warrant have been so exercised. Each stock certificate so
delivered shall be in such denominations of Common Stock as may be requested
by the Holder hereof and shall be registered in the name thereof. In case of
a purchase of less than all the shares which may be purchased under this
Warrant, the Company shall cancel this Warrant and execute and deliver a new
Warrant or Warrants of like tenor for the balance of the shares purchasable
under the Warrant surrendered upon such purchase to the Holder hereof within
a reasonable time. Upon exercise of this Warrant, (i) the Common Stock issued
to the Holder upon such conversion automatically thereupon shall become
subject to the restrictions upon "Common Stock" under and as defined in that
certain Amended and Restated Stockholders' Agreement dated as of May 4, 1999,
as amended, substantially in the form attached hereto as EXHIBIT D, between
the Company and its stockholders (including any agreement entered into in
substitution thereof by Holdco pursuant to a Reorganization noted in Section
3.3.1(b) hereof, the "Stockholders' Agreement"), (ii) the Holder
automatically thereupon shall become a party to the Stockholders' Agreement,
and (iii) if requested by the Company, the Holder shall execute and deliver
to the Company such other documents or instruments reasonably necessary to
evidence the exercise of this Warrant and the other terms of this paragraph.
1.3 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Common Stock is
greater than the Stock Purchase Price (at the date of calculation as set forth
below), in lieu of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Form of Subscription
and notice of such election in which event the Company shall issue to the Holder
a number of shares of Common Stock computed using the following formula:
X = Y (A-B)
------
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the
Warrant being canceled (at the date of such
calculation)
A = the fair market value of one share of Common Stock (at the
date of such calculation)
B = Stock Purchase Price (as adjusted to the date of such
calculation)
For purposes of the above calculation, the fair market value of one
share of Common Stock shall be determined by the Company's Board of Directors in
good faith; PROVIDED, HOWEVER, that in the event the Company makes an initial
public offering of its Common Stock the fair market value per share shall be:
(i) if the Warrant is being converted in connection with and contingent upon a
public offering of the Company's securities, and if the Company's registration
statement relating to such public offering has been declared effective by the
U.S. Securities and Exchange Commission, then the fair market value of the
Common Stock shall be the initial "Price to Public" specified in the final
prospectus with respect to such offering multiplied by the number
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<PAGE>
of shares of Common Stock into which each share of Common Stock is then
convertible; or (ii) if the Warrant is not being converted in connection with
and contingent upon a public offering of the Company's securities, then as
follows: (x) if traded on a securities exchange or the Nasdaq National
Market, the fair market value of the Common Stock shall be deemed to be the
average of the daily closing prices per share of such stock for the 20
consecutive trading days commencing 30 trading days before the date of
calculation, and the fair market value of the Common Stock shall be deemed to
be such fair market value of the Common Stock multiplied by the number of
shares of Common Stock into which each share of Common Stock is then
convertible or (y) if otherwise traded in an over-the-counter market, the
fair market value of the Common Stock shall be deemed to be the median of the
average of the reported closing bid and ask prices of the Common Stock over
the 30-day period ending five business days prior to the date of calculation,
and the fair market value of the Common Stock shall be deemed to be such fair
market value of the Common Stock multiplied by the number of shares of Common
Stock into which each share of Common Stock is then convertible.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all shares of Common Stock that may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable and free from all preemptive
rights of any stockholder and free of all taxes, liens and charges with respect
to the issue thereof. The Company further covenants and agrees that, during the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved, for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of authorized but unissued Common Stock, or other
securities and property, when and as required to provide for the exercise of the
rights represented by this Warrant. The Company will take all such action as may
be necessary to assure that such shares of Common Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Common Stock may
be listed; provided, however, that the Company shall not be required to effect a
registration under federal or state securities laws with respect to such
exercise. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) (i) if
the total number of shares of Common Stock issuable after such action upon
exercise of all outstanding warrants and options, together with all shares of
Common Stock then outstanding and all shares of Common Stock then issuable upon
the conversion of all convertible securities then outstanding, would exceed the
total number of shares of Common Stock then authorized by the Company's
Certificate of Incorporation, or (ii) if the total number of shares of Common
Stock issuable after such action upon the conversion of all outstanding shares
of Common Stock, together with all shares of Common Stock then issuable upon the
conversion of all shares of Common Stock then issuable upon exercise of all
outstanding warrants and options, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise of all
warrants and options and upon the conversion of all convertible securities then
outstanding would exceed the total number of shares of Common Stock then
authorized by the Company's Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock Purchase
Price and the number of shares purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the occurrence of certain
events described in this Section 3. Upon each adjustment of the Stock Purchase
Price, the Holder of this Warrant shall thereafter be entitled to purchase, at
the Stock Purchase Price resulting from such adjustment, the
3
<PAGE>
number of shares obtained by multiplying the Stock Purchase Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment, and dividing the
product thereof by the Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OF COMBINATION OF STOCK. In case the Company shall at
any time subdivide its outstanding shares of Common Stock into a greater number
of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION.
If at any time or from time to time the Holders of Common Stock (or any shares
of stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received or become entitled to receive, without payment
therefor,
3.2.1 Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution;
3.2.2 Any cash paid or payable otherwise than as a cash
dividend; or
3.2.3 Common Stock or additional stock or other securities or
property (including cash) by way of spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement (other than (i)
shares of Common Stock issued as a stock split, adjustments in respect of
which shall be covered by the terms of Section 3.1 above or (ii) an event for
which adjustment is otherwise made pursuant to Section 3.3 below); then and
in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of
Common Stock receivable thereupon, and without payment of any additional
consideration therefor, the amount of stock and other securities and property
(including cash in the cases referred to in clauses 3.2.2 and 3.2.3 above)
which the Holder would hold on the date of such exercise had he been the
Holder of record of such Common Stock as of the date on which holders of
Common Stock received or became entitled to receive such shares or all other
additional stock and other securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
3.3.1 (a) If any recapitalization, reclassification or capital
reorganization of the capital stock of the Company (including any merger not
described in Section 3.3.2 below) shall be effected in such a way that holders
of Common Stock shall be entitled to receive stock, securities, or other assets
or property (a "Restructuring"), then, as a condition of such Restructuring,
lawful and adequate provisions shall be made whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common
4
<PAGE>
Stock equal to the number of shares of such stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby. In any Restructuring described above, appropriate provision shall be
made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.
(b) The Holder hereof acknowledges that the Company may undertake a
reorganization, whereby a new corporation shall be organized in Delaware
("Holdco") which shall acquire, through the merger of a newly formed Delaware
subsidiary of Holdco ("Sub") with and into the Company, all of the outstanding
capital stock of the Company (the "Reorganization"). The Holder hereof agrees
that in the event of a Reorganization whereby each holder of Common Stock
receives one share of common stock of Holdco in exchange for each share of
Common Stock held by such holder, this Warrant shall automatically, and without
further action by any party hereto, be assigned to and assumed by Holdco in its
entirety so that (i) this Warrant shall represent the Holder's right to receive
91,152 shares of common stock of Holdco, (ii) the provisions hereof obligating
the Company (including, without limitation, provisions for adjustments of the
Stock Purchase Price and of the number of shares purchasable and receivable upon
the exercise of this Warrant) shall thereafter be applicable to Holdco, and
(iii) the Company shall not have any obligation to issue its stock in exercise
hereof.
3.3.2 In the event of a consolidation or merger of the
Company with another corporation in which the holders of the Company's
voting securities before the transaction beneficially own 50% or less of the
voting securities of the surviving entity after the transaction, or the sale
of all or substantially all of its assets of the Company (a "Change of
Control"), any unexercised portion of this Warrant shall be deemed to have
been automatically converted pursuant to Section 1.3 hereof and thereafter
the Holder shall participate in the Change of Control on the same terms as
other holders of the Common Stock; provided however, that if the Stock
Purchase Price in effect immediately prior to the Change of Control exceeds
the value of the stock, securities or other assets or property (determined in
good faith by the Board of Directors of the Company) issuable or payable with
respect to one share of Common Stock immediately theretofore purchasable and
receivable upon exercise of the rights represented hereby, the Warrant shall
terminate and be of no further effect as of the Change of Control.
3.4 NOTICE OF ADJUSTMENT. Upon any adjustment of the Stock Purchase
Price or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such Holder as shown on the books of the Company. The
notice shall be signed by an officer of the Company and shall state the Stock
Purchase Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
3.5 OTHER NOTICES. If at any time:
3.5.1 the Company shall declare any cash dividend upon its Common
Stock;
5
<PAGE>
3.5.2 the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other distribution to
the holders of its Common Stock;
3.5.3 there shall be any Restructuring or Change of Control; or
3.5.4 there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by first
class mail, postage prepaid, addressed to the Holder of this Warrant at 1221
Avenue of the Americas, New York, NY 10020, attn: Charles Mather, (a) at
least ten (10) days prior written notice of the date on which the books of
the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such Restructuring, Change of Control, dissolution,
liquidation or winding-up, and (b) in the case of any such Restructuring,
Change of Control, dissolution, liquidation, or winding-up, at least ten (10)
days prior written notice of the date when the same shall take place;
PROVIDED, HOWEVER, that the Holder shall make a best efforts attempt to
respond to such notice as early as possible after the receipt thereof. Any
notice given in accordance with the foregoing clause (a) shall also specify,
in the case of any such dividend, distribution or subscription rights, the
date on which the holders of Common Stock shall be entitled thereto. Any
notice given in accordance with the foregoing clause (b) shall also specify
the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon such
Restructuring, Change of Control, dissolution, liquidation, winding-up or
public offering, as the case may be.
3.6 CERTAIN EVENTS. If any change in the outstanding Common Stock of
the Company or any other event occurs as to which the other provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of the Warrant in accordance with such
provisions, the Board of Directors of the Company shall make an adjustment in
the number and class of shares available under the Warrant, the Stock Purchase
Price or the application of such provisions, so as to protect such purchase
rights as aforesaid. The adjustment shall be such as will give the Holder of the
Warrant upon exercise for the same aggregate Stock Purchase Price the total
number, class and kind of shares as he would have owned had the Warrant been
exercised prior to the event and had he continued to hold such shares until
after the event requiring adjustment.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the
exercise of the Warrant shall be made without charge to the Holder of the
Warrant for any issue tax (other than any applicable income taxes) in respect
thereof; PROVIDED, HOWEVER, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the then Holder of the
Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in
this Warrant shall be construed as conferring upon the Holder hereof the right
to vote or to
6
<PAGE>
consent or to receive notice as a stockholder of the Company or any other
matters or any rights whatsoever as a stockholder of the Company. No
dividends or interest shall be payable or accrued in respect of this Warrant
or the interest represented hereby or the shares purchasable hereunder until,
and only to the extent that, this Warrant shall have been exercised. No
provision hereof in the absence of affirmative action by the Holder to
purchase shares of Common Stock, and no mere enumeration herein of the rights
or privileges of the Holder hereof, shall give rise to any liability of such
Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
7. WARRANTS NON-TRANSFERABLE. Except as set forth in Section 3.3.1(b) hereof,
this Warrant is not transferable and the shares acquired upon exercise hereof
shall not be transferred or assigned in whole or in part except in compliance
with the Stockholders' Agreement and applicable federal and state securities
laws.
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the Holder of this Warrant and of the Holder of
shares of Common Stock issued upon exercise of this Warrant, referred to in
Section 7 shall survive the exercise of this Warrant.
9. NOTICES. Any notice, request or other document required or permitted to be
given or delivered to the Holder hereof or the Company shall be delivered or
shall be sent by first-class mail, postage prepaid, to the Holder at the address
set forth in Section 3.5 hereof or such other address as either may from time to
time provide to the other.
10. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Illinois.
11. LOST WARRANTS. The Company represents and warrants to the Holder hereof that
upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant, the Company, at its expense, will make and deliver
a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Warrant.
12. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of
this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the Holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer, thereunto duly authorized as of the __th day
of June, 1999.
TUNES.COM INC.,
a Delaware corporation
By: ___________________________
Howard A. Tullman
Chief Executive Officer and Chairman
8
<PAGE>
EXHIBIT A
TO WARRANT
SUBSCRIPTION FORM
Date:______________, 19___
Tunes.com Inc.
640 N. LaSalle Street
Suite 560
Chicago, IL 60614
Attn: Chief Executive Officer
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
Tunes.com Inc. (the "Company") and dated June __, 1999, Warrant No.
W-__ (the "Warrant") and to purchase thereunder __________ shares of
the Common Stock (as defined in the Warrant) of the Company (the
"Shares") at a purchase price per share of $10.00, or an aggregate
purchase price of ___________________________________ ($__________)
(the "Purchase Price").
/ / The undersigned hereby elects to convert ___________________ percent
(___%) of the value of the Warrant pursuant to the provisions of
Section 1.3 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also makes the representations set forth on the attached EXHIBIT
B of the Warrant.
Very truly yours,
SG COWEN SECURITIES CORPORATION
By:_____________________________________
Name: __________________________________
Title:__________________________________
<PAGE>
EXHIBIT B
TO WARRANT
INVESTMENT REPRESENTATIONS
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO TUNES.COM INC. ALONG
WITH THE SUBSCRIPTION FORM BEFORE THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE
WARRANT DATED __________________, 199__, WILL BE ISSUED.
_____________________, 19__
Tunes.com Inc.
640 N. LaSalle Street
Suite 560
Chicago, IL 60614
Attn: Chief Executive Officer
Ladies and Gentlemen:
The undersigned, SG Cowen Securities Corporation ("Purchaser"),
intends to acquire up to ______________ shares of the Common Stock (as
defined in the Warrant to purchase such Common Stock held by the Purchaser
(the "Warrant")) of Tunes.com Inc. (the "Company") from the Company pursuant
to the exercise or conversion of the Warrant. The Common Stock will be issued
to Purchaser in a transaction not involving a public offering and pursuant to
an exemption from registration under the Securities Act of 1933, as amended
(the "1933 Act") and applicable state securities laws. Purchaser has been
advised that the Common Stock has not been registered under the 1933 Act or
state securities laws on the ground that this transaction is exempt from
registration, and that reliance by the Company on such exemptions is
predicated in part on Purchaser's representations set forth in this letter.
Accordingly, Purchaser represents, warrants and agrees as follows:
1. Purchaser is acquiring the Common Stock for its own account and
beneficial interest, to hold for investment and not for sale or with a
view to distribution of the Common Stock or any part thereof. Purchaser
has no present intention of selling (in connection with a distribution
or otherwise), granting any participation in, or otherwise distributing
the same, and does not presently have reason to anticipate a change in
such intention.
2. Purchaser acknowledges that it has received all the information it
has requested from the Company and considers necessary or appropriate
for deciding whether to acquire the Common Stock. Purchaser represents
that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of
the Common Stock and to obtain any additional information necessary to
verify the accuracy of the information given the Purchaser. Purchaser
further represents that it has such knowledge and experience in
financial and business matters that it is capable of evaluating the
merits and risk of this investment.
<PAGE>
3. Purchaser is an "accredited investor" as such term is defined in
Rule 501 under the 1933 Act.
4. Purchaser acknowledges that investment in the Common Stock involves
a high degree of risk, and represents that it is able, without
materially impairing its financial condition, to hold the Common Stock
for an indefinite period of time and to suffer a complete loss of its
investment.
5. Purchaser has been informed that under the 1933 Act, the Common
Stock must be held indefinitely unless it is subsequently registered
under the 1933 Act or unless an exemption from such registration (such
as Rule 144) is available with respect to any proposed transfer or
disposition by Purchaser of the Common Stock. Purchaser further agrees
that the Company may refuse to permit Purchaser to sell, transfer or
dispose of the Common Stock (except as permitted under Rule 144) unless
there is in effect a registration statement under the 1933 Act and any
applicable state securities laws covering such transfer, or unless
Purchaser furnishes an opinion of counsel reasonably satisfactory to
counsel for the Company, to the effect that such registration is not
required. Purchaser shall not make any sale, transfer or other
disposition of the Common Stock in violation of the 1933 Act or the
General Rules and Regulations promulgated thereunder by the
Securities and Exchange Commission or in violation of any applicable
state securities law.
6. Purchaser also understands and agrees that there will be placed on
the certificate(s) for the Common Stock, or any substitutions therefor,
a legend stating in substance:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), or any
state securities laws. These shares have been acquired for investment
and may not be sold or otherwise transferred in the absence of an
effective registration statement for these shares under the 1933 Act
and applicable state securities laws, or an opinion of counsel
satisfactory to the Company that registration is not required and that
an applicable exemption is available."
Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Common Stock with Purchaser's counsel.
Very truly yours,
SG COWEN SECURITIES CORPORATION
By:___________________________________
Name: ________________________________
Title:________________________________
2
<PAGE>
EXHIBIT C
TO
WARRANT
JOINDER AGREEMENT
The undersigned stockholder ("Investor") hereby covenants and agrees to
become a party to that certain Amended and Restated Stockholders' Agreement (as
amended, restated, supplemented, assigned or assumed, and including any
agreement made in substitution thereof, the "Stockholders' Agreement") dated as
of May 4, 1999, as amended, among Tunes.com Inc., a Delaware corporation
(including any assignee any successor, "Tunes.com"), and the "Stockholders"
named therein, and hereby undertakes all of the respective representations,
warranties, obligations and duties of, and accepts all of the benefits of, an
"Existing Investor" and a "Stockholder" (but not a "GSCP Stockholder") under and
as defined in the Stockholders' Agreement.
Dated as of ____________________
SG COWEN SECURITIES CORPORATION
By: _________________________________
Its:_________________________________
Tunes.com hereby covenants and agrees that Investor is hereby made a
party to the Stockholders' Agreement, and hereby undertakes all of the
respective representations, warranties, obligations and duties of the "Company"
under the Stockholder's Agreement, including the grant to Investor of all of the
benefits of the "Existing Investors" and the "Stockholders" (but not the "GSCP
Stockholders") under and as defined in the Stockholders' Agreement.
Dated as of ____________________
TUNES.COM INC.
By: _________________________________
Its:__________________________________
<PAGE>
EXHIBIT D
TO WARRANT
STOCKHOLDERS' AGREEMENT
<PAGE>
Exhibit 4.16
TUNES.COM INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
The purpose of this Plan is to provide Employees of the Company and its
Affiliates with an opportunity to acquire a proprietary interest in the Company
through the purchase of shares of Common Stock of the Company and thereby
provide such Employees with an additional incentive to contribute to the
prosperity of the Company. It is the intention of the Company that the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall be construed, accordingly, so as to extend and
limit participation in a manner consistent with the requirements of Section 423
of the Code.
2. DEFINITIONS.
"Administrator" means the Board of Directors of the Company and/or a
Committee appointed by the Board.
"Affiliate" shall mean a parent or subsidiary corporation as defined in
the applicable provisions (currently Section 424(e) and (f),
respectively) of the Code.
"Applicable Laws" means the provisions and requirements relating to the
administration of stock purchase plans under the laws of any state to
which the Plan is subject, federal and state securities laws, the Code,
any stock exchange or quotation system on which the Common Stock is
listed or quoted and the applicable laws of any other country or
jurisdiction where Shares are issued under the Plan.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to
administer the Plan.
"Common Stock" shall mean the common stock of the Company, $0.01 par
value per share.
"Company" shall mean Tunes.com Inc., a Delaware corporation.
"Employee" shall mean any individual who is an employee of the Company,
or of any Affiliate designated by the Administrator as eligible to
participate in the Plan, for purposes of tax withholding under the Code
whose customary employment with the Company is at least twenty (20)
hours per week and more than five (5) months in any calendar year. For
purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave
of absence approved by the Company or Affiliate. Where the period of
leave exceeds ninety (90) days and the
<PAGE>
individual's right to reemployment is not guaranteed by statute or
by contract, the employment relationship will be deemed to have
terminated on the ninety first (91) day of such leave.
"Five-Percent Stockholder" shall mean an Employee who owns (or is
deemed to own pursuant to Section 424(d) of the Code, or would own upon
the exercise of any option extended hereunder or any other option,
whether qualified or nonqualified, held by such employee) shares of
capital stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company
(or Affiliate).
"Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation the National Market or SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if
no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time
of determination, as reported in The Wall Street Journal
or such other source as the Administrator deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its
Fair Market Value shall be the mean between the high bid
and low asked prices for the Common Stock on the last
market trading day prior to the day of determination; or
(iii) in the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be
determined in good faith by the Administrator.
"Offering Date" shall mean initially October 1, 1999 and thereafter the
first business day of each subsequent sixth month beginning January 1,
2000. For example, the Offering Dates for the year 2000 shall be
January 1, 2000 and July 1, 2000.
"Participant" shall mean an Employee who is a participant in the Plan.
"Pay" shall mean an Employee's total compensation paid by the Company
(or by an Affiliate), exclusive of any payment in cash or kind under
any stock option plan, deferred compensation plan, or other employee
benefit plan or program of the Company (or Affiliate).
"Plan" shall mean this Tunes.com Inc. 1999 Employee Stock Purchase
Plan.
"Plan Year" shall mean a calendar year.
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<PAGE>
"Purchase Date" initially shall mean December 31, 1999 and thereafter
shall mean the last business day of the sixth month following each
Offering Date. For example the initial Purchase Dates for the year 2000
will be June 30, 2000 and December 31, 2000.
"Purchase Period" initially shall mean the three-month period between
October 1, 1999 and December 31, 1999 and thereafter shall mean a
six-month period that commences on the Offering Date and ends on the
Purchase Date.
"Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 9 of the Plan.
"Stockholder" shall mean a stockholder of record of the Company's
capital stock.
"Subsidiary" shall mean a subsidiary corporation of the Company within
the meaning of Section 424(f) of the Code, whether now or hereafter
existing.
3. ADMINISTRATION.
The Board shall appoint an Administrator who will serve for such period
of time as the Board may specify and who may be removed by the Board at any
time. The Administrator will have the authority and responsibility for the
day-to-day administration of the Plan, the authorities and responsibilities
specifically provided in this Plan and any additional duties, responsibilities
and authorities delegated by the Board.
The Administrator may delegate the day-to-day duties and
responsibilities of the administration of the Plan to one or more individuals.
The Administrator shall have full power and authority to: (i) promulgate any
rules and regulations which it deems necessary for the proper administration of
the Plan; (ii) interpret the provisions of the Plan; (iii) supervise the
administration of the Plan; (iv) make factual determinations relevant to Plan
entitlements; and (v) take any action in connection with administration of the
Plan as the Administrator deems necessary and advisable and which is consistent
with the Board's delegation of authority to the Administrator, PROVIDED HOWEVER,
at all times the Plan shall be administered in accordance with Rule 16b-3 ("Rule
16b-3") of the Securities Exchange Act of 1934 as amended and Section 423 of the
Code.
The administration, interpretation or application of the Plan by the
Administrator shall be final and binding upon all Participants. The Company
shall pay all expenses incurred in the administration of the Plan. No Board or
Committee member shall be liable for any action or determination made in good
faith with respect to the Plan or any option granted thereunder.
4. ELIGIBILITY.
Any Employee employed by either the Company (or by any Affiliate) and
designated by the Administrator as eligible to participate in the Plan on any
Offering Date, shall be eligible to participate in the Plan with respect to the
Purchase Period commencing on such Offering Date, PROVIDED, such Employee has
been employed by the Company (or by any Affiliate) for a period
3
<PAGE>
of at least 90 days. Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the
Plan if such Employee: (i) is a Five Percent Stockholder; or (ii)
receives Pay paid by the Company (or by an Affiliate) equal to more
than [$125,000] for any calendar year and who is a "highly
compensated employee" within the meaning of Section 414(q) of the
Code.
5. PARTICIPATION AND WITHDRAWAL.
(a) PAYROLL DEDUCTION AUTHORIZATION AND PLAN ENROLLMENT. An eligible
Employee may become a Participant by completing and filing, on or
prior to a date prescribed by the Administrator immediately prior
to each Offering Date, a payroll deduction authorization and Plan
enrollment form provided by the Company. Once such forms are
properly filed, an eligible Employee's election to participate
shall be automatically renewed for each subsequent Offering
Period, subject to any termination or withdrawal as provided in
SECTION 5(c). Payroll deductions for a Participant shall commence
on the first payroll date in the Purchase Period following the
date the Participant filed his or her payroll deduction
authorization and Plan enrollment form with the Company, and
shall end on the last payroll date in the Purchase Period to
which such authorization is applicable, unless sooner terminated
by the Participant as provided in SECTION 5(c).
An eligible Employee may authorize payroll deductions at the
rate of any whole percentage of the Employee's Pay, PROVIDED
HOWEVER; (i) such Employee's deduction shall not exceed fifteen
percent (15%) of Pay received by such Employee on each payday
during the Purchase Period, and the aggregate of such payroll
deductions during the Purchase Period shall not exceed fifteen
percent (15%) of the Employee's Pay during the Purchase Period;
and (ii) such Employee's participation in the Plan during each
Purchase Period does not violate the Option to Purchase
limitations set forth in SECTION 6(d). All payroll deductions
made for a Participant shall be credited to his account under
the Plan and will be withheld in whole percentages only. A
Participant may not make any additional payments into such
account.
(b) MODIFICATION OF PAYROLL DEDUCTION. A Participant may decrease his
or her rate of payroll deductions at any time in accordance with
procedures prescribed by the Administrator. A Participant may
increase his or her rate of payroll deductions at any time by
filing a new payroll deduction authorization and Plan enrollment
form, PROVIDED HOWEVER, such increase shall not become effective
until the first payroll date following the next Offering Date.
(c) DISCONTINUANCE OF PARTICIPATION. A Participant may discontinue
participation in the Plan at any time during a Purchase Period by
filing a new payroll deduction authorization and Plan enrollment
form with the Company. If a Participant discontinues
participation in the Plan during a Purchase Period, his or her
accumulated payroll deductions will remain in the Plan for
purchase of shares on the following Purchase Date as specified in
SECTION 7, and the Participant will not
4
<PAGE>
be able to participate in the Plan again until he or she
re-enrolls in the Plan by filing a new payroll deduction
authorization and Plan enrollment form with the Company.
If a Participant discontinues participation in the Plan thirty
(30) days prior to the termination of the Purchase Period, he or
she may request a cash distribution of monies accumulated but
not yet distributed by following procedures which shall be
specified by the Administrator. The Administrator may: (i)
establish rules limiting the frequency with which Participants
may discontinue and resume payroll deductions under the Plan and
may impose a waiting period on Participants wishing to resume
payroll deductions following discontinuance; and (ii) change the
rules regarding discontinuance of participation or changes in
participation in the Plan.
In the event any Participant terminates employment with the
Company for any reason (including death) prior to the expiration
of a Purchase Period, the Participant's participation in the
Plan shall terminate and all accumulated payroll deductions
credited to the Participant's account shall be paid to the
Participant (or the Participant's estate) without interest
(except where required by the applicable state law).
(d) FAILURE TO FOLLOW PROCEDURES. If a Participant has not followed
procedures prescribed by the Administrator to change the rate of
payroll deductions or to discontinue the payroll deductions, the
rate of payroll deductions shall continue at the originally
elected rate throughout the Purchase Period and future Purchase
Periods (or any lower maximum rate then in effect).
(e) TAX WITHHOLDING. At the time the option is exercised, or at the
time the Company's Common Stock issued under the Plan is disposed
of, the Participant must make adequate provision for the
Company's federal, state, or other tax withholding obligations,
if any, which arise upon the exercise of the option or the
disposition of the Common Stock. At any time, the Company may,
but will not be obligated to, withhold from the Participant's Pay
the amount necessary for the Company to meet applicable
withholding obligations, including any withholding required to
make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by the
Employee.
6. OFFERING.
(a) MAXIMUM NUMBER OF SHARES. The maximum number of
Shares that may be sold under the Plan is 250,000 (after
giving effect to the 1.25:1 split effective upon the effective
date of the Company's registration statement on Form S-1,
subject to adjustment upon changes in capitalization of the
Company as provided in SECTION 9. Shares sold under the Plan
may be either authorized and ---------- unissued Shares or
issued Shares heretofore or hereafter acquired and held as
treasury Shares, as the Administrator may from time to time
determine. If on a given Purchase Date the number of shares
with respect to which options are to be exercised exceeds the
number of shares then available under the Plan, the Company
shall make a pro rata allocation of the shares
5
<PAGE>
remaining available for purchase in as uniform a manner as
shall be practicable and as it shall determine to be equitable.
(b) PURCHASE PERIODS. The Plan will operate with successive
bi-annual Purchase Periods after the initial Purchase Period
with a new Purchase Period commencing on the first business days
of January and July of each year, or on such other date as the
Administrator shall determine, and continuing thereafter until
terminated in accordance with SECTIONS 12 or 13 hereof. The
Administrator shall have the power to change the duration of the
Purchase Periods with respect to future offerings without
stockholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first
Purchase Period to be affected.
(c) OPTION TO PURCHASE. With respect to each Purchase Period, each
eligible Employee who has elected to participate in the Plan as
provided in SECTION 5(a) shall be granted an option to purchase
the number of shares of Common Stock which may be purchased with
the payroll deductions accumulated in an account maintained on
behalf of such Employee during each Purchase Period at the
purchase price specified in subparagraph (d) below, subject to
the limitation contained in this subparagraph (c). Each
Participant's total annual purchase of Common Stock under the
Plan and any other employee stock purchase plan of the Company
described in Section 423 of the Code, will be limited to the
lesser of: (i) fifteen percent (15%) of the Participant's annual
Pay, (ii) $25,000, or (iii) 1,000 shares of Common Stock.
(d) OPTION PRICE. The option price under each option shall be the
lower of: (i) a percentage (not less than eighty-five percent
(85%)) established by the Administrator ("Designated Percentage")
of the Fair Market Value of the Common Stock on the Offering Date
on which an option is granted (as defined under Section 423 of
the Code); or (ii) the Designated Percentage of the Fair Market
Value of the Common Stock on the Purchase Date. The Administrator
may change the Designated Percentage with respect to any future
Purchase Period, but not below eighty-five percent (85%), and the
Administrator may determine with respect to any prospective
Purchase Period that the option price shall be the Designated
Percentage of the Fair Market Value of the Common Stock on the
Purchase Date.
7. PURCHASE OF STOCK.
Upon the expiration of each Purchase Period, a Participant's option
shall be exercised automatically for the purchase of that number of full shares
of Common Stock which the accumulated payroll deductions credited to the
Participant's account at that time shall purchase at the applicable price
specified in SECTION 6(d), subject to SECTION 6(c). In each Purchase Period, any
payroll deductions that are insufficient to purchase a full share of Common
Stock under the Plan shall be carried over to the next Purchase Period.
6
<PAGE>
8. PAYMENT AND DELIVERY.
Upon the exercise of an option on each Purchase Date, the Company (or
Affiliate) shall deliver to the Participant a record of the Common Stock
purchased, except as specified below. Shares to be delivered to a Participant
under the Plan will be registered in the name of the Participant or, if the
Participant so directs by written notice to the Administrator prior to the
Purchase Date, in the names of the Participant and one such other person as may
be designated by the Participant, as joint tenants with rights of survivorship,
to the extent permitted by the Applicable Laws.
The Administrator may permit or require that shares are deposited
directly with a broker designated by the Administrator (or a broker selected by
the Administrator) or to a designated agent of the Company, and the
Administrator may utilize electronic or automated methods of share transfer. The
Administrator may require that shares be retained with such broker or agent for
a designated period of time (and may restrict dispositions during that period)
and/or may establish other procedures to permit tracking of disqualifying
dispositions of such shares or to restrict transfer of such shares. The
Administrator also may require that shares purchased under the Plan shall
automatically participate in a dividend reinvestment plan or program maintained
by the Company.
The Company shall retain the amount of payroll deductions used to
purchase Common Stock as full payment for the Common Stock and the Common Stock
shall then be fully paid and non-assessable. No Participant shall have any
voting, dividend, or other stockholder rights with respect to shares subject to
any option granted under the Plan until the shares subject to the option have
been purchased and delivered to the Participant as provided in SECTION 7 and
this SECTION 8.
9. RECAPITALIZATION.
(a) If after the grant of an option, but prior to the purchase of
Common Stock under the option, there is any increase or decrease
in the number of outstanding shares of Common Stock because of a
stock split, stock dividend, combination or recapitalization of
shares subject to options, the number of shares to be purchased
pursuant to an option, the share limit of SECTION 6(c) and the
maximum number of shares specified in SECTION 6(a) shall be
proportionately increased or decreased, the terms relating to the
purchase price with respect to the option shall be appropriately
adjusted by the Administrator, and the Administrator shall take
any further actions which, in the exercise of its discretion, may
be necessary or appropriate under the circumstances.
(b) The Administrator, if it so determines in the exercise of its
sole discretion, also may adjust the number of shares specified
in SECTION 6(a), as well as the price per share of Common Stock
covered by each outstanding option and the maximum number of
shares subject to any individual option, in the event the
Company effects one or
7
<PAGE>
more reorganizations, recapitalizations, spin-offs, split-ups,
rights offerings or reductions of shares of its outstanding
Common Stock.
(c) The Administrator's determinations under this SECTION 9 shall be
conclusive and binding on all parties.
10. MERGER, LIQUIDATION, OTHER CORPORATION TRANSACTIONS.
(a) In the event of the proposed liquidation or dissolution of the
Company, the Purchase Period then in progress will terminate
immediately prior to the consummation of such proposed
liquidation or dissolution, unless otherwise provided by the
Administrator in its sole discretion, and all outstanding
options shall automatically terminate and the amounts of all
payroll deductions will be refunded without interest to the
Participants.
(b) In the event of a proposed sale of all or substantially all of
the assets of the Company, or the merger or consolidation of the
Company with or into another corporation, then in the sole
discretion of the Administrator: (i) each option shall be assumed
or an equivalent option shall be substituted by the successor
corporation or parent or subsidiary of such successor
corporation; (ii) a date established by the Administrator on or
before the date of consummation of such merger, consolidation or
sale shall be treated as an Exercise Date, and all outstanding
options shall be deemed exercisable on such date; or (iii) all
outstanding options shall terminate and the accumulated payroll
deductions shall be returned to the Participants, without
interest.
11. TRANSFERABILITY.
Neither payroll deductions credited to a Participant's account nor any
rights with regard to the exercise of an option or to receive Shares under the
Plan may be voluntarily or involuntarily assigned, transferred, pledged, or
otherwise disposed of in any way other than by will or the laws of descent and
distribution or by a "qualified domestic relations order" under the Code, and
any other attempted assignment, transfer, pledge, or other disposition shall be
null and void and without effect. If a Participant in any manner attempts to
transfer, assign or otherwise encumber his or her rights or interest under the
Plan, other than as permitted by the Code, such act shall be treated as an
election by the Participant to discontinue participation in the Plan pursuant to
SECTION 5(c). Any option granted to a Participant under the Plan may be
exercised only by the Participant during his or her lifetime.
12. TERM OF PLAN.
The Plan shall continue for [A TEN YEAR] term measured from its
Effective Date, unless previously terminated in accordance with SECTION 13.
8
<PAGE>
13. AMENDMENT OR TERMINATION OF THE PLAN.
The Administrator may, in its sole discretion, insofar as permitted by
law, terminate or suspend the Plan or revise or amend it in any respect
whatsoever. No such termination shall affect options previously granted and
exercised, nor shall any amendment make any change in any option theretofore
granted which would adversely affect the rights of any Participant. No revision
or amendment shall be made without prior approval of the stockholders if such
amendment would:
(a) materially increase the number of shares subject to the Plan,
other than an adjustment under SECTION 9 of the Plan;
(b) materially modify the requirements as to eligibility for
participation in the Plan, except as otherwise specified in this
Plan;
(c) reduce the purchase price specified in SECTION 6(d), except as
specified in SECTION 9; or
(d) extend the term of the Plan beyond the date specified in SECTION
12.
14. USE OF FUNDS.
All payroll deductions received or held by the Company (or Affiliate)
under the Plan may be used by the Company (or by the Affiliate) for any
corporate purpose, and may be commingled with its other corporate funds. No
interest shall be paid or credited to the Participant with respect to such
payroll deductions except where required by local law as determined by the
Administrator.
15. LOCAL LAW.
The Administrator may adopt rules or procedures relating to the
operation and administration of the Plan to accommodate the specific
requirements of local laws and procedures. Without limiting the generality of
the foregoing, the Administrator is specifically authorized to adopt rules and
procedures regarding handling of payroll deductions, payment of interest,
payroll tax, withholding procedures and handling of stock certificates which
vary with local requirements.
16. SECURITIES LAWS COMPLIANCE.
The Company shall not be under any obligation to issue Common Stock
upon the exercise of any option unless and until the Company has determined
that: (i) the Common Stock which is the subject of such issuance is duly and
properly registered under the Securities Act of 1933 as amended, or the issuance
of such Common Stock is exempt from registration under both federal law and the
applicable state securities laws; (ii) all applicable listing requirements of
the stock market or exchange upon which the Common Stock is listed has been
satisfied; and (iii) all other applicable provisions of state and federal law
have been satisfied.
9
<PAGE>
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such shares if such a
representation is required by Applicable Law.
17. NOTICES.
All notices or other communications by a Participant to the Company (or
Affiliate) under or in connection with the Plan shall be deemed to have been
given when received by the Administrator or when received in the form specified
by the Administrator at the location, or by the person, designated by the
Administrator for the receipt thereof.
18. NO ENLARGEMENT OF EMPLOYEE RIGHTS.
Nothing contained in this Plan shall be deemed to give any Employee the
right to be retained in the employ of the Company (or of the Affiliate) or to
interfere with the right of the Company (or Affiliate) to discharge any Employee
at any time.
19. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
(a) This Plan and the rights granted hereunder shall be construed
and determined in accordance with the laws of the State of
Illinois.
(b) This Plan and the Company's obligation to sell and deliver
Shares under the Plan shall be subject to all Applicable Laws,
and the obtaining of such approvals by governmental agencies
required in connection with the Plan or the authorization,
issuance, sale, or delivery of stock hereunder.
20. NOTICE OF DISQUALIFYING DISPOSITION.
The Administrator may require, as a condition of participation in the
Plan, that a Participant agree to promptly notify the Company of any disposition
of Shares (including the number of such Shares) acquired pursuant to an option
granted under the Plan within two years of the grant date of the applicable
option or within one year of the transfer of the Shares to him or her (a
"Disqualifying Disposition").
21. EFFECTIVE DATE; STOCKHOLDER APPROVAL.
This Plan shall become effective upon October 1, 1999 subject to
approval by the stockholders of the Company within twelve (12) months of such
approval and adoption and provided that prior to such date the Company is
subject to the periodic reporting requirements under Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, ("Effective Date"). Such
stockholder approval shall be obtained in the degree and manner required
under the Third Restated Certificate of Incorporation of Tunes.com Inc. and
Applicable Law. All Shares issued under the Plan shall become void in the
event such approval is not obtained. No options shall be granted under the
Plan prior to the Effective Date.
10
<PAGE>
Exhibit 5.1
______, 1999
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Re: REGISTRATION STATEMENT ON FORM S-1, NO. 333-80627
Ladies and Gentlemen:
We have acted as counsel to Tunes.com Inc., a Delaware corporation (the
"Corporation"), in connection with the preparation and filing of the
Registration Statement on Form S-1, File No. 333-80627 with the United States
Securities and Exchange Commission under the Securities Act of 1933, as
amended, pertaining to the registration by the Corporation of shares (the
"Shares") of its Common Stock (the "Common Stock"), par value $0.01 per
share, described on the cover page of such Registration Statement. Such
Registration Statement, as amended, including any registration statement
relating thereto and filed pursuant to Rule 462(b) under the Securities Act,
is herein referred to as the "Registration Statement."
We are of the opinion that the Shares to be offered and sold by the
Corporation have been duly authorized and, when issued and sold by the
Corporation in the manner described in the Registration Statement and in
accordance with the resolutions adopted by the board of directors of the
Corporation, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under
the section entitled "Legal Matters" in the Registration Statement
and the prospectus included therein. In providing this consent, we
do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act, the
rules and regulations of the Securities and Exchange Commission
promulgated thereunder, or Item 509 of Regulation S-K.
This opinion is rendered as of the date written above, and we disclaim any
obligation to advise you of facts, circumstances, events or developments which
hereafter may be brought to our attention and which may alter, affect or
modify the opinion expressed herein. Our opinion is expressly limited to the
matters set forth above, and we render no opinion, whether by implication or
otherwise, as to any other matters relating to the Corporation or the Shares.
Very truly yours,
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FREEBORN & PETERS
<PAGE>
Exhibit 10.1
AFFILIATION AGREEMENT
This AFFILIATION AGREEMENT (this "Agreement") is entered into as of this
10th day of November 1997 between JAMtv Corporation, a Delaware corporation
("JAMtv"), and Straight Arrow Publishers Company, L.P., a Delaware limited
partnership ("Wenner Media").
RECITALS:
A. Wenner Media and JAMtv desire to enter into the agreements
described herein providing for the integration of the Rolling Stone Content
(including certain content of ROLLING STONE magazine and the Rolling Stone
Online website at the Rolling Stone URL) into the JAMtv Music Network to create
the Rolling Stone Network. Capitalized terms used in this Agreement have the
meanings ascribed to them in Section 1 below.
B. Subject to the satisfaction of the conditions precedent set forth
herein and subject to the other terms and conditions set forth in this Agreement
and the other Affiliation Agreements:
(i) JAMtv and Wenner Media will commence and consummate the
integration of Rolling Stone Online into the JAMtv Music
Network in accordance with the Launch Schedule to create
the Rolling Stone Network;
(ii) JAMtv will provide the JAMtv Hosting Services and present
the JAMtv Content and the Rolling Stone Content on the
Rolling Stone Network;
(iii) Wenner Media will deliver the Rolling Stone Content to
JAMtv, grant or cause the grant of the Wenner Media
Licenses to JAMtv, and pay certain merchandising
commissions to JAMtv;
(iv) Wenner Media will provide certain advertising and promotion
services and opportunities to JAMtv in connection with
ROLLING STONE magazine, as well as access to certain
promotional programs, as appropriate.
(v) JAMtv will be responsible for paying the License Fees and
certain advertising commissions to Wenner Media and for
delivering a Warrant to Wenner Media which provides for the
purchase of certain shares of common stock of JAMtv; and
(vi) from and after the Launch Date, among other things, the
Rolling Stone URL and the JAMtv URL will be integrated into
and/or will point to the Rolling Stone Network.
NOW, THEREFORE, in consideration of the Recitals (which are incorporated
herein by this
<PAGE>
reference), the mutual promises contained herein, and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
JAMtv and Wenner Media hereby agree as follows:
1. DEFINED TERMS. As used in this Agreement, the following
capitalized terms shall have the meanings set forth below unless otherwise
defined herein. All of the Affiliation Agreements referenced below are of even
date herewith unless otherwise expressly dated below.
"Affiliation Agreements" means, collectively, this
Agreement, the Escrow Agreement and the Warrant.
"America Online" means America Online, Inc., together with
its successors, assigns, and affiliates.
"AOL Rolling Stone Site" means the online site with America
Online which features certain exclusive Rolling Stone Content and
other non-exclusive Rolling Stone Content (such as .WAV files of
record reviews) and uses certain of the Rolling Stone Trademarks.
"Archival Rolling Stone Content" means the archival and
historical Rolling Stone Content or derivatives thereof which are
or will be digitized, formatted, modified, recorded, or otherwise
manipulated or stored by JAMtv to render such Rolling Stone
Content suitable for use with the Rolling Stone Network in
accordance with Section 2.
"Confidential Information" means the trade secrets or other
information of a confidential nature of a party hereto, including,
without limitation, such information, arising from such party's
business, customers, or Proprietary Rights, and whether or not
owned by such party or held in confidence by such party under an
obligation of confidentiality with a third party.
"Default" means a default by a party under this Agreement,
as specified in Section 19, or under one of the other Affiliation
Agreements.
"Escrow Agreement" means that certain Escrow Agreement
among JAMtv, Wenner Media, and American National Bank and Trust
Company of Chicago, in the form attached hereto as Exhibit A.
"Escrow License Fees" means the License Fees subject to
deposit under the Escrow Agreement in accordance with paragraph
(d) of Section 9.
"First Payment Date" means the date of the first Scheduled
License Fee payment payable hereunder in accordance with paragraph
(a) of Section 9.
"Initial Term" means the initial three (3) year term of
this Agreement
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specified in paragraph (a) of Section 18.
"Interactive Network" means the Internet, the World Wide
Web and online services (E.G., CompuServe, Prodigy, Microsoft
Network, and Snap), accessed through any interactive electronic
means of distribution or transmission now or hereafter known,
including without limitation computer networks, cable networks,
fiber optic networks, satellite networks, and wireless interactive
networks; and Internet-dependent or enabled CDs, CD-ROMs and DVDs,
the principal purpose of which is obtaining, supplementing and
updating information and multimedia assets that are being provided
online.
"JAMtv Content" means (exclusive of JAMtv's rights in the
Rolling Stone Content) all of JAMtv's: (a) copyrights, whether or
not registered, registrations thereof, applications for
registration thereof, and all secondary and subsidiary rights
therein; (b) service marks, trademarks, trade dress, registrations
thereof, and applications for registration thereof, together with
the goodwill symbolized thereby and connected therewith; (c) art,
audiovisual works, animations, cartoons, characters, choreography,
compilations, collective works, computer software and programs,
data, designs, emblems, films, film clips, graphics, images,
illustrations, likenesses, literary works, logos, motion pictures,
musical compositions, music videos, performances, photographs,
pictorial works, songs, song lyrics, sound recordings, scripts,
screenplays, templates, text, video recordings, copyrightable
subject matter, works of authorship, trade secrets (including
without limitation customer and vendor lists), and other
proprietary rights; (d) all rights under copyright and moral
rights associated with the foregoing; (e) all renewals,
extensions, continuations, derivative works, enhancements,
improvements, modifications, updates, new releases or other
revisions of the foregoing; (f) all publicity rights or privacy
rights (or waivers or quitclaims thereof) of any person or entity,
and (g) all rights corresponding to the foregoing throughout the
world; all of the foregoing which any of JAMtv or its employees,
consultants or representatives has created or may hereafter
create, has licensed or may hereafter license, or has acquired or
may hereafter acquire, in any form and on any medium now known or
hereafter developed, whether tangible, printed, recorded,
digitized, fixed, stored, electronic, or otherwise embodied, and
including, without limitation, such content described on SCHEDULE
1 hereto.
"JAMtv Hosting Services" means the services provided by
JAMtv in accordance with Section 2.
"JAMtv Music Network" means the interactive multimedia site
on the Interactive Network currently hosted by JAMtv at the JAMtv
URL or any other location or site on the Interactive Network
through which JAMtv places, broadcasts, downloads, transmits, or
distributes JAMtv Content (or, after the Launch Date, any Rolling
Stone Content pursuant hereto), together with any affiliated radio
station
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sites and participating venue sites on the Interactive Network.
"JAMtv URL" means the uniform resource locator
'http://www.jamtv.com' and any and all extensions thereof.
"Launch Date" means the completion date of the initial
integration of the JAMtv Music Network and Rolling Stone Online
into the Rolling Stone Network, as mutually accepted by JAMtv and
Wenner Media.
"Launch Schedule" means the tasks to be performed by JAMtv
and Wenner Media to commence and consummate the integration of
Rolling Stone Online, the Rolling Stone Trademarks, and the
Rolling Stone Content into the JAMtv Music Network to create the
Rolling Stone Network and the time line therefor, as such tasks
and time line are more particularly described in Section 2 and on
SCHEDULE 1.
"License Fees" means the Scheduled License Fees and the
Trigger License Fee.
"Microsoft Button" means the Interactive Network enabled
link from Microsoft Corporation's Internet Explorer 4.0 (and later
versions, when available), which presently points to the Rolling
Stone Online site maintained by Wenner Media at the Rolling Stone
URL and which shall (in accordance with paragraph (c) of Section
8) point to the Rolling Stone Network from and after the Launch
Date.
"MusicNet" means a prior joint venture of Wenner Media
(which is no longer operating or in existence, and is commonly
referred to by Wenner Media as >MusicNet') involving Rolling Stone
Content, including specifically recorded interviews with various
artists (which interviews are the property of Wenner Media but not
currently in its possession).
"Net Revenue" means aggregate gross invoice amounts minus
standard discounts and actual returns.
"Network Icon" means a printed icon or logo of type, style,
and design to be mutually agreed upon between the parties for
placement at certain designated locations in ROLLING STONE
magazine which will refer to related supplementary materials and
multimedia assets available on the Rolling Stone Network in
accordance with Section 8.
"Proprietary Rights" means any copyright, trademark, trade
name, trade dress, service mark, domain name, invention,
discovery, patent, patent applications, trade secret, rights of
publicity, and any other proprietary interests, including but not
limited to rights in HTML and/or VRML code, CGI and/or Perl
scripts, JavaScript
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code and Java code or applets and tools or techniques developed,
page designs, layouts, graphic images, and/or styles, and page and/or
form templates developed.
"Qualified Public Offering" means a primary or secondary
sale of shares of common stock of JAMtv to the public pursuant to
a public offering registered under the Securities Act of 1933, as
amended, which shall be consummated where the aggregate net
proceeds to JAMtv (after deducting underwriting discounts and
commissions and expenses of the offering) from the offering of the
shares of common stock so registered are at least $15,000,000.
"Qualified Private Offering" means a private offering of
equity securities of JAMtv which shall be consummated where the
aggregate net proceeds to JAMtv from the offering of such
securities are at least $15,000,000.
"Renewal Term" means the subsequent five (5) year renewal
term or any other renewal term of this Agreement specified in
paragraph (b) of Section 18.
"Rolling Stone Content" means the content of Wenner Media
described on SCHEDULE 2 hereto.
"Rolling Stone Merchandise" means merchandise (including
without limitation books, magazine back issues, compact disks, and
clothing) incorporating, embodying or displaying Rolling Stone
Content or Rolling Stone Trademarks.
"Rolling Stone Network" means JAMtv's interactive
multimedia site(s) available on the Interactive Network (including
without limitation any one or more alternatively named networks
and/or sites available on the Interactive Network) resulting from
the integration of Rolling Stone Online into the JAMtv Music
Network pursuant hereto, as updated, modified, or supplemented
from time to time.
"Rolling Stone Online" means the World Wide Website hosted
by Wenner Media before the Launch Date at the Rolling Stone URL
for Rolling Stone Content and on which JAMtv shall after the
Launch Date, pursuant hereto, place, broadcast, download,
transmit, or distribute Rolling Stone Content (and JAMtv Content
pursuant hereto).
"Rolling Stone Trademarks" means the trademarks, service
marks and logos listed on SCHEDULE 3 hereto, and the trade dress
of ROLLING STONE magazine.
"Rolling Stone URL" means the uniform resource locator
http://www.rollingstone.com' and any and all extensions thereof.
"Scheduled License Fees" means the license fees payable by
JAMtv in accordance with paragraphs (a), (b), (c), (d) and (e) of
Section 9.
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"Term" means the Initial Term or any Renewal Term.
"Third Party Restrictions" means the restrictions imposed
by third parties on Wenner Media's rights in Rolling Stone Content
provided by third parties, as such restrictions are more
particularly described in paragraph (b) of Section 5.
"Trigger Event" means either a Qualified Public Offering or
a Qualified Private Offering occurring before the expiration or
termination of the Initial Term or any Renewal Term.
"Trigger License Fee" means the license fee payable by
JAMtv in accordance with paragraph (f) of Section 9.
"Warrant" means that certain Warrant, issued by JAMtv to
Wenner Media, in the form attached hereto as Exhibit B.
"Wenner Media Licenses" means the licenses and rights
granted to JAMtv pursuant to this Agreement.
2. JAMTV HOSTING SERVICES. JAMtv will install and host, at no cost
to Wenner Media, the Rolling Stone Online site as redesigned and incorporated
into the Rolling Stone Network on its servers in Chicago (or elsewhere) and use
its best efforts to provide at all times commercially reasonable access at
competitive speeds to the Rolling Stone Network for a reasonable number
(expected to increase significantly over time) of simultaneous audio, video and
database users located anywhere on the Internet. In accordance therewith, JAMtv
will: (a) migrate and integrate Rolling Stone Online and other Rolling Stone
Content (including, without limitation, the Rolling Stone Content on the AOL
Rolling Stone Site which is not exclusively licensed to America Online) into the
JAMtv Music Network to create the Rolling Stone Network; (b) digitize and
integrate existing and future Rolling Stone Content (including, without
limitation, the Rolling Stone Content on the AOL Rolling Stone Site which is not
exclusively licensed to America Online and the Archival Rolling Stone Content)
as it deems appropriate for use on the Rolling Stone Network; (c) maintain,
support and further develop the Rolling Stone Network, including without
limitation developing and acquiring new JAMtv programming, acquiring and
maintaining such technological advances as are necessary to develop and maintain
a competitive advantage in the field of music and related networks on the
Interactive Network and consistent with the quality of the premiere music
network on the Interactive Network; and (d) promote, distribute, and offer to
sell Rolling Stone Merchandise on the Rolling Stone Network. JAMtv may, at any
time, in its sole discretion after the Launch Date, change, expand, alter or
redesignate the physical server(s) for the Rolling Stone Network (and associated
servers for Rolling Stone Online, if any, and the JAMtv Music Network) as well
as their physical locations in order to enhance, optimize, simplify, consolidate
or otherwise integrate the performance and other operating characteristics of
all of the sites on the Interactive Network which collectively constitute the
Rolling Stone Network. The web site constituting the home page of the Rolling
Stone Network shall be called the "Rolling Stone Network," unless the parties
agree
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<PAGE>
otherwise. JAMtv will also migrate, maintain and support, but not provide
any content for, Wenner Media's US magazine, MEN'S JOURNAL and CEASE FIRE Web
sites at their respective URLs; provided that, Wenner Media will provide
fractional page advertisements to JAMtv a minimum of four times per year in each
of US magazine (one-third or one-half page ads) and MEN'S JOURNAL (one-quarter
or one-half page ads), the specific issues and placement to be determined in
Wenner Media's sole discretion.
3. JAMTV CONTENT. In accordance with and subject to the terms more
particularly described on SCHEDULE 1 attached hereto, JAMtv will make the JAMtv
Content available to the Rolling Stone Network.
4. ROLLING STONE CONTENT. In accordance with and subject to the
following terms and the terms more particularly described on SCHEDULE 2 attached
hereto, Wenner Media will develop, create, and acquire, and make available to
JAMtv, to the extent not prohibited by Third Party Restrictions, the Rolling
Stone Content at no cost to JAMtv other than as expressly provided in this
Agreement, provided Wenner Media possesses the necessary Proprietary Rights
thereto.
(a) ACCESS AND DELIVERY. Wenner Media shall provide
JAMtv, at reasonable times and from time to time, access to the
facilities where Rolling Stone Content is or may be stored in
order to access, copy, duplicate, digitize, retrieve, and utilize
the Rolling Stone Content. Wenner Media shall provide JAMtv with
reasonable assistance and technical support pursuant thereto
including, without limitation, provision and shipping to JAMtv of
recordings, CDs or other copies of the Rolling Stone Content or
transmission thereof by electronic, satellite, Internet, or
telecommunications means to JAMtv. JAMtv will have access to such
new Rolling Stone Content to be published in ROLLING STONE
magazine on or before the on sale date which is included in the
official ROLLING STONE publishing schedule for the issue of
ROLLING STONE magazine in which such Rolling Stone Content is to
appear. Wenner Media and JAMtv will provide to each other, at no
cost to the other, access to and appropriate copies of statistics,
charts, lists, sales figures, and other data related to activities
on the Rolling Stone Network which each of them may obtain,
purchase, develop or otherwise possess.
(b) FORM. Wenner Media will provide JAMtv with
(1) electronic, CD, or digital copies of Rolling Stone Content in
server ready format (except for Archival Rolling Stone Content
more than five years old which may be provided or delivered in
whatever form it is presently available) and (2) color copies, of
typeset quality, of all trademarks, service marks, design logos,
and artwork comprising Rolling Stone Content.
(c) ACQUISITION AND CREATION OF ROLLING STONE CONTENT.
To the extent consistent with Wenner Media's agreements with
contributors, writers, photographers, promoters, artists,
musicians, and other originators, creators, owners,
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<PAGE>
and licensors of Rolling Stone Content, Wenner Media will in good faith
develop, create, and acquire additional Rolling Stone Content upon terms
consistent with the Wenner Media License granted hereunder.
Wenner Media will in good faith use reasonable efforts to acquire
such incremental or incidental rights necessary to use on the
Rolling Stone Network, Rolling Stone Content to which it does not
otherwise have the necessary Proprietary Rights sufficient to
permit such use, whenever an opportunity to acquire such rights
arises by virtue of any contract negotiations or discussions
between Wenner Media and any originator, creator, owner, or
licensor (or any agent or manager thereof) of rights covered by
the definition of Rolling Stone Content (including without
limitation such rights relating to any literary, artistic, or
photographic contribution, interview, live performance, or studio
session); provided that the incremental reasonable out-of-pocket
costs associated therewith that Wenner Media would not otherwise
incur in the ordinary course of business for ROLLING STONE
magazine or for the AOL Rolling Stone Site will be promptly
reimbursed by JAMtv (provided that JAMtv has agreed in writing to
such costs prior to their being incurred). Wenner Media shall
notify JAMtv upon Wenner Media's acquisition of any significant
new Rolling Stone Content out of the ordinary course of business
and, provided it possesses the necessary Proprietary Rights
sufficient to permit use thereof on the Rolling Stone Network,
will make all such Rolling Stone Content readily available to
JAMtv in accordance with paragraph (a) above. Wenner Media will
also use reasonable efforts to assist JAMtv in identifying,
soliciting and contracting with writers and other talent which the
parties believe can make substantial contributions to the content
on the Rolling Stone Network. Wenner Media and the Rolling Stone
Online staff will assist JAMtv in developing new sections, areas,
features, and other elements for the Rolling Stone Network
including, without limitation, weekly events, trivia and
photography games and quizzes, personals and polls online,
celebrity chats, music critics round tables, and gossip columns.
In addition, Wenner Media and the Rolling Stone Online staff will
assist JAMtv in contacting and developing, with major third party
Internet businesses (such as Yahoo, Excite, Infoseek, Microsoft
Corporation, America Online, and Netscape), new brand
opportunities, products and services for such items as branded
Rolling Stone Network webcasts for Yahoo, branded Rolling Stone
Network interviews, and branded Rolling Stone Network online
celebrity chats.
(d) ROLLING STONE STAFFING. Wenner Media will maintain a
sufficient Rolling Stone Online staff throughout the Term to meet
its content production responsibilities under this Agreement.
Wenner Media, at JAMtv's expense (other than two trips per year at
Wenner Media's expense, staff to be sent at Wenner Media's
discretion) will direct appropriate senior members of the Rolling
Stone Online staff to visit JAMtv offices in Chicago on a regular
basis to plan and coordinate the activities of the parties in
providing the content for the Rolling Stone Network and will
provide one or more work spaces in the Wenner Media offices in New
York to be used from time to time by JAMtv personnel in connection
with their visits to New
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<PAGE>
York for similar coordination and planning meetings, which work spaces
need not be the same on each visit.
5. CONTENT LICENSE.
(a) GRANT. Subject to the Third Party Restrictions,
Wenner Media hereby grants to JAMtv an exclusive (as defined in
Section 12 hereof) worldwide license to and right to use and
exploit the Rolling Stone Content (including without limitation
through the reproduction, translation, printing, adaptation,
modification, reformatting, publishing, alteration, digitizing,
capturing, editing, cropping, combination, synchronization,
exhibition, performance, display, and transmission thereof in any
form and through any medium now known or later developed) in
connection with the Rolling Stone Network and the design,
operation, distribution, display, transmission, marketing,
advertising, and promotion thereof. Notwithstanding the
foregoing, JAMtv shall not sublicense any Rolling Stone Content to
any entity reasonably deemed by Wenner Media to be a competitor of
Wenner Media.
(b) THIRD PARTY RESTRICTIONS. JAMtv acknowledges that
Wenner Media does not possess all of the Proprietary Rights
necessary to provide and license certain Rolling Stone Content for
use on the Rolling Stone Network because certain Rolling Stone
Content is subject to Third Party Restrictions. Wenner Media
will, upon JAMtv's request, provide JAMtv with copies of
documentation describing specific Third Party Restrictions or will
disclose to JAMtv the nature, duration, scope, and other material
terms of such Third Party Restrictions in reasonable detail.
Wenner Media shall have no obligation to obtain all necessary
rights to use such Rolling Stone Content in connection with the
Rolling Stone Network unless it does so in the ordinary course of
business in connection with ROLLING STONE magazine or for the AOL
Rolling Stone Site; provided that Wenner Media will in good faith
use reasonable efforts to obtain such rights if JAMtv agrees in
advance in writing to pay the reasonable out-of-pocket costs of
Wenner Media associated therewith which Wenner Media would not
otherwise have incurred in the ordinary course of business for
ROLLING STONE magazine or for the AOL Rolling Stone Site.
(c) FIRST OFFER TO JAMTV. If Wenner Media is unable,
despite its reasonable efforts, to acquire or license the rights
covered by the definition of Rolling Stone Content pursuant to the
preceding paragraphs, Wenner Media will reasonably cooperate with
JAMtv to assist JAMtv in acquiring or licensing such rights.
6. TRADEMARK LICENSE.
(a) GRANT. Subject to the terms and conditions of this
Agreement, Wenner Media hereby grants to JAMtv a right and license
to use the Rolling Stone
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Trademarks and the Rolling Stone URL solely in connection with the
Rolling Stone Network and the design, operation, distribution, display,
transmission, marketing, advertising and promotion thereof.
(b) QUALITY CONTROL. Wenner Media shall have the right
to exercise quality control over the Rolling Stone Network and
JAMtv's use of the Rolling Stone Trademarks to that degree
necessary, in the reasonable opinion of Wenner Media, to maintain
the validity and enforceability of the Rolling Stone Trademarks
and to protect the goodwill associated therewith. JAMtv shall, in
its design, operation, distribution, display, transmission,
marketing, advertising and promotion of the Rolling Stone Network,
adhere to a level of quality at least as high as that established
by Wenner Media in connection with Rolling Stone Online prior to
the Launch Date, and to such reasonable standards and
specifications as may be provided by Wenner Media to JAMtv from
time to time.
(c) TRADEMARK USAGE. JAMtv shall use the Rolling Stone
Trademarks in accordance with sound trademark and trade name usage
principles and in compliance with all applicable laws and
regulations of the United States, including without limitation all
laws and regulations relating to the maintenance of the validity
and enforceability of the Rolling Stone Trademarks; and JAMtv
shall not use the Rolling Stone Trademarks in any manner which
might tarnish, disparage, or reflect adversely on Wenner Media or
the Rolling Stone Trademarks. JAMtv shall use, in connection with
the Rolling Stone Trademarks, all legends, notices and markings as
required by law. JAMtv shall not materially alter the appearance
of the Rolling Stone Trademarks on the Rolling Stone Network or in
any advertising, marketing, distribution, or sales materials, or
any other publicly distributed materials.
(d) CONFORMANCE WITH STANDARDS. JAMtv shall, upon the
request of Wenner Media, submit to Wenner Media representative
samples of all publicly distributed advertising materials using
the Rolling Stone Trademarks prior to their initial distribution.
In the event that Wenner Media finds that such advertising
materials, or any materials included on the Rolling Stone Network,
materially deviate from the standards and specifications provided
to JAMtv by Wenner Media or from the standards of quality
associated with Rolling Stone Online prior to the Launch Date, or
that, in the reasonable opinion of Wenner Media, such materials
misuse the Rolling Stone Trademarks, JAMtv shall, upon notice from
Wenner Media, immediately, and no later than ten (10) days after
receipt of Wenner Media's notice, take all measures reasonably
necessary to correct the deviations or misrepresentation in, or
misuse of, the respective items; provided, however, in the event
Wenner Media reasonably determines that the defect poses a threat
to the validity of the Rolling Stone Trademarks or to the goodwill
associated therewith, JAMtv shall, upon notice from Wenner Media,
immediately cease and desist all distribution, sale and marketing
of the nonconforming items, and shall immediately remove such
nonconforming items
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from the Rolling Stone Network and/or order its distributors and
retailers to cease shipment and/or sale of such nonconforming items.
If JAMtv fails to take such steps, Wenner Media shall have the right
to terminate this Agreement pursuant to the terms of Section 20.
(e) COOPERATION. JAMtv shall comply with such other
reasonable requests as are made by Wenner Media to enable Wenner
Media to assure the quality of any materials on the Rolling Stone
Network bearing any Rolling Stone Trademark. JAMtv agrees that it
shall cooperate with Wenner Media to avoid confusion or conflict
arising out of Wenner Media's or any other licensee's simultaneous
use of the Rolling Stone Trademarks in connection with other
products or services outside of the Interactive Network (but
including the AOL Rolling Stone Site), and to resolve any such
conflicts to the satisfaction of Wenner Media.
7. ALLOCATION OF CREATIVE AND EDITORIAL CONTROL.
(a) WENNER MEDIA. Wenner Media shall have creative and
editorial control over all content of the Rolling Stone Network
(other than the JAMtv Content) which shall be subject to the final
review and edit of the editorial management of Rolling Stone
Online. Without limiting the foregoing, the initial layout and
design of the integrated Rolling Stone Network site (as of the
Launch Date) and any subsequent changes thereto shall be subject
to the artistic approval of Wenner Media which shall not be unduly
delayed or unreasonably withheld.
(b) JAMTV. Except as set forth in paragraph (a) above,
JAMtv shall have editorial and creative control over the JAMtv
Content contained in the Rolling Stone Network, subject to
paragraph (d) of Section 6. JAMtv may use the JAMtv trademarks on
or in connection with the Rolling Stone Network solely to identify
JAMtv as "producer," "distributor," "syndicator" or "host" of the
Rolling Stone Network and only as approved in advance by Wenner
Media, such approval not to be unreasonably withheld. JAMtv may,
in its sole discretion, at any time, add, modify, change, delete,
substitute or reschedule in whole or in part from time to time any
and all aspects of the JAMtv Content, subject to paragraph (d) of
Section 6.
8. PROMOTION AND ADVERTISING.
(a) In accordance with and in consideration of the terms
more particularly described on SCHEDULE 4 attached hereto, Wenner
Media will in good faith promote the Rolling Stone Network, and
the programming contained thereon. Such promotion duties shall
include, without limitation, the preparation and inclusion in
every issue of ROLLING STONE magazine of an editorial column to be
written and edited by Wenner Media, as more fully described on
SCHEDULE 4 attached hereto. Wenner Media will produce advertising
copy for any commercial messages as Wenner Media
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uses to promote the foregoing. Wenner Media shall submit examples of
all proposed advertisements and other promotional materials for the
Rolling Stone Network to JAMtv for inspection, provided that Wenner
Media will have the final right of approval with respect thereto.
(b) Wenner Media shall immediately prior to the Launch
Date undertake all steps necessary to assure that the Microsoft
Button and the PointCast College Network at all times after the
Launch Date permit all users thereof to seamlessly link to the
Rolling Stone Network. JAMtv shall be responsible for all
maintenance and support necessary to maintain the Microsoft Button
and PointCast College Network links, respectively, to the Rolling
Stone Network.
(c) Wenner Media shall place an explanation of the
Network Icon and examples of the Network Icon in each issue of
ROLLING STONE magazine, in a manner designed to encourage readers
to access the Rolling Stone Network. A Network Icon shall be
placed at such locations in the magazine as Wenner Media elects in
its sole discretion, provided that Wenner Media shall place a
Network Icon at the end of the music reviews section.
(d) JAMtv and Wenner Media shall cooperate in good faith
to jointly develop promotions in the field, as Wenner Media deems
appropriate, on the Rolling Stone Network, in ROLLING STONE
magazine, and in other publications of Wenner Media, which are
designed to increase the visibility, prominence, awareness and
popularity of the Rolling Stone Network so as to increase traffic
and attract advertisers to the Rolling Stone Network.
(e) JAMtv and Wenner Media shall cooperate and
participate in the following types of marketing promotions and
co-marketing opportunities: (i) online promotions; (ii) press
releases and public announcements (subject to paragraph (g) of
Section 13); and (iii) reasonable inclusion in the other party's
booths, presentations, presences, and promotions at trade shows,
conferences, conventions, in print and on radio and/or television,
and in marketing materials and advertising campaigns.
(f) The services provided by the Rolling Stone Online
staff in connection with the advertising and promotional services
of Wenner Media described in the preceding paragraphs of this
Section shall be without charge to JAMtv (except as expressly
described on SCHEDULE 4 hereto); provided that JAMtv shall bear
any out-of-pocket costs associated therewith and, to the extent
JAMtv requires advertising and promotional services of Wenner
Media beyond the scope of the services described in the preceding
paragraphs, Wenner Media will provide advertising to JAMtv at a
net rate of twenty percent (20%) below the published ROLLING STONE
rate card then in effect, in accordance with the terms and
conditions thereof.
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(g) JAMtv will use reasonable efforts to promote the
Rolling Stone Network, including conducting advertising campaigns
in various media at its own expense.
9. LICENSE FEES. In consideration for the Wenner Media Licenses and
the obligations of Wenner Media under this Agreement and the other Affiliation
Agreements, provided no Default by Wenner Media exists, JAMtv will pay the
License Fees to Wenner Media as follows.
(a) YEAR ONE. JAMtv will pay $1,000,000 to Wenner Media
for the one year period commencing on the later of (i) the Launch
Date and (ii) January 6, 1998 and ending on the first anniversary
of such First Payment Date, which shall be payable in four (4)
equal quarterly installments of $250,000 each. The first
installment shall be payable on January 6, 1998, the second
installment shall be payable on April 6, 1998, the third
installment shall be payable on July 6, 1998, and the fourth
installment shall be payable on October 6, 1998.
(b) YEAR TWO. JAMtv will pay $1,000,000 to Wenner Media
for the one year period commencing on the first anniversary of the
First Payment Date and ending on the second anniversary of the
First Payment Date, which shall be payable in four (4) equal
installments of $250,000 each. The first installment shall be
payable on January 6, 1999, the second installment shall be
payable on April 6, 1999, the third installment shall be payable
on July 6, 1999, and the fourth installment shall be payable on
October 6, 1999.
(c) YEAR THREE. JAMtv will pay $1,000,000 to Wenner
Media for the one year period commencing on the second anniversary
of the First Payment Date and ending on the third anniversary of
the First Payment Date, which shall be payable in four (4) equal
installments of $250,000 each. The first installment shall be
payable on January 6, 2000, the second installment shall be
payable on April 6, 2000, the third installment shall be payable
on July 6, 2000, and the fourth installment shall be payable on
October 6, 2000.
(d) ESCROW OF SCHEDULED LICENSE FEES FOR YEARS 1 AND 2.
The Scheduled License Fees described in paragraphs (a) and (b)
above shall be deposited into escrow by JAMtv on the date hereof
and subject to release to Wenner Media in accordance with the
terms and conditions of the Escrow Agreement. Any release of
funds from the Escrow Agreement to Wenner Media or its designees
shall be deemed to be a payment by JAMtv in satisfaction of its
payment obligations under this Agreement.
(e) SCHEDULED LICENSE FEES FOR RENEWAL TERM(S). If
there shall be a first Renewal Term pursuant to Section 18, JAMtv
will pay $1,250,000 to Wenner Media for each one year period
commencing on each anniversary of the First Payment Date and
ending on the next succeeding anniversary of the First Payment
Date, which shall
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be payable in four (4) equal installments of $312,500 each on the
January 6, April 6, July 6, and October 6 dates within such one year
period. If there shall be a second Renewal Term pursuant to Section 18,
JAMtv will pay $1,500,000 to Wenner Media for each one year period
commencing on each anniversary of the First Payment Date and ending on
the next succeeding anniversary of the First Payment Date, which shall
be payable in four (4) equal installments of $375,000 each on the
January 6, April 6, July 6, and October 6 dates within such one
year period.
(f) TRIGGER LICENSE FEE. Upon the first to occur of (i)
a Qualified Private Offering and (ii) a Qualified Public Offering,
JAMtv will pay to Wenner Media, within 30 days after the
completion and closing of the applicable Trigger Event, a one time
Trigger License Fee (in addition to the Scheduled License Fees
payable hereunder but subject to paragraph (f) above) equal to
$1,500,000. No Trigger License Fee shall be payable upon a second
or later occurring Trigger Event, if any.
10. ADVERTISING AND MERCHANDISE REVENUE.
(a) JAMtv shall pay Wenner Media an advertising
commission equal to twenty-five percent (25%) of the Net Revenue
of JAMtv derived from advertisements obtained by, directed by, or
otherwise placed on website pages of the Rolling Stone Network by
or through the direct efforts of Wenner Media, and ten percent
(10%) of the Net Revenue of JAMtv derived from all other
advertisements on the Rolling Stone Network. Up to five percent
(5%) of the available advertising space on the Rolling Stone
Network shall be reserved for Wenner Media's allocation to ROLLING
STONE advertisers and shall not be subject to the foregoing
provision or any payment to JAMtv.
(b) Wenner Media shall pay JAMtv a commission equal to
ten percent (10%) of the Net Revenue derived from the sale of all
Rolling Stone Merchandise through the Rolling Stone Network and a
commission equal to five percent (5%) of the Net Revenue derived
from the sale of all Rolling Stone Merchandise through the
Interactive Network other than through the Rolling Stone Network.
Notwithstanding the foregoing, subscriptions to ROLLING STONE
magazine, including, without limitation, those obtained through a
subscription solicitation button on the Rolling Stone Network
website, shall not be subject to any JAMtv commission.
(c) Wenner Media and JAMtv acknowledge that from time to time,
either or both of the parties will be approached and presented with third
party licensing, promotion, marketing and/or advertising opportunities
which specifically relate to and/or involve other online or Internet
companies, websites, networks or businesses seeking to use Rolling Stone
Content or to gain access to features, functionality, or content of the
Rolling Stone Network for a fee or other consideration, for online or
Internet-related uses. Wenner Media acknowledges that, in accordance
with its exclusivity obligations under Section 12, it is
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prohibited from taking advantage of such third party opportunities
without the written consent of JAMtv. Accordingly, Wenner Media and
JAMtv agree that any and all revenue obtained from any or all such
online or Internet-related transactions to which JAMtv consents shall
be shared evenly by the parties hereto except that the finding or
originating party (JAMtv or Wenner Media as the case may be) shall be
entitled to a fifteen percent (15%) origination commission or finder's
fee off the top of any revenues with the remaining revenues being
shared equally.
11. TAXES. Each party shall be responsible for any sales, use or
other tax assessed in connection with the services performed, licenses granted,
or programming made available by such party hereunder.
12. EXCLUSIVITY. Except for the AOL Rolling Stone Site and any
websites associated with foreign editions of ROLLING STONE, and except as agreed
to by JAMtv pursuant to paragraph (c) of Section 10, JAMtv shall be the
exclusive provider of Rolling Stone Content on the Interactive Network and
Wenner Media shall not, and shall cause each of its affiliates not to, use,
license, grant any right to use, sublicense, or otherwise transfer any right,
title or interest in or to the Rolling Stone Content or any content of ROLLING
STONE magazine to any other person or entity for use in connection with the
Interactive Network or in the design, operation, distribution, display,
transmission, marketing, advertising, or promotion of goods and services
thereon.
13. PROPRIETARY RIGHTS.
(a) RIGHTS CLEARANCES. Subject to the terms of this
Agreement, Wenner Media shall obtain the necessary rights
clearances and shall be responsible for payment of any license
fees or royalties for such rights clearances, including, without
limitation, copyright or public performance music license fees
(through, for example, ASCAP, BMI or SESAC) for any merchandise or
Rolling Stone Content made available by Wenner Media to JAMtv
pursuant to this Agreement, except as otherwise provided herein.
(b) JAMTV CONTENT. Wenner Media acknowledges that all
right, title and interest in the JAMtv Content and other
Proprietary Rights embodied therein are and shall remain in JAMtv
and its licensors. Wenner Media shall not acquire any right,
title, or interest in the Proprietary Rights created or developed
by JAMtv (whether or not incorporating the Rolling Stone Content
or Rolling Stone Trademarks) in connection with this Agreement,
other than as expressly reserved herein. If any JAMtv Content or
segment thereof is provided to Wenner Media on disc, tape or other
tangible embodiment, such disc, tape or other tangible embodiment
shall remain the property of JAMtv and shall be returned promptly
upon JAMtv's request therefor. Except as expressly provided in
this Agreement, Wenner Media is not authorized to, shall not, and
shall not authorize any access, transmission, duplication, or any
other use whatsoever of any JAMtv Content, any portion thereof, or
any
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derivative work thereof or any other programs or broadcast material
which may have been transmitted or distributed by JAMtv to Wenner Media,
the Rolling Stone Network or otherwise. Wenner Media will not
authorize, cause, permit, or enable any JAMtv Content or portion thereof
to be recorded, stored, duplicated, rebroadcast, or otherwise
transmitted or distributed or used for any purpose.
(c) ROLLING STONE CONTENT. JAMtv acknowledges that all
right, title and interest in the Rolling Stone Content and other
Proprietary Rights embodied therein are and shall remain in Wenner
Media and its licensors. JAMtv shall not acquire any right,
title, or interest in the Proprietary Rights created or developed
by Wenner Media (whether or not incorporating the JAMtv Content)
in connection with this Agreement, other than as expressly granted
herein. If any Rolling Stone Content or segment thereof is
provided to JAMtv on disc, tape or other tangible embodiment, such
disc, tape or other tangible embodiment shall remain the property
of Wenner Media and shall be returned promptly upon termination of
this Agreement, except as otherwise provided herein. Except as
expressly provided in this Agreement, and with the express
understanding that transmission to, access by and syndication of
the content of the Rolling Stone Network to JAMtv-affiliated radio
stations and clubs is expressly authorized hereunder, JAMtv is not
authorized to, shall not, and shall not authorize any access,
transmission, duplication, or any other use whatsoever of any
Rolling Stone Content, any portion thereof, or any derivative work
thereof or any other programs or broadcast material which may have
been transmitted or distributed by Wenner Media to JAMtv, the
Rolling Stone Network or otherwise. JAMtv shall not challenge
Wenner Media's right, title or interest in the Rolling Stone
Content or otherwise interfere with Wenner Media's use thereof,
except as such use may be inconsistent with any exclusive rights
of JAMtv granted pursuant to this Agreement or the other
Affiliation Agreements.
(d) USER DATA. Each party shall be deemed a co-owner of
any data collected from the Rolling Stone Network ("User Data"),
including without limitation any information provided by or
concerning users of the Rolling Stone Network (other than
subscription information obtained by Wenner Media pursuant to
Section 10(b)), and each party shall have the right to use such
User Data only for internal purposes, unless it obtains the
consent of the other party.
(e) CONFIDENTIAL INFORMATION. Each party will, to the
extent and in accordance with the policies used to protect its own
information of similar importance, use its best efforts to refrain
from and prevent the use, duplication, or disclosure of during or
after the Term any Confidential Information of the other party,
disclosed or obtained by such party while performing its
obligations under this Agreement, except when such use or
disclosure is for the limited purpose of performing obligations
under this Agreement. Neither party will have an obligation of
confidentiality with regard to any information insofar as the same
(i) was known to such party prior to disclosure; (ii) is at the
time of disclosure publicly available or
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becomes publicly available other than as a result of a breach of this
Agreement; or (iii) is disclosed to such party by a third party not
under a duty not to disclose such information. In addition, the
confidentiality obligations set forth above will not apply to any
Confidential Information which is disclosed pursuant to any law of
the United States or any state thereof; the order of any court or
governmental agency; or the rules and regulations of any
governmental agency. Prior to any disclosure required by law or
order of any court or government agency, the disclosing party will
notify the other party of the required disclosure. If the
required disclosure is to be made within ten (10) days after the
disclosing party becoming aware or informed of the obligation to
disclose, the disclosing party will notify the other party by the
end of the next business day following the day the disclosing
party became aware of its disclosure obligation. The parties
agree that an impending or existing violation of any provision of
this Section by one party would cause the other party irreparable
injury for which it would have no adequate remedy at law, and
agree that such other party will be entitled to obtain immediate
injunctive relief prohibiting such violation, in addition to any
other rights and remedies available to it. The nclusion of
copyright notices on any software licensed hereunder does not
constitute publication thereof.
(f) ROLLING STONE TRADEMARKS. JAMtv acknowledges that
the Rolling Stone Trademarks and all rights therein (with the
exception of those rights expressly granted to JAMtv hereunder)
and the goodwill pertaining thereto belong exclusively to Wenner
Media. JAMtv's use of the Rolling Stone Trademarks shall inure to
the benefit of Wenner Media for all purposes, including without
limitation trademark registration. Without limiting the
generality of the foregoing, JAMtv shall not challenge the
validity of Wenner Media's ownership of any Rolling Stone
Trademark or any registration or application for registration
thereof or contest the fact that JAMtv's rights under this
Agreement are solely those of a licensee, which rights terminate
upon termination of this Agreement.
(g) PUBLICITY. This Agreement constitutes Confidential
Information. Accordingly, each party shall submit to the other
all advertising, written sales promotion, press releases, and
other publicity matters relating to this Agreement in which the
other party's name or trademark is mentioned or language from
which the connection of said name or trademark may be inferred or
implied, and neither party shall publish or use such advertising,
sales promotion, press releases, or publicity matters without the
prior written approval of the other party, which shall not be
unreasonably withheld or delayed. However, either party may
include the other party's name and a mutually agreed factual
description of the work performed under this Agreement in employee
communications, in internal business planning documents, in its
reports to stockholders or offering memoranda, and whenever
required by reason of legal, accounting, or regulatory
requirements; provided that prior to such disclosure the party
whose name is mentioned has not less than seven
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(7) days to review and comment on such disclosure.
14. REGISTRATION AND PROTECTION.
(a) COPYRIGHT REGISTRATION. Except as otherwise
expressly authorized by Wenner Media, all registrations and
applications for registration of copyright in the Rolling Stone
Content shall be in the name of Wenner Media. JAMtv, when
requested by Wenner Media, shall assist and cooperate with Wenner
Media in connection with any such filings at Wenner Media's
expense.
(b) ACTIONS AFFECTING VALIDITY. Wenner Media shall not
take any action, not fail to take any action, and use its best
efforts not to permit any action to be taken by others, which
would in any respect affect the validity or enforcement of the
Wenner Media Licenses or the rights in the Rolling Stone Content
granted to JAMtv herein.
(c) COPYRIGHT NOTICE. JAMtv shall (i) place notices of
copyright in a manner consistent with Wenner Media's placement
thereof on the Rolling Stone Content which is published by JAMtv,
(ii) displaying on one or more screens of any web site operated by
JAMtv a legend reasonably calculated to warn users that such web
site contains proprietary material which may not be copied without
permission, and (iii) display artist attribution or credits as
reasonably requested by Wenner Media on the Rolling Stone Content
which is published by JAMtv.
(d) TRADEMARK REGISTRATION. Wenner Media shall be
responsible for the prosecution and maintenance of trademark
registrations of the Rolling Stone Trademarks. JAMtv shall
cooperate with Wenner Media at Wenner Media's expense, and shall
execute any documents required by Wenner Media and supply Wenner
Media with a reasonable number of specimens to assist Wenner
Media, in the registration, enforcement, or maintenance of any
Rolling Stone Trademark or recordal of JAMtv as a registered user
or licensee. JAMtv agrees not to register, or attempt to
register, any Rolling Stone Trademark or any confusingly similar
mark in its own name or any other name, or to use any Rolling
Stone Trademark or any confusingly similar mark in commerce other
than as provided herein.
(e) THIRD PARTY INFRINGEMENT. In the event that either
party learns of any infringement, misappropriation or unauthorized
use of (i) any of the Rolling Stone Trademarks in connection with
the Rolling Stone Network or similar products or services, or (ii)
any of the Rolling Stone Content, then the party with such
knowledge shall promptly notify the other party thereof. Wenner
Media shall take such actions as it determines are reasonably
necessary or desirable in its sole discretion. JAMtv shall not
undertake any action without the prior written consent of Wenner
Media, which consent shall not be unreasonably withheld with
respect to any infringement
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or misappropriation of the Rolling Stone Content or the Rolling Stone
Trademarks in connection with the Interactive Network or similar
products or services. Wenner Media shall promptly notify JAMtv as to
whether Wenner Media wishes to prosecute or settle any action with
respect thereto. JAMtv agrees to cooperate with and assist Wenner Media
in taking whatever action Wenner Media determines to be reasonably
necessary or desirable. Wenner Media shall reimburse JAMtv for its
reasonable out-of-pocket attorneys' fees and other costs incurred
in investigating, prosecuting or settling any such claim, suit,
damage or loss.
(f) THIRD PARTY CLAIMS. If any claim is asserted
against either party alleging that any of the Rolling Stone
Content or Rolling Stone Trademarks infringes, misappropriates or
otherwise violates a third party's rights, then the party against
whom such claim was asserted shall promptly notify the other
party. If such claim is asserted against JAMtv, Wenner Media
shall promptly notify JAMtv whether Wenner Media wishes to conduct
a defense or settlement of any such claim on behalf of JAMtv.
Should Wenner Media elect to conduct such a defense or settlement,
Wenner Media shall have sole control of such defense and any
settlement of such claim. JAMtv shall afford Wenner Media every
reasonable assistance in regard to Wenner Media's defense of any
such claim. Should Wenner Media not elect to conduct such a
defense or settlement, JAMtv may elect to conduct its own defense
or settlement, and Wenner Media shall afford JAMtv every
reasonable assistance in regard to JAMtv's defense of any such
claim and Wenner Media shall name itself as a party to such an
action if requested by JAMtv. Wenner Media shall reimburse JAMtv
for its reasonable out-of-pocket attorneys' fees and other costs
incurred in connection with investigating or defending any such
claim, suit, damage or loss.
150 REPRESENTATIONS AND WARRANTIES OF WENNER MEDIA.
(a) CORPORATE EXISTENCE AND STANDING. Wenner Media is
duly organized under the laws of the state of Delaware and has all
requisite power and authority, corporate or otherwise, to conduct
its business, to own its property and to execute, deliver and
perform all of its obligations under this Agreement and the other
Affiliation Agreements to which it is a party.
(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement and the other Affiliation Agreements by
Wenner Media have been duly authorized by proper corporate
proceedings, and this Agreement and the other Affiliation
Agreements, upon their execution and delivery, will constitute
legal, valid and binding obligations of Wenner Media, enforceable
in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and similar laws
affecting the validity or enforcement of creditors' rights
generally.
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(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement and the other Affiliation Agreements
by Wenner Media, the consummation by Wenner Media of the
transactions contemplated therein, and compliance by Wenner Media
with the provisions thereof (including, without limitation, its
exclusivity obligations hereunder), will not violate any existing
law, rule, regulation, order, writ, judgment, injunction, decree
or award binding on Wenner Media or its articles of incorporation
or its by-laws or the provisions of any instrument or agreement to
which Wenner Media is a party or is subject, or by which it, or
its property, is bound (including, without limitation, any such
instrument or agreement with America Online or Microsoft
Corporation), or conflict with or constitute a default thereunder;
and the execution, delivery and performance of this Agreement and
the other Affiliation Agreements, the consummation of the
transactions contemplated therein, and compliance with the
provisions thereof, in each case by Wenner Media, will not require
the consent of any party or the giving of notice to, the exemption
by, any registration, or filing with any governmental authority,
to the extent not previously obtained or made.
(d) INTELLECTUAL PROPERTY. Wenner Media represents and
warrants that (i) it has the full power and authority to grant the
Wenner Media Licenses (as limited by the Third Party Restrictions)
and the other rights granted hereunder, (ii) it is not aware of
and has not received any oral or written notice of any claims
adverse to Wenner Media's rights in the Rolling Stone Content or
Rolling Stone Trademarks, or that the Rolling Stone Content or
Rolling Stone Trademarks infringe upon the proprietary rights of
any third party, (iii) it has not granted to any other party any
rights to use the Rolling Stone Content or Rolling Stone
Trademarks in connection with the Interactive Network (except for
the AOL Rolling Stone Site and in connection with the Microsoft
Button and the PointCast College Network), (iv) subject to the
Third Party Restrictions, the exercise of the rights granted JAMtv
hereunder will not now or hereafter in any manner constitute an
infringement or other violation of any trademark, trade name,
service mark, copyright, trade secret, patent, or other
intellectual property or proprietary rights of any person, or the
publicity, publication, display, attribution, integrity, approval,
performance, moral, or privacy rights of any person or entity and
(v) the Rolling Stone Content is not obscene.
160 REPRESENTATIONS AND WARRANTIES OF JAMTV.
(a) CORPORATE EXISTENCE AND STANDING. JAMtv is duly
organized and existing in good standing under the laws of the
state of Delaware and has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its
property and to execute, deliver and perform all of its
obligations under this Agreement and the other Affiliation
Agreements to which it is a party.
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(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement and the other Affiliation Agreements by
JAMtv have been duly authorized by proper corporate proceedings,
and this Agreement and the other Affiliation Agreements, upon
their execution and delivery, will constitute legal, valid and
binding obligations of JAMtv, enforceable in accordance with their
respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and similar laws affecting the validity or enforcement
of creditors' rights generally.
(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement and the other Affiliation Agreements
by JAMtv, the consummation by JAMtv of the transactions
contemplated therein, and compliance by JAMtv with the provisions
thereof, will not violate any existing law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on
JAMtv or its articles of incorporation or its by-laws or the
provisions of any instrument or agreement to which JAMtv is a
party or is subject, or by which it, or its property, is bound, or
conflict with or constitute a default thereunder; and the
execution, delivery and performance of this Agreement and the
other Affiliation Agreements, the consummation of the transactions
contemplated therein, and compliance with the provisions thereof,
in each case by JAMtv, will not require the consent of any party
or the giving of notice to, the exemption by, any registration, or
filing with any governmental authority, to the extent not
previously obtained or made.
(d) INTELLECTUAL PROPERTY. JAMtv represents and
warrants that (i) it has the full power and authority to provide
the JAMtv Content to the Rolling Stone Network, (ii) it is not
aware of and has not received any oral or written notice of any
claims adverse to JAMtv's rights in the JAMtv Content, or that the
JAMtv Content infringes upon the proprietary rights of any third
party, (iii) the use of the JAMtv Content on the Rolling Stone
Network as contemplated hereunder will not now or hereafter in any
manner constitute an infringement or other violation of any
trademark, trade name, service mark, copyright, trade secret,
patent, or other intellectual property or proprietary rights of
any person, or the publicity, publication, display, attribution,
integrity, approval, performance, moral, or privacy rights of any
person or entity and (iv) JAMtv Content is not obscene.
(e) FINANCIALS. The unaudited balance sheet of JAMtv as
of October 31, 1997, and a schedule of the capitalization of JAMtv
as of the date hereof are attached hereto as SCHEDULE 5.
170 CONDITIONS PRECEDENT. The obligations of JAMtv and Wenner Media
hereunder shall be subject to the satisfaction of the following conditions
precedent.
(a) JAMTV. JAMtv (i) shall have executed and delivered
to Wenner
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Media: (A) the Escrow Agreement, and (B) the Warrant, and (ii) shall
have deposited the Escrow License Fees in accordance with the Escrow
Agreement; and
(b) WENNER MEDIA. Wenner Media shall have executed and
delivered to JAMtv the Escrow Agreement.
180 TERM.
(a) INITIAL TERM. The Initial Term of this Agreement
shall be three (3) years which shall commence on the date hereof
and continue until the third anniversary date hereof, unless
earlier terminated as provided in Section 20.
(b) RENEWAL TERM. If a Trigger Event occurs during the
Initial Term, this Agreement shall continue for a first Renewal
Term of five (5) years which shall commence on the third
anniversary date hereof and continue until the eighth anniversary
date hereof, unless earlier terminated as provided in Section 20.
This Agreement shall be automatically renewed for a second Renewal
Term of five (5) years at the expiration of the eighth year;
provided that, as of that date, JAMtv and/or its parent, successor
or acquirer has successfully completed a Qualified Public Offering
of its stock and has a market capitalization no less than $150
million. This Agreement may thereafter continue for additional
Renewal Terms upon the mutual agreement of the parties hereto.
190 DEFAULT. A Default shall mean the occurrence of any of the
following:
(a) TECHNICAL SUPPORT. If JAMtv fails to maintain the
technical reliability reasonably required to make the Rolling
Stone Network available in all respects on commercially reasonable
terms (excepting regularly scheduled maintenance downtime, network
and other outages not due to the actions or fault of JAMtv, delays
or other problems associated with or due to any failures on the
part of Wenner Media to timely perform any of its obligations
hereunder) and JAMtv shall not have materially improved such
reliability or availability within 30 days after receiving written
notice thereof from Wenner Media; provided, however, that it shall
be deemed a Default if the Rolling Stone Network is "down" or
otherwise unavailable for reasons other than the foregoing
exceptions for a total of more than twenty-four (24) total hours
or twelve (12) consecutive hours in any 60-day period.
(b) PAYMENT DEFAULT. JAMtv fails to pay (whether
directly or through a direction given under the Escrow Agreement)
any License Fee or payment obligation under Section 9 or any
portion thereof required to be paid to Wenner Media hereunder
within 30 days after the date such fee or payment became due
hereunder.
(c) TRADEMARK MISUSE. JAMtv breaches its obligations
with respect to
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the Rolling Stone Trademarks under Section 6 and fails to cure such
breach within 30 days after receiving written notice thereof from Wenner
Media.
(d) CHANGE OF CONTROL. JAMtv (i) is acquired by, or (ii)
transfers or agrees to transfer all or substantially all of its assets,
ownership of a majority of voting securities or other equity interest, or
power to cause the direction of its management and policies to, any
entity (the "Transferee") reasonably deemed by Wenner Media to be a
competitor of Wenner Media, or otherwise unacceptable to Wenner Media.
(e) OTHER DEFAULT BY JAMTV. JAMtv fails to provide any
or all of the JAMtv Content in a timely fashion and in the form
and manner specified herein or breaches any of its
representations, warranties, covenants or its other obligations
set forth herein and shall not have remedied, corrected, and/or
materially improved its performance or cured such breach within 60
days after receiving written notice thereof from Wenner Media.
(f) PERFORMANCE DEFAULT BY WENNER MEDIA. Wenner Media
fails to provide any or all of the Rolling Stone Content in a
timely fashion and in the form and manner specified herein or
breaches any of its representations, warranties, covenants or its
other obligations set forth herein and shall not have remedied,
corrected, and/or materially improved its performance or cured
such breach within 60 days after receiving written notice thereof
from JAMtv.
(g) INSOLVENCY. (i) Either party admits in writing in
any proceeding its inability to pay its debts generally as they
become due, or makes a general assignment for the benefit of
creditors, (ii) any proceeding is instituted by such party seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any
substantial part of its property, (iii) there shall be commenced
against such party any case, proceeding or other action of a
nature referred to in clause (ii) which results in the entry of an
order for relief or any adjudication that it is bankrupt or
insolvent or which remains undismissed, undischarged, unstayed or
unbounded for a period of 60 days, or (iv) either party takes any
corporate action to authorize any of the actions set forth in this
paragraph.
200 EFFECT OF DEFAULT.
(a) TERMINATION BY JAMTV. JAMtv may terminate this
Agreement if a Default by Wenner Media occurs, which termination
shall be effective upon 30 days' written notice to Wenner Media
from JAMtv. If this Agreement is terminated by JAMtv for such
Default, JAMtv shall have no further obligation to pay the License
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Fees and any amounts remaining subject to the Escrow Agreement
shall be returned to JAMtv promptly.
(b) TERMINATION BY WENNER MEDIA. Wenner Media may
terminate this Agreement if a Default by JAMtv occurs, which
termination shall be effective upon 30 days' written notice to
JAMtv from Wenner Media. If this Agreement is terminated by
Wenner Media for such Default, JAMtv shall have no further
obligation to pay the License Fees other than to pay to Wenner
Media any amounts remaining subject to the Escrow Agreement or, if
no such amounts remain, the next quarterly payment of the License
Fees due pursuant to Section 9; PROVIDED, HOWEVER, that in the
event of a Default pursuant to paragraph (d) of Section 19 in
which the Transferee is a public company, JAMtv shall have no
further obligation to the pay the License Fees and any amounts
remaining subject to the Escrow Agreement shall be returned to
JAMtv promptly.
(c) EFFECT OF TERMINATION. Upon expiration or
termination of this Agreement, the Wenner Media Licenses shall
terminate and JAMtv shall no longer be entitled to receive from
Wenner Media any additional Rolling Stone Content and shall no
longer use any Rolling Stone Content or Rolling Stone Trademarks;
provided, however, that upon expiration or termination by JAMtv,
the parties will negotiate in good faith for a royalty-bearing
license commencing upon termination of the Wenner Media Licenses
to use Archival Rolling Stone Content on such terms and conditions
as may be mutually agreed by the parties. To the extent that the
parties are unable to agree on such a license, JAMtv shall provide
to Wenner Media all materials containing Rolling Stone Content
(including any electronic versions thereof on magnetic or other
storage media).
(d) TERMINATION NOT EXCLUSIVE REMEDY. Termination of
this Agreement by either party hereunder shall not preclude any
other rights or remedies to which such party may be entitled.
210 FORCE MAJEURE. Neither party will have any liability hereunder if
performance by such party shall be prevented, interfered with or omitted because
of labor dispute, failure of facilities, act of God, natural disaster, laws,
government or court action, or any other cause beyond the control of the party
so failing to perform hereunder.
220 LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE.
(a) LIMITATION OF LIABILITY. EXCEPT FOR INDEMNIFICATION
OBLIGATIONS, IF ANY, OF A PARTY FOR INFRINGEMENT OF ANY
INTELLECTUAL PROPERTY RIGHTS PURSUANT TO PARAGRAPH (D) OF SECTIONS
15 AND 16, OR WENNER MEDIA'S INDEMNIFICATION OBLIGATIONS, IF ANY,
FOR PRODUCT CLAIMS WITH RESPECT TO THE ROLLING STONE MERCHANDISE
PURSUANT TO PARAGRAPH (C) BELOW, (i) NEITHER
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PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY
FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR INDIRECT DAMAGES (INCLUDING
LOSS OF GOOD WILL OR BUSINESS PROFITS), OR EXEMPLARY OR PUNITIVE DAMAGES
AND (ii) NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY
OTHER PERSON OR ENTITY FOR DIRECT DAMAGES IN EXCESS OF THE
AGGREGATE FEES PAID BY THE PARTIES UNDER THIS AGREEMENT. NO
OFFICER, DIRECTOR, MANAGER, MEMBER, OR EMPLOYEE OF EITHER PARTY
SHALL HAVE ANY PERSONAL LIABILITY UNDER THIS AGREEMENT AND THE
OTHER PARTY HEREBY HOLDS SUCH PERSONS HARMLESS FOR ANY LIABILITY
HEREUNDER.
(b) LIMITATION OF WARRANTIES. (i) JAMTV WILL MAKE THE
JAMTV CONTENT, THE JAMTV HOSTING SERVICES, AND OTHER SERVICES
AVAILABLE IN ACCORDANCE WITH THE TERMS HEREOF ON A COMMERCIALLY
REASONABLE BASIS, AND DOES NOT WARRANT OR GUARANTEE THAT THE
AVAILABILITY THEREOF WILL BE FREE FROM ERRORS IN COMMUNICATIONS OR
TRANSMISSION. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
JAMTV EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC
PURPOSE. (ii) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
WENNER MEDIA EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
SPECIFIC PURPOSE. (iii) EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY ENDORSES, WARRANTS, OR GUARANTEES ANY
PRODUCT OR SERVICE OFFERED THROUGH THE ROLLING STONE NETWORK AND
NEITHER PARTY WILL BE A PARTY TO OR IN ANY WAY MONITOR ANY
TRANSACTION BETWEEN ANY PERSON AND ANY THIRD PARTY PROVIDERS OF
PRODUCTS OR SERVICES.
(c) INDEMNIFICATION. JAMtv will indemnify Wenner Media,
its officers, directors, managers, employees, agents, and
telecommunications providers against all claims, damages, losses,
costs and expenses (including attorneys' fees) which Wenner Media
may incur as a result of JAMtv's breach of any representation,
warranty, or covenant contained in this Agreement. Wenner Media
will indemnify JAMtv, its officers, directors, managers,
employees, agents, and telecommunications providers against all
claims, damages, losses, costs and expenses (including attorneys'
fees) which JAMtv may incur as a result of Wenner Media's breach
of any representation, warranty, or covenant contained in this
Agreement, or any product liability claims made by any party with
respect to the Rolling Stone Merchandise. This paragraph shall
not be in limitation of any other indemnification obligations of
the parties set forth in the other Affiliation Agreements.
(d) INSURANCE. Each of JAMtv and Wenner Media agrees to
maintain comprehensive general liability insurance, including contractual
and product liability insurance in the amount of $5 million per incident
and $5 million umbrella excess coverage.
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230 REPRESENTATION ON BOARD. During the Term, Wenner Media shall have
the right to appoint one member of JAMtv's Board of Directors.
240 MISCELLANEOUS.
(a) GOVERNING LAW. Any question as to the validity,
construction or performance of this Agreement shall be construed
in accordance with and subject to the substantive laws (as opposed
to the conflicts of laws provisions) of the State of New York and,
where applicable, the laws of the United States.
(b) JURISDICTION. JAMtv and Wenner Media agree that all
claims, disputes, or controversies between them arising out of,
connected with, related to, or incidental to the relationship
established between them in connection with this Agreement,
whether arising at law or equity in contract, tort, equity, or
otherwise, if pursued in court shall be resolved only by state or
federal courts located in New York County, New York, but each
party hereto acknowledges that any appeals from those courts may
have to be heard by a court located outside of New York County,
New York. Each party hereto waives in all disputes any objection
that it may have to the location of the court considering the
dispute. Each party consents that service of process may be
effected by certified or registered mail, return receipt
requested, to the address set forth below each party's signature
to this Agreement.
(c) UNFORESEEN CIRCUMSTANCES. Due to the rate of change
in Internet businesses and the high degree of uncertainty as to
the competitive environment, the parties agree to use their
reasonable good faith efforts in the event of unforeseen
circumstances or other material external changes which may require
further discussions and negotiations leading to amendments to this
Agreement, if any, to be mutually agreed upon between the parties.
(d) ENTIRE AGREEMENT. This Agreement, together with the
other Affiliation Agreements, contain the entire understanding
between JAMtv and Wenner Media with respect to its subject matter,
supersedes all previous oral or written agreements or
understandings between them with respect thereto, and shall not be
modified except by a writing signed by all parties hereto.
(e) NO WAIVER. No waiver by either party or any breach
of this Agreement by the other shall be deemed to be a waiver of
any preceding, or subsequent breach thereof. Any waiver must be
in writing executed by the waiving party.
(f) PARTIAL INVALIDITY. If any portion of the Agreement
shall be held to be illegal, invalid or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
affect any other provision hereof, and this Agreement shall
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<PAGE>
be constructed as if such invalid, illegal or unenforceable provision
had never been contained herein. Additionally, in lieu of each
such illegal, invalid or unenforceable provision, there shall be
added automatically as part of this Agreement a provision as
similar to such former provision as shall be legal, valid and
enforceable.
(g) NOTICES. Except as otherwise expressly provided
herein, all notices and other communications required or desired
to be served, given, or delivered hereunder shall be made in
writing or by a telecommunications device capable of creating a
written record and shall be addressed to the party to be notified
at the respective addresses set forth on the signature page hereto
or, as to each party, at such other address as designated by such
party in a written notice to the other party. Notices shall be
deemed to have been duly given (i) if delivered personally or
otherwise actually received, (ii) if sent by overnight delivery
service, (iii) if mailed by first class United States mail,
postage prepaid, registered or certified, with return receipt
requested, or (iv) if sent by telecopy. Notice mailed as provided
in clause (iii) above shall be effective upon the expiration of
seven (7) days after its deposit in the United States mail and
notice sent as provided in clause (iv) above shall be effective
upon transmission. Notice given in any other manner described in
this paragraph shall be effective upon receipt by the addressee
thereof; PROVIDED, HOWEVER, that if any notice is tendered to an
addressee and delivery thereof is refused by such addressee, such
notice shall be effective upon such tender.
(h) SECTION HEADINGS. Section and Paragraph headings
used herein are for informational purposes only and shall not
define nor limit the provisions of this Agreement.
(i) SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of JAMtv and its successors
and assignees and Wenner Media and its successors and assignees
permitted hereunder; provided, however, that neither party hereto
shall assign, subcontract or otherwise delegate its obligations
hereunder without the prior written consent of the other party,
which consent shall not be unreasonably withheld.
(j) INDEPENDENT CONTRACTORS. Each party agrees it is
and will be an independent contractor as to the other party and
not an agent, employee, partner or joint venturer of or with the
other party. Without limiting the foregoing, neither party nor
any officer or employee of such will have any right to bind the
other party, to make any representations or warranties on behalf
of the other, to accept service of process, to receive notice, or
to perform any act or thing on behalf of the other party other
than as expressly authorized by such other party in its sole
discretion. JAMtv shall not be obligated to pay any fees or other
compensation to Wenner Media in connection with the transactions
contemplated by this Agreement other than as expressly
contemplated by Sections 9, 10 and 17 of this Agreement.
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(k) COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each such counterpart shall be an original
instrument, and all such counterparts shall together constitute
the same agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Affiliation Agreement as of the day and year first above written.
STRAIGHT ARROW PUBLISHERS COMPANY, L.P.
By: /s/ R. Kent Brown
------------------------------------
Name: R. Kent Brown
Title: Senior Vice President
1290 Avenue of the Americas
New York, NY 10104
Attn.: Tom Cohen
Facsimile: (212) 484-4290
JAMTV CORPORATION
By: /s/ Howard A. Tullman
------------------------------------
Name: Howard A. Tullman
Title: Chief Executive Officer
640 N. LaSalle Street
Suite 560
Chicago, IL 60610
Attn.: Howard A. Tullman
Facsimile: (312) 642-0616
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<PAGE>
SCHEDULE 1
JAMTV HOSTING SERVICES AND CONTENT
LAUNCH SCHEDULE
______________________________________________________
JAMTV CONTENT
A series of Internet distributed live music and music events programs
including real time audio and video streaming, online chat and other
functionality, delivered through the "Virtual Venue" section of the JAMtv Music
Network. Archival and biographical multimedia information on artists and bands
including audio, video, photography, links, news, etc. and detailed
discographies relating to each such artist or band. Online stores for books,
CDs, merchandise, etc. as well as access to tour and ticket information from
Ticketmaster and Pollstar. JAMtv agrees to develop new JAMtv Content throughout
the term, as is necessary or desirable to maintain the quality of the Rolling
Stone Network.
LAUNCH SCHEDULE
The initial Launch Schedule for the Rolling Stone Network shall be as
follows:
November 14, 1997 - Site design overall approval
November 21, 1997 - Site technical operation approval
November 28, 1997 - Site contents approval
December 5, 1997 - Site integration completed
December 8, 1997 - Launch Date
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SCHEDULE 2
ROLLING STONE CONTENT
___________________________________
The Rolling Stone Content shall include the following sections, parts,
elements and portions of ROLLING STONE magazine, to the extent that Wenner Media
possesses or acquires the necessary Proprietary Rights therein sufficient for
use on the Rolling Stone Network (except for such Rolling Stone Content which
has been exclusively licensed for the AOL Rolling Stone Site). Wenner Media
will use reasonable efforts to obtain supplemental materials relating to the
Rolling Stone Content, such as outtakes, photos or descriptive materials,
provided that Wenner Media will bear no additional costs therefor, other than as
set forth in the Agreement.
(1) The contents, including photos, created for and contained in the
Random Notes section of Rolling Stone Online or any successor to
such section containing similar types of content, to the extent
that the Random Notes section or any such successor continues to
appear in ROLLING STONE magazine;
(2) Magazine covers from ROLLING STONE magazine;
(3) MusicNet recorded interviews (insofar as such interviews are in
Wenner Media's possession);
(4) Excerpts or selections from the cover stories of ROLLING STONE
magazine, provided on the dates specified in paragraph (a) of
Section 4, in Wenner Media's discretion;
(5) Exclusive feature stories prepared on a regular basis solely for
the Rolling Stone Network by the Rolling Stone Online staff, in
conjunction with the magazine staff, including multimedia
components;
(6) Information contained in the Grapevine and The Industry sections
of ROLLING STONE magazine, and any successors to such sections
containing similar types of content, to the extent that such
sections or successors continue to appear therein, along with new
materials developed by the parties relating to gossip columns and
similar commentaries;
(7) The contents of and information contained in concert reviews,
record reviews, artists' questions and answers, artists' picks,
college reports, and any charts, polls (such as readers' and
critics' polls) or compilations contained in Rolling Stone Online
along with exclusive record reviews and charts prepared and
developed for ROLLING STONE magazine;
(8) Available photography, audio assets, video assets, art,
interviews, transcripts, digital material, images, illustrations,
animations, books, etc. in the possession and control
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of Wenner Media and/or ROLLING STONE magazine which may be used
to create new and/or supplementary or repurposed audio/visual and
multimedia material for the Rolling Stone Network, in Wenner
Media's discretion.
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<PAGE>
SCHEDULE 3
ROLLING STONE TRADEMARKS
______________________________________________________
The following trademarks and service marks, and trademarks and service marks
containing or deriving from the following marks:
ROLLING STONE
ROLLINGSTONE
ROLLINGSTONE.COM
ROLLING_STONE.COM
ROLLINGSTONE ONLINE
RS ONLINE
RSO
All registrations and applications for registration of the foregoing trademarks
and service marks, including, without limitation the following:
ROLLINGSTONE.COM and Design, U.S. Ser. No. 75-247,880, International Class 42;
ROLL YOUR OWN, U.S. Ser. No. 75-033,911, International Class 42;
ROCK AND ROLL ROAD TRIP, U.S. Ser. No. 75-033,223, International Class 41;
ROLLING STONE, U.S. Reg. No. 1,574,947, International Class 16;
ROLLING STONE (Stylized), U.S. Reg. No. 952,014, International Class 16;
ROLLINGSTONE ONLINE, U.S. Reg. No. 2,028,322, International Class 42;
ROLLINGSTONE (Stylized), U.S. Reg. No. 1,588,810, International Class 16.
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SCHEDULE 4
PROMOTION AND ADVERTISING
___________________________________
For a monthly advertising fee of $90,000/month payable by JAMtv on the
first day of each month of the Term, Wenner Media shall:
(a) produce and include a regular column
of two to three column inches in every
issue of ROLLING STONE magazine about
the Rolling Stone Network which
chronicles the pending events thereon,
encourages readers to visit the
Network sites, and references special
promotions, contests, games, etc.
appearing on the Network;
(b) assist JAMtv in designing and present a full
page ad at least twelve (12) times per year
in ROLLING STONE magazine promoting the
Rolling Stone Network and its events,
provided that such ad shall be produced by
JAMtv at its cost; and
(c) bundle and distribute at least 400,000
Connected CDs per year, promoting the Rolling
Stone Network, in at least four separate
distributions of 100,000 units each to
subscribers of ROLLING STONE magazine,
provided that the cost of providing and
producing such CDs shall be borne by JAMtv.
After the Initial Term, the above-mentioned fee shall be subject to
increase proportional to any increases in the ROLLING STONE magazine rate
card then in effect.
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SCHEDULE 5
JAMTV FINANCIAL STATEMENTS
___________________________________
CAPITALIZATION. The authorized capital stock of JAMtv immediately prior
to the consummation of the transactions contemplated hereby shall consist of:
(i) 2,500,000 shares of Series A Convertible Preferred Stock
("Series A Stock"), of which 1,666,666 shares of Series A-I Convertible
Preferred Stock are outstanding, and of which 200,000 shares of Series
A-II Convertible Preferred Stock are outstanding;
(ii) 400,000 shares of Series B Convertible Preferred Stock
("Series B Stock"), of which 160,000 shares are outstanding;
(iii) 1,600,000 shares of preferred stock, par value $.01 per
share, issuable in series, of which none are outstanding; and
(iv) 8,000,000 shares of Common Stock, of which (A) 1,150,530
shares shall have been validly issued and be outstanding; (B) 2,500,000
shares shall have been duly reserved for issuance upon the conversion of
the Series A Stock, (C) 400,000 shares shall have been duly reserved for
issuance upon conversion of the Series B Stock; and (D) 1,100,000 shares
shall have been duly reserved for issuance upon the exercise of options
granted pursuant to JAMtv's 1997 Stock Option Plan (the "Plan").
Except for options granted under the Plan, commitments in connection with
the issuance by JAMtv of up to an aggregate of 400,000 shares Series B Stock at
a purchase price of $5.00 per share, and a commitment to issue an option to
purchase up to 5,000 shares of Common Stock at an exercise price of $5.00 per
share, there is no existing contract, option, warrant, call or other commitment
or right of any character granted or issued by the Corporation calling for or
relating to the issuance or transfer of shares of capital stock or any other
securities of JAMtv. As of the date hereof, the Company has granted options
under the Plan to acquire in the aggregate 763,660 shares of Common Stock as
follows:
(i) options to acquire up to an aggregate of 287,600 shares at an
exercise price of $1.00 granted to executive officers and employees of
the Company, all of which are currently exercisable;
(ii) an option to acquire up to an aggregate of 103,180 shares at
an exercise price of $3.00 granted to an executive officer which is
currently exercisable;
(iii) options to acquire up to an aggregate of 137,190 shares at
an exercise price of $3.00 granted to executive officers, all of which
become exercisable approximately ten years from the date of grant but
which may be become exercisable earlier in whole or in part on
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<PAGE>
or after the effective date of a registration statement (the "Effective
Date") filed in connection with an initial public offering of the
Company (the "IPO") based on a pre-IPO valuation of the Company as set
forth in the stock option agreements with such executive officers;
(iv) options to acquire up to an aggregate of 90,000 shares at an
exercise price of $3.00 granted to executive officers, all of which
become exercisable over a two year period following the date of grant but
which may be become exercisable earlier in whole or in part on or after
the Effective Date of an IPO based on a pre-IPO valuation of the Company
as set forth in the stock option agreements with such executive officers;
(v) options to acquire up to an aggregate of 115,040 shares at an
exercise price of $3.00 granted to employees which become exercisable
over a four year period from the date of grant; and
(vi) options to acquire up to an aggregate of 30,650 shares at an
exercise price of $5.00 granted to employees which become exercisable
over a four year period from the date of grant.
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<PAGE>
EXHIBITS
EXHIBIT A ESCROW AGREEMENT
EXHIBIT B WARRANT
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<PAGE>
Exhibit 10.2
AFFILIATION AGREEMENT
This AFFILIATION AGREEMENT (this "Agreement") is entered into as of the
1st day of January, 1999, between JAMtv Corporation, a Delaware corporation
("JAMtv"), and Source Enterprises, Inc., a Delaware corporation ("SEI").
RECITALS:
A. SEI and JAMtv desire to enter into the agreements described herein
providing for the use of the Source Content (including the content of THE SOURCE
magazine) for and in connection with the development of THE SOURCE website at
the Source URL. Capitalized terms used in this Agreement have the meanings
ascribed to them in Section 1 below.
B. Subject to the satisfaction of the conditions precedent set forth
herein and subject to the other terms and conditions set forth in this Agreement
and the other JAMtv/Source Agreements:
(i) JAMtv and SEI will commence the creation and operation of
the Source Website and the integration of Source Content
into the JAMtv Music Hub in accordance with the Launch
Schedule;
(ii) JAMtv will provide the JAMtv Hosting Services and present
the Source Content on the Source Website;
(iii) SEI will deliver the Source Content to JAMtv and grant or
cause the grant of the SEI Licenses to JAMtv;
(iv) SEI will provide certain advertising and promotion services
and opportunities to JAMtv in connection with THE SOURCE
magazine, as well as access to certain promotional
programs, as appropriate;
(v) JAMtv will be responsible for paying the License Fees and
certain shared Net Revenues to SEI and for delivering a
Warrant to SEI which provides for the purchase of certain
shares of common stock of JAMtv; and
(vi) from and after the Launch Date, among other things, the
Source URL will point to the Source Website hosted by
JAMtv.
NOW, THEREFORE, in consideration of the Recitals (which are incorporated
herein by this reference), the mutual promises contained herein, and other
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, JAMtv and SEI hereby agree as follows:
<PAGE>
1. DEFINED TERMS. As used in this Agreement, the following
capitalized terms shall have the meanings set forth below unless otherwise
defined herein. Each use herein of "including" shall mean a reference to
"including, without limitation," and shall not be exclusive. All of the
JAMtv/Source Agreements referenced below are of even date herewith unless
otherwise expressly dated below.
"Archival Source Content" means the archival and historical
Source Content or derivatives thereof which are or will be
digitized, formatted, modified, recorded, or otherwise manipulated
or stored by JAMtv to render such Source Content suitable for use
with the Source Website in accordance with Section 2.
"Confidential Information" means the trade secrets or other
information of a confidential nature of a party hereto, including,
without limitation, such information, arising from such party's
business, customers, or Proprietary Rights, and whether or not
owned by such party or held in confidence by such party under an
obligation of confidentiality with a third party.
"Default" means a default by a party under this Agreement
or the other JAMtv/Source Agreements as specified in Section 19.
"Interactive Network" means the Internet, the World Wide
Web, and any other similar interactive electronic means of
distribution or transmission now or hereafter known, including
such other distribution channels and means as the parties may
agree from time to time hereafter and including specifically those
means listed and/or described in Schedule 4.
"Initial Term" means the initial two (2) year term of this
Agreement specified in paragraph (a) of Section 18.
"JAMtv Competitor" means any person or entity that offers,
aggregates, and/or distributes (for sale or otherwise) on the
Interactive Network content, the principal or substantial focus of
which is about or relating to music or musicians, including,
without limitation, text, images, video, and audio (including,
without limitation, music used in synchronization or timed
relation with visual displays), including without limitation,
Launch, mtv.com, SonicNet, Cdnow, N2K, Amazon, Spinner, and UBL.
"JAMtv Content" means (exclusive of JAMtv's rights in the
Source Content, if any, and/or arising under this Agreement) all
of JAMtv's: (a) copyrights, whether or not registered,
registrations thereof, applications for registration thereof, and
all secondary and subsidiary rights therein, (b) service marks,
trademarks, trade dress, registrations thereof, and applications
for registration thereof, together with the goodwill symbolized
thereby and connected
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<PAGE>
therewith, (c) art, audiovisual works, animations, cartoons,
characters, choreography, compilations, collective works, computer
software and programs, data, designs, emblems, films, film clips,
graphics, images, illustrations, likenesses, literary works, logos,
motion pictures, musical compositions, music videos, performances,
photographs, pictorial works, songs, song lyrics, sound recordings,
scripts, screenplays, templates, text, video recordings, copyrightable
subject matter, works of authorship, trade secrets (including without
limitation customer and vendor lists), and other proprietary rights,
(d) publication rights, display rights, attribution rights, integrity
rights, performance rights, mechanical rights, approval rights, and
moral rights associated with the foregoing, (e) all renewals,
extensions, continuations, derivative works, enhancements,
improvements, modifications, updates, new releases or other revisions
of the foregoing, (f) all publicity rights or privacy rights (or
waivers or quitclaims thereof) of any person or entity, and (g) all
rights corresponding to the foregoing throughout the world; all of the
foregoing which any of JAMtv or its employees, consultants or
representatives has created or may hereafter create, has licensed or
may hereafter license, or has acquired or may hereafter acquire, in
any form and on any medium now known or hereafter developed, whether
tangible, printed, recorded, digitized, fixed, stored, electronic, or
otherwise embodied.
"JAMtv Hosting Services" means the services provided by
JAMtv in accordance with Section 2.
"JAMtv-Tunes Music Hub" means the interactive multimedia
site(s) on the Interactive Network currently hosted by JAMtv at
the JAMtv or Tunes URL or any other location or site on the
Interactive Network through which JAMtv places, broadcasts,
downloads, transmits, or distributes JAMtv Content (or, after the
Launch Date, any Source Content pursuant hereto), together with
any affiliated radio station sites, participating venue sites, and
all other partnership, syndication, affiliation or distribution
sites receiving content from JAMtv on the Interactive Network.
"JAMtv URL" means the uniform resource locator
http://www.jamtv.com and any and all related URLs identifying
related web pages within such web site (e.g.,
http://www.jamtv.com/sections/home/text/) (hereinafter
"Extensions"). "Tunes URL" means the uniform resource locator
http://www.tunes.com and any and all Extensions thereof.
"JAMtv/Source Agreements" means, collectively, this
Agreement, the Warrant, and the other agreements, documents, and
instruments executed or delivered in connection therewith.
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<PAGE>
"Launch Date" means the later of the completion date of the
initial complete integration of the Source Content into the Source
Website, as mutually accepted by JAMtv and SEI, and the date all
of the basic pages constituting the Source Website become
available to and accessible by the general public at the Source
URL.
"Launch Schedule" means the tasks to be performed by JAMtv
and SEI to commence and consummate the integration of the Source
Trademarks and the Source Content into the Source Website and the
time line therefor, as such tasks and time line are more
particularly described in Section 2 and on SCHEDULE 1.
"License Fees" means the license fees payable by JAMtv in
accordance with paragraphs (a), (b), (c), and (d) of Section 8.
"Net Revenue" means total gross cash receipts, and the cash
value of payments in kind and/or barter, if any, for sales of site
advertising or sponsorships and/or for onsite product or service
advertising or promotion directly attributable to or arising by
reason of the Source Website or the net receipts from any
sublicensee of Source Content actually received by JAMtv which, in
each case, shall require the consent of SEI, less the following
amounts:
(i) a sales commission of fifteen
percent (15%) to be shared equally by JAMtv
and SEI regardless of which JAMtv or SEI
sales representative made any sale;
(ii) any currency exchange fees
incurred by JAMtv with respect to invoiced
amounts other than in United States dollars;
(iii) a reserve for amounts that
cannot be repatriated to the United States
because of currency control or similar laws,
less any amounts previously reserved against
release from such controls; and
(iv) legal fees and disbursements paid
by JAMtv to outside counsel in connection
with obtaining, maintaining, and enforcing
Proprietary Rights for the Source Content (to
the extent that JAMtv is expressly authorized
by SEI to do so hereunder) in accordance with
this Agreement, and any and all amounts paid
by JAMtv (A) as damages for infringement by
any part of the Source Content (or the use of
such content for its intended purpose) of a
third party's Proprietary Rights or (B) in
settlement with SEI's consent
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of allegations of such infringement or (C) as a
license fee with respect to any such Proprietary Rights.
In determining Net Revenues, amounts invoiced or received by JAMtv
in foreign currencies will be deemed converted into United States
dollars at the average exchange rates used by JAMtv in its
financial statements for the month of invoice or receipt, as
appropriate. In determining Net Revenues, barter and in-kind
remuneration shall not be accepted, except as any such
arrangements shall be approved in advance by JAMtv and SEI. Any
deductions applicable to Net Revenues may be taken by JAMtv in the
reporting period in which such deduction is paid or incurred in
accordance with JAMtv's customary accounting procedures. Any
unused deductions from a given period may be carried over to
subsequent reporting periods.
The parties hereby acknowledge that Net Revenues do not include
any proceeds of sale of Source Merchandise or other non-music
merchandise sold on the Source Website and any revenue derived by
a party through the Noncompeting Source Website.
"Net Revenue Payments" means the percentages of Net Revenue
which are payable by JAMtv under paragraphs (a) and (b) of Section
9.
"Mandatory Renewal Term" means the three (3) year renewal
term of this Agreement arising upon a Trigger Event as specified
in paragraph (b) of Section 18.
"Network Icon" means a printed icon or logo of type, style,
and design to be mutually agreed upon between the parties for
placement in the sole discretion of SEI at certain designated
locations in THE SOURCE magazine which will refer to related
supplementary materials and multimedia assets available on the
Source Website in accordance with Section 7.
"Noncompeting Source Website" means a website at a uniform
resource locator other than the Source URL where SEI (either alone
or in conjunction with others except a JAMtv Competitor) may
place, broadcast, download, transmit, or distribute third party
content (or limited Source Content as provided below) provided
that such website: (i) does not contain non-Source Content the
principal or substantial focus of which is about or relating to
music or musicians unless SEI receives the prior consent of JAMtv
to the use of such non-Source Content which consent shall not be
unreasonably withheld or delayed; and (ii) does not contain any
Source Content the principal or substantial focus of which is
about or relating to music other than headlines, teasers, links to
the Source Website, and other limited content, in each case where
a principal purpose of the use of such Source
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Content shall be to drive and/or direct additional traffic to the
Source Website. In connection with paragraph (i) above, failure by
JAMtv to expressly approve or disapprove of such arrangement within
ten (10) business days of JAMtv's receipt from SEI of a written
request for approval of such arrangement shall be deemed acceptance by
JAMtv of such arrangement.
"Optional Renewal Term" means any renewal term of this
Agreement other than a Mandatory Renewal Term.
"Proprietary Rights" means any copyright, trademark, trade
name, trade dress, service mark, domain name, invention,
discovery, patent, patent applications, trade secret, rights of
publicity, and any other proprietary interests, including but not
limited to rights in assets such as HTML and/or VRML code, CGI
and/or Perl scripts, JavaScript code and Java code or applets and
tools or techniques developed, page designs, layouts, graphic
images, and/or styles, and page and/or form templates developed.
"Qualified Public Offering" means a primary or secondary
sale of shares of common stock of JAMtv to the public pursuant to
a public offering registered under the Securities Act of 1933, as
amended, which shall be consummated where the aggregate net
proceeds to JAMtv (after deducting underwriting discounts and
commissions and expenses of the offering) from the offering of the
shares of common stock so registered are at least $10,000,000.
"Qualified Private Offering" means a private offering of
equity securities of JAMtv, which shall be consummated after the
date hereof where the aggregate net proceeds to JAMtv (after
deducting expenses of the offering) from the offering of such
securities are at least $15,000,000.
"Renewal Term" means the Mandatory Renewal Term or any
Optional Renewal Term.
"Source Content" means all of THE SOURCE magazine's (and
such of SEI's as SEI shall designate) (a) copyrights, whether or
not registered, registrations thereof, applications for
registration thereof, and all secondary and subsidiary rights
therein, (b) the Source URL, service marks, trademarks, trade
dress, registrations thereof, and applications for registration
thereof, together with the goodwill symbolized thereby and
connected therewith, (c) art, audiovisual works, animations,
cartoons, characters, choreography, compilations, collective
works, computer software and programs, data, designs, emblems,
films, film clips, graphics, images, illustrations, likenesses,
literary works, logos, motion pictures, musical compositions,
music videos, performances, photographs, pictorial works, songs,
song lyrics, sound recordings, scripts, screenplays, templates,
text, video
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recordings, copyrightable subject matter, works of authorship, and
other proprietary rights, (d) publication rights, display rights,
attribution rights, integrity rights, performance rights, mechanical
rights, approval rights, and moral rights associated with the
foregoing, (e) renewals, extensions, continuations, derivative works,
enhancements, improvements, modifications, updates, new releases or
other revisions of the foregoing, (f) publicity rights or privacy
rights (or waivers or quitclaims thereof) of any person or entity, and
(g) rights of THE SOURCE Magazine corresponding to the foregoing
throughout the world; in any form and on any medium now known or
hereafter developed, whether tangible, printed, recorded, digitized,
fixed, stored, electronic, or otherwise embodied; including, without
limitation, but subject to Third Party Restrictions, if any, the
content of THE SOURCE magazine and the rights of SEI described on
SCHEDULE 2 hereto.
"Source Merchandise" means merchandise (including without
limitation books, magazine back issues, compact disks, and
clothing) incorporating, embodying or displaying Source Content
or Source Trademarks or not displaying Source Content or Source
Trademarks but sold on the Source Website
"Source Trademarks" means the Source URL and the
trademarks, service marks, and logos listed on SCHEDULE 3 hereto.
"Source URL" means the uniform resource locator
'http://www.thesource.com' and any and all Extensions thereof.
"Source Website" means the website at the Source URL (and
at any JAMtv interactive multimedia site available on the
Interactive Network, including, without limitation, the JAMtv-Tunes
Music Hub, featuring primarily Source Content with the
consent of SEI) and on which JAMtv shall after the Launch Date,
pursuant hereto, place, broadcast, download, transmit, or
distribute Source Content with the consent of SEI (and JAMtv
Content pursuant hereto), as updated, modified, or supplemented
from time to time.
"SEI Licenses" means the licenses and rights granted to
JAMtv pursuant to this Agreement.
"Term" means the Initial Term or any Renewal Term.
"THE SOURCE magazine" means a reference to THE SOURCE
magazine.
"Third Party Restrictions" means the rights of, if any,
and/or restrictions imposed by, third parties on SEI's and/or THE
SOURCE Magazine's rights in Source Content, as such restrictions
are more particularly described in paragraph (b) of Section 4.
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"Trigger Event" means either a Qualified Public Offering or
a Qualified Private Offering occurring before the expiration or
termination of the Initial Term or any Renewal Term.
"URL" means UNIFORM RESOURCE LOCATOR, the global address of
documents and other resources on the World Wide Web.
"Warrant" means that certain Warrant, initially for 75,000
shares of common stock of JAMtv, issued by JAMtv to SEI.
2. JAMTV HOSTING SERVICES. JAMtv will install and host, at no cost
to SEI, the Source Website on JAMtv's Internet servers in Chicago (or
elsewhere). In accordance therewith, JAMtv will: (a) integrate existing and
future Source Content into the Source Website as consented to by SEI from time
to time which the parties deem appropriate for use on the Source Website; and
(b) maintain, support and further develop the Source Website. JAMtv may, at any
time, in its sole discretion after the Launch Date, change, expand, alter or
redesignate the physical server(s) for the Source Website as well as their
physical locations in order to enhance, optimize, simplify, consolidate or
otherwise integrate the performance and other operating characteristics of all
of the sites on the Interactive Network which collectively constitute the
JAMtv-Tunes Music Hub so long as such changes do not adversely impact or reflect
on the Source Content, SEI ,THE SOURCE magazine or the Source Website. JAMtv
will use commercially reasonable good faith efforts to ensure that JAMtv Hosting
Services and the Source Website will be maintained, operated, supported and
developed consistent with this Agreement and the development of the Source
Website to date. JAMtv will use commercially reasonable good faith efforts to
maintain the JAMtv Hosting Services and the Source Website in its present status
as a technically state-of-the-art website.
3. SOURCE CONTENT. In accordance with and subject to the following
terms and the terms more particularly described on SCHEDULE 2 attached hereto,
SEI will develop, create, acquire, deliver, and make available to JAMtv to the
extent not prohibited by Third Party Restrictions, the Source Content at no cost
to JAMtv other than as expressly provided in this Agreement.
(a) ACCESS AND DELIVERY. SEI shall provide JAMtv, at
reasonable times and from time to time, access to the Source
Content in order to access, copy, duplicate, digitize, retrieve,
and utilize the Source Content. SEI shall provide JAMtv with
reasonable assistance and technical support pursuant thereto
including, without limitation, provision and shipping to JAMtv of
recordings, CDs or other copies of the Source Content or
transmission thereof by electronic, satellite, Internet, or
telecommunications means to JAMtv. JAMtv will have access to new
Source Content which is to be published in THE SOURCE magazine
within ten (10) days after the earlier of: the initial mailing of
subscription copies
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of or the initial distribution to newsstands of the issue of THE
SOURCE magazine in which such Source Content is to appear. SEI will
also provide to JAMtv, at no cost, access to and appropriate copies
of statistics, charts, lists, sales figures, and other data contained
in THE SOURCE magazine for use on the Source Website.
(b) FORM. Where practicable, SEI will provide JAMtv
with (1) electronic, CD, or digital copies of Source Content in
server ready format (except for Archival Source Content which may
be provided or delivered in whatever form it is presently
available) and (2) color copies, of typeset quality, of all
trademarks, service marks, design logos, and artwork comprising
Source Content.
(c) ACQUISITION AND CREATION OF SOURCE CONTENT. SEI
will in good faith use commercially reasonable efforts to develop,
create, and acquire additional Source Content upon terms
consistent with the scope of the SEI Licenses granted hereunder
for use on the Source Website. SEI will also assist JAMtv in
identifying, soliciting and contracting with writers and other
talent which the parties believe can make substantial
contributions to the content on the Source Website. SEI will
assist JAMtv in developing new sections, areas, features, and
other elements for the Source Website including, without
limitation, weekly events, photography, trivia, games and quizzes,
personals and polls online, celebrity chats, music critics round
tables, and gossip columns. In addition, SEI and THE SOURCE
magazine staff will assist JAMtv in developing, with major third
party Internet businesses (such as Yahoo, Excite, Lycos,
GeoCities, Infoseek, Microsoft Corporation, America Online, and
Netscape), new brand opportunities, products and services for
items such as branded Source Website webcasts for Yahoo, branded
Source Website interviews, and branded Source Website online
celebrity chats. As between SEI and JAMtv, all material acquired
and/or created for inclusion as Source Content for use on the
Source Website (except JAMtv Content) shall be owned solely by and
deemed assigned to SEI and may be used by SEI so long as it
conforms to the license grant restrictions set forth in Section 4
and Section 5 and its exclusivity obligations under Section 11)
without payment of any kind.
(d) SOURCE STAFFING. SEI will maintain and make
available a staff sufficient in its sole discretion throughout the
Term to meet its content production responsibilities under this
Agreement. SEI will permit appropriate senior members of THE
SOURCE magazine staff to visit JAMtv offices in Chicago on a
regular basis to plan and coordinate the activities of the parties
in providing the content for the Source Website and will provide
one or more work spaces in the SEI offices in New York to be used
from time to time by JAMtv personnel in connection with their
visits to New York for similar coordination and planning meetings.
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4. CONTENT LICENSE.
(a) GRANT. Subject to the Third Party Restrictions and
SEI's approval in each case, SEI hereby grants to JAMtv for the
Term only (as same may be modified, extended or shortened pursuant
hereto) an exclusive, irrevocable, paid-up and royalty-free
(except for the License Fees hereunder) worldwide right and
license to use and commercially exploit the Source Content
(including without limitation through the reproduction,
translation, printing, adaptation, combination, modification,
reformatting, publishing, alteration, digitizing, capturing,
editing, cropping, combination, synchronization, exhibition,
performance, display, download, broadcast, transmission, and
retransmission thereof in any form and through any medium now
known or later developed) in connection with the Source Website,
and the design, operation, distribution, display, transmission,
marketing, advertising, and promotion thereof.
(b) THIRD PARTY RESTRICTIONS. JAMtv acknowledges that
SEI does not possess all of the Proprietary Rights necessary to
provide and license certain Source Content for use on the Source
Website because certain Source Content is subject to Third Party
Restrictions. SEI will provide JAMtv with copies of
documentation, if any, setting forth any Third Party Restrictions
known to SEI or will disclose to JAMtv the nature, duration,
scope, and other material terms of any Third Party Restrictions in
reasonable detail. SEI's failure to provide such documentation
shall not negate the existence or impact or applicability of any
Third Party Restrictions. SEI shall have no obligation to obtain
all necessary rights to use such Source Content in connection with
the Source Website unless it does so in the ordinary course of
business in connection with THE SOURCE magazine.
5. TRADEMARK LICENSE.
(a) GRANT. Subject to the terms and conditions of this
Agreement, and SEI's approval in each case, SEI hereby grants to
JAMtv for the Term only (as same may be modified, extended or
shortened pursuant hereto) an exclusive, irrevocable, paid-up and
royalty-free (except for the License Fees hereunder) right and
license to use the Source Trademarks and the Source URL in
connection with the Source Website, and the design, operation,
distribution, display, transmission, marketing, advertising, and
promotion thereof.
(b) QUALITY CONTROL. SEI shall have the right to
exercise quality control over the Source Content and the Source
Trademarks and JAMtv's use of the Source Content and Source
Trademarks to that degree necessary, in the reasonable opinion of
SEI, to maintain the validity and enforceability of the Source
Trademarks and to protect the goodwill associated therewith and
the
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intellectual property and other rights of third parties, if
any. JAMtv shall, in its design, operation, distribution,
display, transmission, marketing, advertising and promotion of the
Source Website, adhere to such reasonable standards and
specifications as shall be provided by SEI to JAMtv from time to
time.
(c) TRADEMARK USAGE. JAMtv shall use the Source
Content and Source Trademarks in accordance with sound trademark,
trade name usage, and other intellectual property and related
principles and in material compliance with all applicable laws and
regulations of the United States or other applicable
jurisdictions, including without limitation all laws and
regulations relating to the maintenance of the validity and
enforceability of the Source Trademarks. JAMtv shall use, in
connection with the Source Trademarks, all legends, notices and
markings as reasonably requested by SEI. Any use by JAMtv of
Source Content and Source Trademarks shall be approved in final
form by SEI. Failure by SEI to expressly approve JAMtv's use of
Source Content and Source Trademarks within ten (10) business days
of SEI's receipt from JAMtv of a request for approval of such
proposed usage of Source Content and Source Trademarks shall be
deemed acceptance by SEI of such usage.
(d) CONFORMANCE WITH STANDARDS. JAMtv shall submit to
SEI representative samples of all publicly distributed advertising
materials using the Source Trademarks and/or the Source Content
prior to their initial distribution. Within ten (10) business
days of SEI's receipt of the aforementioned representative
samples, SEI may disapprove such representative samples for
reasonable cause or basis. Failure by SEI to disapprove such
representative samples within ten (10) business days of SEI's
receipt of them shall be deemed approval by SEI. Such advertising
materials, Source Trademarks and Source Content included on the
Source Website shall reasonably conform to the standards and
specifications provided to JAMtv by SEI, which shall not be more
onerous than the standards of quality associated with THE SOURCE
magazine from time to time.
(e) COOPERATION. JAMtv shall comply with such other
reasonable requests as are made by SEI to enable SEI to assure the
quality of any materials on the Source Website bearing any Source
Trademark. JAMtv agrees that it shall cooperate with SEI to avoid
likely confusion or conflict arising out of SEI's or any other
licensee's simultaneous use of the Source Trademarks or Source
Content in connection with other products or services outside of
the Interactive Network.
(f) SOURCE URL. Subject to the licenses granted
hereunder, SEI shall at all times own the Source URL.
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6. ALLOCATION OF CREATIVE AND EDITORIAL CONTROL.
(a) SEI. SEI shall have creative, editorial and quality
control over all content of the Source Website which shall be
subject to the final review and edit of the management of THE
SOURCE magazine. Without limiting the foregoing, the initial
layout and design of the Source Website site (as of the Launch
Date) and any subsequent changes thereto shall be subject to the
artistic approval of SEI which shall not be unreasonably withheld.
(b) JAMTV. Except as set forth in paragraph (a) above,
JAMtv shall have editorial and creative control over such JAMtv
Content, if any, contained in the Source Website subject to SEI's
right to review and approve such JAMtv Content. JAMtv may use the
JAMtv trademarks in conjunction with the Source Trademarks and/or
Source Content to whatever extent JAMtv desires so long as such
use does not create a likelihood of confusion, association or
sponsorship as to the primary identity and branding of the Source
Website as being associated with THE SOURCE magazine. In this
context, the good faith determination of SEI shall be binding and
determinative. JAMtv may, in its sole discretion, at any time,
subject to SEI's review and express approval add, modify, change,
delete, substitute or reschedule in whole or in part from time to
time any and all aspects of the JAMtv Content.
7. PROMOTION AND ADVERTISING.
(a) In accordance with and in consideration of the terms
more particularly described on SCHEDULE 4 attached hereto, SEI
will in good faith promote the Source Website, and the programming
contained thereon. Such promotion duties shall include the
preparation and inclusion in no less than nine (9) issues of THE
SOURCE magazine each year of such partial or full page ads
promoting the Source Website and events occurring in connection
therewith as SEI may in good faith determine are appropriate and
commercially reasonable which shall be written and edited by SEI,
as more fully described on SCHEDULE 4 attached hereto. SEI will
produce advertising copy for any commercial messages SEI proposes
to use to promote the foregoing. Subject to any time constraints,
SEI shall endeavor to submit proposed advertisements and other
promotional materials for the Source Website to JAMtv for
inspection, provided that SEI will have the final right of
approval with respect thereto.
(b) SEI shall place an explanation of the Network Icon
and examples of the Network Icon in each issue of THE SOURCE
magazine, in a manner designed to encourage readers to access the
Source Website. A Network Icon shall be placed at such
location(s) in the magazine as SEI elects in its sole discretion.
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(c) JAMtv and SEI shall cooperate in good faith to
jointly develop promotions in the field, on the Source Website and
in THE SOURCE magazine, which are designed to increase the
visibility, prominence, awareness and popularity of the Source
Website so as to increase traffic and attract advertisers to the
Source Website.
(d) JAMtv and SEI shall cooperate and participate in the
following types of marketing promotions and co-marketing
opportunities: (i) online promotions; (ii) press releases and
public announcements (subject to paragraph (g) of Section 13); and
(iii) reasonable inclusion in the other party's booths,
presentations, presences, and promotions at trade shows,
conferences, conventions, in print and on radio and/or television,
and in marketing materials and advertising campaigns.
(e) SEI shall place on the index/home page of any
Noncompeting Source Website a link or button above-the-fold
pointing directly to the Source Website.
(f) The services provided by THE SOURCE magazine staff
in connection with the advertising and promotional services of SEI
described in the preceding paragraphs of this Section shall be
without charge to JAMtv.
8. LICENSE FEES. In consideration for the SEI Licenses and the
obligations of SEI under this Agreement and the other JAMtv/Source Agreements,
provided no Default by SEI exists, JAMtv will pay the License Fees (subject to
recoupment under Section 9) to SEI as follows.
(a) YEAR ONE. JAMtv will pay $72,000 to SEI for the
nine month period commencing on April 1, 1999 and ending on
December 31, 1999, which shall be payable in nine (9) equal
monthly installments of $8,000 each on the last day of each
calendar month.
(b) YEAR TWO. JAMtv will pay $120,000 to SEI for the
one year period commencing on January 1, 2000 and ending on
December 31, 2000, which shall be payable in twelve (12) equal
monthly installments of $10,000 each on the last day of each
calendar month.
(c) LICENSE FEES FOR OPTIONAL RENEWAL TERM. If there
shall be any Optional Renewal Term, JAMtv will pay $144,000 to SEI
for each one year period thereof commencing on January 1st of each
such year and ending on December 31st of each such year, which
shall be payable in twelve (12) equal monthly installments of
$12,000 each on the last day of each calendar month.
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(d) LICENSE FEES FOR A MANDATORY RENEWAL TERM. If there
shall be any Mandatory Renewal Term, JAMtv will pay $144,000 to
SEI for each one year period thereof commencing on January 1st of
each such year and ending on December 31st of each such year,
which shall be payable in twelve (12) equal monthly installments
of $12,000 each on the last day of each calendar month.
9. ADVERTISING AND SUBLICENSING REVENUE.
(a) ADVERTISING. JAMtv shall pay SEI seventy percent
(70%) of the Net Revenue of JAMtv derived from advertisements,
product or service promotion and/or sponsorships obtained by,
directed by, or otherwise placed on pages of the Source Website.
(b) SUBLICENSING. JAMtv shall pay SEI seventy percent
(70%) of the Net Revenue of JAMtv derived from the sublicensing of
Source Content conditioned upon SEI's express consent in each case
to third parties where expressly permitted by SEI
(c) PAYMENT SCHEDULE AND RECOUPMENT.
(1) SCHEDULE AND REALIZATION. The Net
Revenue Payments will be payable (i) in increments
as realized within a one calendar month period and
(ii) within thirty (30) days after the end of such
calendar month. Net Revenue with respect to any Net
Revenue Payment will be realized when actually
received by JAMtv. Any deductions applicable to Net
Revenues may be taken by JAMtv in the reporting
period in which such deduction is paid in accordance
with JAMtv's customary accounting procedures. Any
unused deductions from a given period may be carried
over to subsequent reporting periods.
(2) RECOUPMENT AND CARRY OVER. JAMtv's
payments of License Fees shall be credited,
amortized, and recouped against JAMtv's obligation
to pay Net Revenue Payments under this Section.
Accordingly, one hundred percent (100%) of the Net
Revenues shall first be applied to permit JAMtv to
recoup one hundred percent (100%) of the License
Fees actually paid by JAMtv to SEI and only after
full recoupment of such License Fees shall JAMtv be
obligated to make Net Revenue Payments to SEI.
Within any given one year period ending on any
anniversary date
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hereof, any unused recoupment amounts against Net
Revenue Payments from a given calendar month may be
carried over to any subsequent calendar month.
10. TAXES. Each party shall be responsible for any sales, use or
other tax assessed in connection with the services performed, licenses granted,
or programming made available by such party hereunder.
11. EXCLUSIVITY. JAMtv shall, during the Term hereof, be the
exclusive provider of Source Content on the Interactive Network and SEI shall
not use and shall not license, grant any right to use, sublicense, or otherwise
transfer any right, title or interest in or to the Source Content to any other
person or entity for use in connection with the Interactive Network or in the
design, operation, distribution, display, transmission, marketing, advertising,
or promotion of goods and services thereon. Notwithstanding the foregoing, (i)
Source magazine advertisers may be given permission to place headlines, teasers
and links to the Source Website on their own websites so long as a primary
purpose or effect of such links, etc. is to drive additional traffic to the
Source Website and (ii) nothing herein contained shall limit SEI's rights and/or
the rights of any affiliate of the Source which is not a JAMtv Competitor: (A)
to operate a Noncompeting Source Website, (B) subject to the limitations set
forth in this Agreement, to use the Source Trademarks or Source Content on a
Noncompeting Source Website, (C) to earn revenue from a Noncompeting Source
Website so long as such revenue is not derived from any JAMtv Competitor without
the need for the prior consent of JAMtv or (D) to operate and to earn revenue
(either alone or in conjunction with others except a JAMtv Competitor) as an
internet service provider, e-mail provider, or portal on the Interactive Network
provided that its presence on the Interactive Network in such capacity is as a
Noncompeting Source Website. Failure by JAMtv to expressly approve or disapprove
of any arrangement within ten (10) business days of JAMtv's receipt from SEI of
a written request for approval of such arrangement shall be deemed acceptance by
JAMtv of such arrangement. SEI and JAMtv acknowledge that from time to time SEI
may be requested by third parties to enter into certain promotion, marketing,
licensing, and/or advertising opportunities, which would propose to use certain
of the Source Content on the Interactive Network or certain of the features or
functionality of the Source Website on the Interactive Network, and SEI
acknowledges that, in accordance with its exclusivity obligations under this
Section, SEI is prohibited from entering into such third party opportunities
without the written consent of JAMtv which shall not be unreasonably withheld or
delayed. Use of The Source name alone (e.g. "as advertised in The Source")
shall not violate the foregoing exclusivity provisions. In addition, references
on third party Source advertiser websites to promotions, events, contests, etc.
which are being created by the advertiser and THE SOURCE will not violate the
foregoing exclusivity provisions. In such cases, SEI shall attempt to have any
such references include the Source URL or link directly to the Source Website.
12. JAMTV RESTRICTIONS DURING TERM. During the Initial Term and any
extended Term as well, JAMtv will not provide similar services to those being
provided hereunder for any direct
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competitor of THE SOURCE magazine, including, but not limited to, Vibe, Spin or
Blaze, and/or such other publications as the parties may hereafter specify
(but excluding ROLLING STONE magazine and DOWNBEAT magazine).
13. PROPRIETARY RIGHTS.
(a) RIGHTS CLEARANCES. SEI shall obtain the necessary
rights clearances with respect to Source Content and/or other
content that SEI and/or the SOURCE magazine put on the Source
Website and shall be responsible for payment of any license fees
or royalties for such rights clearances, including, without
limitation, copyright or public performance (including digital
performance) music license fees (through, for example, ASCAP, BMI,
SESAC, or RIAA). JAMtv shall obtain the necessary rights
clearances with respect to JAMtv Content and/or other content that
JAMtv puts on the Source Website and shall be responsible for
payment of any license fees or royalties for such rights
clearances, including, without limitation, copyright or public
performance (including digital performance) music license fees
(through, for example, ASCAP, BMI, SESAC, or RIAA).
(b) JAMTV CONTENT. SEI acknowledges that all right,
title and interest in the JAMtv Content and other Proprietary
Rights embodied therein are and shall remain in JAMtv and its
licensors. SEI shall not acquire any right, title, or interest in
the Proprietary Rights created or developed by JAMtv (except to
the extent incorporating the Source Content or Source Trademarks)
in connection with this Agreement, other than as expressly
reserved herein. If any JAMtv Content or segment thereof is
provided to SEI on disc, tape or other tangible embodiment, such
disc, tape or other tangible embodiment shall remain the property
of JAMtv and shall be returned promptly upon JAMtv's request
therefor. Except as expressly provided in this Agreement, SEI is
not authorized to, shall not, and shall not authorize any access,
transmission, duplication, or any other use whatsoever of any
JAMtv Content, any portion thereof, or any derivative work thereof
or any other programs or broadcast material which may have been
transmitted or distributed by JAMtv to SEI, the Source Website or
otherwise. SEI will not authorize, cause, permit, or enable any
JAMtv Content or portion thereof to be recorded, stored,
duplicated, rebroadcast, or otherwise transmitted or distributed
or used for any purpose.
(c) SOURCE CONTENT. JAMtv acknowledges that all right,
title and interest in the Source Content and other Proprietary
Rights embodied therein are and shall remain in SEI and its
licensors. JAMtv shall not acquire any right, title,
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or interest in the Proprietary Rights created or developed by SEI
(whether or not incorporating the JAMtv Content) in connection with
this Agreement, other than as expressly granted herein. If any Source
Content or segment thereof is provided to JAMtv on disc, tape or other
tangible embodiment, such disc, tape or other tangible embodiment
shall remain the property of SEI and shall be returned promptly upon
SEI's request therefor and upon termination of this Agreement JAMtv
shall not challenge SEI's right, title or interest in the Source
Content or otherwise interfere with SEI's use thereof, except as such
use may be inconsistent with any exclusive rights of JAMtv granted
pursuant to this Agreement or the other JAMtv/Source Agreements.
(d) USER DATA. Each party shall be deemed a co-owner of
any data collected from the Source Website, including without
limitation any information provided by or concerning users of the
Source Website, and neither party shall have the right to make use
(including the renting, leasing, or any other third party use) of
such data without the consent of the other except that SEI may use
user name data (and e-mail addresses) generated from the Source
Website at its expense for its own marketing, solicitation and/or
subscription purposes without the consent of JAMtv
(e) CONFIDENTIAL INFORMATION. Each party will, to the
extent and in accordance with the policies used to protect its own
information of similar importance, use its best efforts to refrain
from and prevent the use, duplication, or disclosure of during or
after the Term any Confidential Information of the other party,
disclosed or obtained by such party while performing its
obligations under this Agreement, except when such use or
disclosure is for the limited purpose of performing obligations
under this Agreement. Neither party will have an obligation of
confidentiality with regard to any information insofar as the same
(i) was known to such party prior to disclosure; (ii) is at the
time of disclosure publicly available or becomes publicly
available other than as a result of a breach of this Agreement; or
(iii) is disclosed to such party by a third party not under a duty
not to disclose such information. In addition, the
confidentiality obligations set forth above will not apply to any
Confidential Information which is disclosed pursuant to any law of
the United States or any state thereof; the order of any court or
governmental agency; or the rules and regulations of any
governmental agency. Prior to any disclosure required by law or
order of any court or government agency, the disclosing party will
notify the other party of the required disclosure. If the
required disclosure is to be made within ten (10) days after the
disclosing party becoming aware or informed of the obligation to
disclose, the disclosing party will notify the other party by the
end of the next business day following the day the disclosing
party became aware of its disclosure obligation. The parties
agree that an impending or existing violation of any provision of
this Section by one party would cause the other party irreparable
injury for which it
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would have no adequate remedy at law, and agree that such other
party will be entitled to obtain immediate injunctive relief
prohibiting such violation, in addition to any other rights and
remedies available to it. The nclusion of copyright notices on
any software licensed hereunder does not constitute publication thereof.
(f) SOURCE TRADEMARKS. JAMtv acknowledges that the
Source Trademarks and SEI's other Proprietary Rights and all
rights therein (with the exception of those rights expressly
granted to JAMtv hereunder) and the goodwill pertaining thereto
belong exclusively to SEI. JAMtv's use of the Source Trademarks
and SEI's other Proprietary Rights shall inure to the benefit of
SEI for all purposes, including without limitation, any trademark
registration. Without limiting the generality of the foregoing,
JAMtv shall not challenge the validity of SEI's ownership of any
Source Trademark, Source Proprietary Rights or Source Content or
any registration or application for registration thereof or
contest the fact that JAMtv's rights under this Agreement are
those of a licensee.
(g) PUBLICITY. This Agreement constitutes Confidential
Information. Accordingly, each party shall submit to the other
all advertising, written sales promotion, press releases, and
other publicity matters relating to this Agreement in which the
other party's name or trademark is mentioned or language from
which the connection of said name or trademark may be inferred or
implied, and neither party shall publish or use such advertising,
sales promotion, press releases, or publicity matters without the
prior written approval of the other party, which shall not be
unreasonably withheld or delayed. However, either party may
include the other party's name and a mutually agreed factual
description of the work performed under this Agreement in employee
communications, in internal business planning documents, in its
reports to stockholders, and whenever required by reason of legal,
accounting, or regulatory requirements (including SEC regulations,
state blue sky laws, and the rules of public stock exchanges);
provided that prior to such disclosure the party whose name is
mentioned has not less than ten (10) days to review and comment on
such disclosure.
14. REGISTRATION AND PROTECTION.
(a) COPYRIGHT REGISTRATION. Except as otherwise
expressly authorized by SEI, all registrations and applications
for registration of copyright in the Source Content shall be in
the name of SEI. JAMtv, when requested by SEI, shall assist and
cooperate with SEI in connection with any such filings at SEI's
expense.
(b) ACTIONS AFFECTING VALIDITY. Neither JAMtv nor SEI
shall take any action, fail to take any action, or fail to use its
best efforts to prevent any action to
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be taken by others, which would in any respect affect the validity
or enforcement of the SEI Licenses or the rights in the Source Content
granted to JAMtv herein.
(c) COPYRIGHT NOTICE. JAMtv shall place notices of
copyright in a manner consistent with SEI's placement thereof on
the Source Content which is published by JAMtv.
(d) TRADEMARK REGISTRATION. SEI shall be responsible
for the prosecution and maintenance of trademark registrations of
the Source Trademarks at SEI's sole election and in its sole
discretion. JAMtv shall cooperate with SEI, at SEI's expense, and
shall execute any documents required by SEI and supply SEI with a
reasonable number of specimens to assist SEI, in the registration,
enforcement, or maintenance of any Source Trademark or recordal of
JAMtv as a registered user or licensee.
(e) THIRD PARTY INFRINGEMENT OF SOURCE TRADEMARKS OR
SOURCE CONTENT. If either party discovers any infringement or
misappropriation of (i) any of the Source Trademarks in connection
with the Source Website or similar products or services, or (ii)
any of the Source Content, then the party with knowledge of such
infringement or misappropriation shall promptly notify the other
party thereof. SEI shall take such actions which it determines
are reasonably necessary or desirable in its sole discretion in
connection with any infringement or misappropriation by a third
party of any portion of the Source Content or the Source
Trademarks. JAMtv shall not undertake any action in response to
any infringement or misappropriation of the Source Content or the
Source Proprietary Rights without the prior written consent of
SEI. SEI shall promptly notify JAMtv whether SEI wishes to
prosecute or settle any action with respect thereto. JAMtv agrees
to cooperate with and assist SEI in taking whatever action
(including consenting to being named as a party to any suit or
other proceeding) which SEI determines to be reasonably necessary
or desirable.
(f) THIRD PARTY CLAIMS WITH RESPECT TO SOURCE TRADEMARKS OR
SOURCE CONTENT. If any claim is asserted against either party
hereto alleging that any of the Source Content or Source
Trademarks infringes, misappropriates, or otherwise violates a
third party's rights, then the party with knowledge of such claim
shall promptly notify the other party. If such a claim is
asserted against JAMtv, SEI shall promptly notify JAMtv whether
SEI wishes to conduct a defense or settlement of any such claim on
behalf of JAMtv. Should SEI elect to conduct such a defense or
settlement, SEI shall be permitted to control fully the defense
and any settlement of such claim. JAMtv shall afford SEI every
reasonable assistance in regard to SEI's defense of any such claim
and JAMtv may appear in any such action.
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(g) THIRD PARTY INFRINGEMENT OF JAMTV TRADEMARKS OR
JAMTV CONTENT. If either party discovers any infringement or
misappropriation of (i) any of the JAMtv Trademarks in connection
with the Source Website or similar products or services, or (ii)
any of the JAMtv Content, then the party with knowledge of such
infringement or misappropriation shall promptly notify the other
party thereof. JAMtv shall take such actions which it determines
are reasonably necessary or desirable in its sole discretion in
connection with any infringement or misappropriation by a third
party of any portion of the JAMtv Content or the JAMtv Trademarks.
SEI shall not undertake any action in response to any infringement
or misappropriation of the JAMtv Content or the JAMtv Proprietary
Rights without the prior written consent of JAMtv. JAMtv shall
promptly notify SEI whether JAMtv wishes to prosecute or settle
any action with respect thereto. SEI agrees to cooperate with and
assist JAMtv in taking whatever action (including consenting to
being named as a party to any suit or other proceeding) which
JAMtv determines to be reasonably necessary or desirable.
(h) THIRD PARTY CLAIMS WITH RESPECT TO JAMTV TRADEMARKS
OR JAMTV CONTENT OR JAMTV USE OF PATENTS AND TECHNOLOGY. If any
claim is asserted against either party hereto alleging that any of
the JAMtv Content or JAMtv Trademarks or JAMtv's use of any
technology or patents infringes, misappropriates, or otherwise
violates a third party's rights, then the party with knowledge of
such claim shall promptly notify the other party. If such a claim
is asserted against SEI, JAMtv shall promptly notify SEI whether
JAMtv wishes to conduct a defense or settlement of any such claim
on behalf of SEI. Should JAMtv elect to conduct such a defense or
settlement, JAMtv shall be permitted to control fully the defense
and any settlement of such claim. SEI shall afford JAMtv every
reasonable assistance in regard to JAMtv's defense of any such
claim and SEI may appear in any such action.
15. REPRESENTATIONS AND WARRANTIES OF SEI.
(a) CORPORATE EXISTENCE AND STANDING. SEI is duly
organized and existing in good standing under the laws of the
state or Delaware and has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its
property and to execute, deliver and perform all of its
obligations under this Agreement and the other JAMtv/Source
Agreements to which it is a party.
(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement and the other JAMtv/Source Agreements
by SEI have been duly authorized by proper corporate proceedings,
and this Agreement and the other JAMtv/Source Agreements, upon
their execution and delivery, will constitute legal, valid and
binding obligations of SEI, enforceable in accordance with their
respective terms, except as such enforceability may be limited by
bankruptcy,
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insolvency, reorganization, fraudulent conveyance, moratorium and
similar laws affecting the validity or enforcement of creditors'
rights generally.
(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement and the other JAMtv/Source
Agreements by SEI, the consummation by SEI of the transactions
contemplated therein, and compliance by SEI with the provisions
thereof (including, without limitation, its exclusivity
obligations hereunder), will not violate any existing law, rule,
regulation, order, writ, judgment, injunction, decree or award
binding on SEI or its articles of incorporation or its bylaws or
the provisions of any instrument or agreement to which SEI is a
party or is subject, or by which it, or its property, is bound, or
conflict with or constitute a default thereunder; and the
execution, delivery and performance of this Agreement and the
other JAMtv/Source Agreements, the consummation of the
transactions contemplated therein, and compliance with the
provisions thereof, in each case by SEI, will not require the
consent of any party or the giving of notice to, the exemption by,
any registration, or filing with any governmental authority, to
the extent not previously obtained or made.
(d) INTELLECTUAL PROPERTY. SEI represents and warrants
that (i) it has the full power and authority to grant the SEI
Licenses (as limited by the Third Party Restrictions) and the
other rights granted hereunder, (ii) it is not aware of and has
not received any oral or written notice of any claims adverse to
SEI's rights in the Source Content or Source Trademarks, or that
the Source Content or Source Trademarks infringe upon the
proprietary rights of any third party, (iii) it has not granted to
any other party any rights to use the Source Content or the Source
Trademarks in connection with the Interactive Network, (iv)
subject to the Third Party Restrictions, the exercise of the
rights granted JAMtv hereunder will not now or hereafter in any
manner constitute an infringement or other violation of any
trademark, trade name, service mark, copyright, trade secret,
patent, or other intellectual property or proprietary rights of
any person, or the publicity, publication, display, attribution,
integrity, approval, performance, moral, or privacy rights of any
person or entity, and (v) the Source Content is not in SEI's
reasonable opinion determined in good faith defamatory and does
not violate any constitutionally valid laws relating to indecency,
obscenity, or pornography.
16. REPRESENTATIONS AND WARRANTIES OF JAMTV.
(a) CORPORATE EXISTENCE AND STANDING. JAMtv is duly
organized and existing in good standing under the laws of the
state or Delaware and has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its
property and to execute, deliver and perform all of its
obligations under this Agreement and the other JAMtv/Source
Agreements to which it is a party.
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(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement and the other JAMtv/Source Agreements
by JAMtv have been duly authorized by proper corporate
proceedings, and this Agreement and the other JAMtv/Source
Agreements, upon their execution and delivery, will constitute
legal, valid and binding obligations of JAMtv, enforceable in
accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and similar laws
affecting the validity or enforcement of creditors' rights
generally.
(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement and the other JAMtv/Source
Agreements by JAMtv, the consummation by JAMtv of the
transactions contemplated therein, and compliance by JAMtv with
the provisions thereof, will not violate any existing law, rule,
regulation, order, writ, judgment, injunction, decree or award
binding on JAMtv or its articles of incorporation or its by-laws
or the provisions of any instrument or agreement to which JAMtv is
a party or is subject, or by which it, or its property, is bound,
or conflict with or constitute a default thereunder; and the
execution, delivery and performance of this Agreement and the
other JAMtv/Source Agreements, the consummation of the
transactions contemplated therein, and compliance with the
provisions thereof, in each case by JAMtv, will not require the
consent of any party or the giving of notice to, the exemption by,
any registration, or filing with any governmental authority, to
the extent not previously obtained or made.
(d) INTELLECTUAL PROPERTY. JAMtv represents and warrants that (i) it
is not aware of and has not received any oral or written notice of any claims
adverse to JAMtv's rights in the JAMtv Content or JAMtv Trademarks or the use by
JAMtv of technology or patents, or that the JAMtv Content or JAMtv Trademarks or
the use by JAMtv of technology or patents infringe upon the proprietary rights
of any third party, and (ii) the JAMtv Content is not in JAMtv's reasonable
opinion determined in good faith defamatory and does not violate any
constitutionally valid laws relating to indecency, obscenity, or pornography.
17. CONDITIONS PRECEDENT. The obligations of JAMtv and SEI hereunder
shall be subject to the satisfaction of the following conditions precedent.
(a) JAMTV. JAMtv shall have executed and delivered to
SEI: (i) this Agreement and (ii) the Warrant; and
(b) SEI. SEI shall have executed and delivered this
Agreement to JAMtv.
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18. TERM.
(a) INITIAL TERM. The Initial Term of this Agreement
shall be two (2) years which shall commence on the earlier to
occur of the Launch Date or January 1, 1999 and continue until
December 31, 2000, unless earlier terminated as provided in
Section 20.
(b) MANDATORY RENEWAL TERM. If a Trigger Event occurs
during the Initial Term, this Agreement shall continue for a
Mandatory Renewal Term of three (3) years which shall commence on
January 1, 2001 and continue until December 31, 2003, unless
earlier terminated as provided in Section 20.
(c) OPTIONAL RENEWAL TERM(S). If a Trigger Event does
not occur during the Initial Term, this Agreement may thereafter
continue for Optional Renewal Term(s) upon the mutual agreement of
the parties hereto. Six months prior to the expiration of the
Initial Term, JAMtv and SEI shall begin to negotiate in good faith
in order to determine whether to enter into an Optional Renewal
Term of three (3) years (subject to the possibility of a Trigger
Event occurring during such negotiations and a corresponding
Mandatory Renewal Term).
19. DEFAULT. A Default shall mean the occurrence of any of the
following:
(a) JAMTV. JAMtv fails to pay any License Fee or
payment obligation under Section 9 required to be paid to SEI
hereunder within ten (10) days after the date such fee or payment
became due hereunder. JAMtv breaches any of its representations,
warranties, covenants or its other obligations set forth herein
and shall not have remedied, corrected, and/or materially improved
its performance or cured such breach within 60 days after
receiving written notice thereof from SEI.
(b) SEI. SEI fails to provide any or all of the Source
Content in a timely fashion and in the form and manner specified
herein or breaches any of its representations, warranties,
covenants or its other obligations set forth herein and shall not
have remedied, corrected, and/or materially improved its
performance or cured such breach within 60 days after receiving
written notice thereof from JAMtv.
20. EFFECT OF DEFAULT.
(a) TERMINATION BY JAMTV. JAMtv may terminate this
Agreement if a Default by SEI occurs, which termination shall be
effective immediately upon written notice to SEI from JAMtv. If
this Agreement is terminated by JAMtv for such Default, JAMtv
shall have no further obligation to pay the License Fees or
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or any payments due on Net Revenues other than Net Revenues which
accrued prior to the termination.
(b) TERMINATION BY SEI. SEI may terminate this
Agreement if a Default by JAMtv occurs, which termination shall be
effective immediately upon written notice to JAMtv from SEI. If
this Agreement is terminated by SEI for such Default, JAMtv shall
thereafter have no further obligation to pay the License Fees or
any payments due on Net Revenues except those which accrued prior
to termination.
(c) EFFECT OF TERMINATION. Upon termination of this
Agreement, the SEI Licenses shall terminate and JAMtv shall no
longer be entitled to receive from SEI any additional Source
Content and shall no longer use any Source Proprietary Rights or
Source Trademarks or Source Content; provided, however, that JAMtv
shall thereafter be permitted to use, in connection with the
Interactive Network, Archival Source Content which has been
incorporated into the Artists' Archives section of the JAMtv-Tunes
Music Hub. If the SEI License is not renewed, then JAMtv shall
cooperate with SEI and shall promptly transfer a complete copy of
all of the pages of the Source Website to an ISP or other provider
designated by SEI within a reasonable time after the expiration of
the SEI License.
(d) TERMINATION NOT EXCLUSIVE REMEDY. Termination of
this Agreement by either party hereunder shall not preclude any
other rights or remedies to which such party may be entitled.
21. FORCE MAJEURE. Neither party will have any liability hereunder if
performance by such party shall be prevented, interfered with or omitted because
of labor dispute, failure of facilities, act of God, natural disaster, laws,
government or court action, or any other cause beyond the control of the party
so failing to perform hereunder.
22. LIMITATION OF LIABILITY; INDEMNIFICATION.
(a) LIMITATION OF LIABILITY. EXCEPT AS EXPRESSLY
PROVIDED FOR HEREIN INCLUDING PURSUANT TO SECTIONS 8 AND 9,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OTHER
PERSON OR ENTITY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR
INDIRECT DAMAGES, LOSS OF GOOD WILL OR BUSINESS PROFITS, WORK
STOPPAGE, DATA LOSS, COMPUTER FAILURE OR MALFUNCTION, ANY AND ALL
OTHER COMMERCIAL DAMAGES OR LOSS, OR EXEMPLARY OR PUNITIVE DAMAGES
AND (B) NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY
OTHER PERSON OR ENTITY FOR DIRECT DAMAGES IN EXCESS OF THE
AGGREGATE PAYMENTS MADE BY THE PARTIES UNDER THIS AGREEMENT. NO
OFFICER, DIRECTOR, MANAGER, MEMBER, OR EMPLOYEE OF
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EITHER PARTY SHALL HAVE ANY PERSONAL LIABILITY UNDER THIS AGREEMENT
AND THE OTHER PARTY HEREBY HOLDS SUCH PERSONS HARMLESS FOR ANY LIABILITY
HEREUNDER.
(b) LIMITATION OF WARRANTIES. JAMTV WILL MAKE THE JAMTV
CONTENT, THE JAMTV HOSTING SERVICES, AND OTHER SERVICES AVAILABLE
IN ACCORDANCE WITH THE TERMS HEREOF ON A COMMERCIALLY REASONABLE
BASIS, AND DOES NOT WARRANT OR GUARANTY THAT THE AVAILABILITY
THEREOF WILL BE FREE FROM ERRORS IN COMMUNICATIONS OR TRANSMISSION
EXCEPT THOSE ERRORS RESULTING FROM GROSS NEGLIGENCE OR WILFUL
MISCONDUCT. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
JAMTV EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY AND
FITNESS FOR A SPECIFIC PURPOSE. JAMTV DOES NOT ENDORSE, WARRANT,
OR GUARANTEE ANY PRODUCT OR SERVICE OFFERED THROUGH JAMTV AND WILL
NOT BE A PARTY TO OR IN ANY WAY MONITOR ANY TRANSACTION BETWEEN
ANY PERSON AND ANY THIRD PARTY PROVIDERS OF PRODUCTS OR SERVICES.
(c) INDEMNIFICATION.
(1) JAMtv will indemnify SEI, its officers,
directors, managers, employees, agents, and
telecommunications providers against all claims (including
defamation), damages, losses, costs and expenses (including
attorneys' fees) which SEI may incur as a result of JAMtv's
breach of any representation, warranty, or covenant
contained in this Agreement or by reason of JAMtv's gross
negligence or willful misconduct or based on or resulting
from allegedly defamatory, indecent, obscene or
pornographic JAMtv Content. This paragraph shall not be in
limitation of any other indemnification obligations of the
parties set forth in the other JAMtv/Source Agreements.
(2) SEI will indemnify JAMtv, its officers,
directors, managers, employees, agents, and
telecommunications providers against all claims, damages,
losses, costs and expenses (including attorneys' fees)
which JAMtv may incur as a result of SEI's breach of any
representation, warranty, or covenant contained in this
Agreement or by reason of SEI's gross negligence or willful
misconduct, or based on or resulting from allegedly
defamatory, indecent, obscene or pornographic Source
Content. This paragraph shall not be in limitation of any
other indemnification obligations of the parties set forth
in the other JAMtv/Source Agreements.
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23. MISCELLANEOUS.
(a) GOVERNING LAW. Any question as to the validity,
construction or performance of this Agreement shall be construed
in accordance with and subject to the substantive laws (as opposed
to the conflicts of laws provisions) of the State of New York and,
where applicable, the laws of the United States.
(b) JURISDICTION. JAMtv and SEI agree that all claims,
disputes, or controversies between them arising out of, connected
with, related to, or incidental to the relationship established
between them in connection with this Agreement, whether arising at
law or equity in contract, tort, equity, or otherwise, if pursued
in court shall be resolved only by state or federal courts located
in New York County, New York, but each party hereto acknowledges
that any appeals from those courts may have to be heard by a court
located outside of New York County, New York. Each party hereto
waives in all disputes any objection that it may have to the
location of the court considering the dispute.
(c) UNFORESEEN CIRCUMSTANCES. Due to the rate of change
in Internet businesses and the high degree of uncertainty as to
the competitive environment, the parties agree to use their
reasonable good faith efforts in the event of unforeseen
circumstances or other material external changes which may require
further discussions and negotiations leading to amendments to this
Agreement, if any, to be mutually agreed upon between the parties.
(d) DISPUTE RESOLUTION. All claims, dispute and
controversies of every kind and nature arising out of or in
connection with this Agreement shall be resolved by arbitration in
New York, New York, in accordance with the rules of the American
Arbitration Association. The determination of the arbitrator(s)
shall be accompanied by a written opinion and shall be final,
binding and conclusive on the parties, and judgment on the
arbitrator's award may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, if interim judicial
relief is necessary prior to rendition of any arbitral award in
order to avoid irreparable injury to either party, then such party
may seek interim measures of protection, including without
limitation orders of injunction, specific performance or other
equitable relief, from any court of competent jurisdiction,
provided that the foregoing shall not be deemed to preclude the
arbitrators from awarding similar or other interim relief or
entering interim arbitration awards. Each party shall bear its
own arbitration costs and expenses, unless the arbitrators, in
consideration of fairness to the parties, determine otherwise.
(e) ENTIRE AGREEMENT. This Agreement, together with the
other JAMtv/Source Agreements, contain the entire understanding
between JAMtv and
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SEI with respect to its subject matter, supersedes all previous
oral or written agreements or understandings between them with
respect thereto, and shall not be modified except by a writing
signed by all parties hereto.
(f) NO WAIVER. No waiver by either party or any breach
of this Agreement by the other shall be deemed to be a waiver of
any preceding, or subsequent breach thereof. Any waiver must be
in writing executed by the waiving party.
(g) PARTIAL INVALIDITY. If any portion of the Agreement
shall be held to be illegal, invalid or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
affect any other provision hereof, and this Agreement shall be
constructed as if such invalid, illegal or unenforceable provision
had never been contained herein. Additionally, in lieu of each
such illegal, invalid or unenforceable provision, there shall be
added automatically as part of this Agreement a provision as
similar to such former provision as shall be legal, valid and
enforceable.
(h) NOTICES. Except as otherwise expressly provided
herein, all notices and other communications required or desired
to be served, given, or delivered hereunder shall be made in
writing or by a telecommunications device capable of creating a
written record and shall be addressed to the party to be notified
(together with a copy to the respective party designated on the
signature page hereto) at the respective addresses set forth on
the signature page hereto or, as to each party, at such other
address as designated by such party in a written notice to the
other party. Notices shall be deemed to have been duly given (i)
if delivered personally or otherwise actually received, (ii) if
sent by overnight delivery service, (iii) if mailed by first class
United States mail, postage prepaid, registered or certified, with
return receipt requested, or (iv) if sent by telecopy. Notice
mailed as provided in clause (iii) above shall be effective upon
the expiration of ten (10) days after its deposit in the United
States mail and notice sent as provided in clause (iv) above shall
be effective upon transmission. Notice given in any other manner
described in this paragraph shall be effective upon receipt by the
addressee thereof; PROVIDED, HOWEVER, that if any notice is
tendered to an addressee and delivery thereof is refused by such
addressee, such notice shall be effective upon such tender.
(i) SECTION HEADINGS. Section and Paragraph headings
used herein are for informational purposes only and shall not
define nor limit the provisions of this Agreement.
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(j) SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of SEI and its successors
and assignees permitted hereunder and JAMtv and its successors and
assignees permitted hereunder. SEI shall not assign this
Agreement, except (i) in a sale of substantially all of the assets
or equity shares of SEI, to, or through a merger or dissolution of
SEI into, another entity which agrees in writing to be bound by
this Agreement or (ii) to a greater than fifty percent (50%) owned
affiliate of SEI which acquires rights in the Source Content and
Source Trademarks consistent with the grant of the SEI Licenses
hereunder and agrees in writing to be bound by this Agreement.
JAMtv shall not assign this Agreement, except (i) in a sale of
substantially all of the assets or equity shares of JAMtv to, or
through a merger or dissolution of JAMtv into, another entity
which agrees in writing to be bound by this Agreement or (ii) to a
greater than fifty percent (50%) owned affiliate of JAMtv which
agrees in writing to be bound by this Agreement.
(k) INDEPENDENT CONTRACTORS. Each party agrees it is
and will be an independent contractor as to the other party and
not an agent, employee, partner or joint venturer of or with the
other party. Without limiting the foregoing, neither party nor
any officer or employee of such will have any right to bind the
other party, to make any representations or warranties on behalf
of the other, to accept service of process, to receive notice, or
to perform any act or thing on behalf of the other party other
than as expressly authorized by such other party in its sole
discretion. JAMtv shall not be obligated to pay any fees or other
compensation to SEI in connection with the transactions
contemplated by this Agreement other than as expressly
contemplated by Section 8 and Section 9.
(l) INSPECTION/AUDIT RIGHTS. JAMtv will maintain
complete and accurate records of all expenses, revenues and fees
in connection with the performance of this Agreement. For the
sole purpose of ensuring compliance with this Agreement, SEI will
have the right, at its expense, to direct an independent certified
public accounting firm to conduct a reasonable and necessary
inspection and/or audit of such portions of the books and records
of JAMtv which are relevant to JAMtv's performance and/or
obligations pursuant to this Agreement which inspection and/or
audit shall be conducted during normal business hours on
reasonable notice. For this purpose, ten (10) business days prior
written notice shall be deemed reasonable. JAMtv agrees to
reimburse SEI for the reasonable costs of the inspection and/or
audit if the inspection discloses an underpayment of five percent
(5%) or more.
[SIGNATURE PAGE IMMEDIATELY FOLLOWS]
-28-
<PAGE>
[SIGNATURE PAGE TO AFFILIATION AGREEMENT BETWEEN JAMTV CORPORATION AND
SOURCE ENTERPRISES, INC.]
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Affiliation Agreement as of the day and year first above written.
SOURCE ENTERPRISES, INC.
By: /s/ David Mays
-----------------------------
David Mays,
President
with a copy to:
215 Park Avenue South Schekter, Rishty, Goldstein &
11th floor Blumenthal
New York, NY 10003 1500 Broadway
Attn.: David Mays New York, NY 10036
Facsimile: (212) 253-9344 Attn.: Neil Goldstein
Facsimile: (212) 944-7372
JAMTV CORPORATION
By: /s/ Howard A. Tullman
------------------------------
Howard A. Tullman,
Chief Executive Officer
with a copy to:
640 N. LaSalle Street Freeborn & Peters
Suite 560 311 South Wacker Drive
Chicago, IL 60610 Suite 3000
Attn.: Howard A. Tullman Attn.: Richard R. Dennerline
Facsimile: (312) 642-0616 Facsimile: (312) 360-6575
-29-
<PAGE>
SCHEDULE 1
LAUNCH SCHEDULE
---------------------------------------------------
All of the Launch Schedule Requirements have been met and
satisfied as of the date of execution of this Agreement.
<PAGE>
SCHEDULE 2
SOURCE CONTENT
---------------------------------------------------
Feature articles, graphics and other content from various sections of THE
SOURCE magazine;
Reviews, columns, cover art, logos, artwork, illustrations, photos, print
and audio interviews, excerpts, charts, etc. from THE SOURCE magazine and
archives;
Other select archival material, compilations, special inserts, sections,
etc.;
All material prepared specifically for electronic distribution for The
Source website;
Access to all DVDs, CDs, videos, tapes, cassettes, etc. supplied to The
Source by any artists, labels, promotions, etc. for the purpose of
website/Internet promotion, marketing, advertising, etc, which (subject
to consents of holders of intellectual property rights) may be used by
JAMTV to create clips and other multimedia assets for digital inclusion
in The Source website; and
Such other selected music-related material of whatever nature which The
Source obtains, creates, licenses, or otherwise has the right to use,
publish and distribute on the Internet and through its website.
Exclusive feature stories prepared on a regular basis solely for the
Source Website by THE SOURCE magazine staff, with substantial multimedia
components.
The contents of and information contained in concert reviews, record
reviews, artists' questions and answers, artists' picks, college reports,
and any charts, polls (such as readers' and critics' polls) or
compilations contained in THE SOURCE magazine along with exclusive record
reviews and charts prepared and developed by THE SOURCE magazine staff,
solely for the Source Website;
All available photography, audio assets, video assets, art, interviews,
transcripts, digital material, images, illustrations, animations, books,
etc. in the possession and control of SEI and/or THE SOURCE magazine
which may be used to create new and/or supplementary or repurposed
audio/visual and multimedia material for the Source Website;
All available illustrations, photographs, and artwork contained in THE
SOURCE magazine, which is in the possession and control of SEI and which
may be used to create new and/or supplementary multimedia material for
the Source Website.
<PAGE>
SCHEDULE 3
SOURCE TRADEMARKS
----------------------------------------------------
SOURCE TRADEMARKS
THE FOLLOWING TRADEMARKS AND SERVICE MARKS AND ALL TRADEMARKS AND SERVICE MARKS
CONTAINING OR DERIVED FROM THE FOLLOWING MARKS:
THE SOURCE
THESOURCE.COM
ALL REGISTRATIONS AND APPLICATIONS FOR REGISTRATION OF THE FOREGOING TRADEMARKS
AND SERVICE MARKS, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING:
REGISTRATIONS WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE:
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION
TRADEMARK NUMBER DATE
---------- ------------ ---------------
<S> <C> <C>
THE SOURCE 1,954,494 February 6, 1996
</TABLE>
<PAGE>
SCHEDULE 4
OTHER PERMITTED MEANS OF
DISTRIBUTION OR TRANSMISSION
--------------------------------------------
1. interactive proprietary systems (including broadly distributed
computer-based networks) such as AOL, Compuserve, MSN, Earthlink, Mindspring,
Walled Garden, etc.;
2. interactive cable or broadband networks such as WEBTV, @Home, etc. when
used as a means of distribution to and for the advanced set-top box (e.g.
ST5000) and expressly excluding traditional non-interactive programs such as
those currently distributed on broadcast TV, analog cable networks like HBO,
etc.;
3. interactive satellite networks such as Direct TV and/or Direct PC and
expressly excluding traditional non-interactive programs such as those currently
distributed on broadcast TV, analog cable networks like HBO, etc.;
4. "Connected" CDs or DVDs which are Internet dependent to the extent
Internet dependent; and
5. wireless interactive networks and expressly excluding traditional
non-interactive programs such as those currently distributed on broadcast TV,
analog cable networks like HBO, etc.
<PAGE>
Exhibit 10.3
AFFILIATION AGREEMENT
This AFFILIATION AGREEMENT (this "Agreement") is entered into as of
February 1, 1999 between JAMtv Corporation, a Delaware corporation ("JAMtv"),
and Maher Publications, Inc., an Illinois corporation ("DOWNBEAT").
RECITALS:
A. DOWNBEAT and JAMtv desire to enter into the agreements described
herein providing for the use of the Downbeat Content (including the contents of
DOWNBEAT magazine and the Website at the Downbeat URL) on the Downbeat Website
and on the JAMtv Music Network. Capitalized terms used in this Agreement have
the meanings ascribed to them in Section 1 below.
B. Subject to the satisfaction of the conditions precedent set forth
herein and subject to the other terms and conditions set forth in this
Agreement:
(i) JAMtv and DOWNBEAT will commence the creation and operation
of the Downbeat Website and the integration of Downbeat
Content into the JAMtv Music Network in accordance with the
Launch Schedule;
(ii) JAMtv will provide the JAMtv Hosting Services and present
the Downbeat Content on the Downbeat Website;
(iii) DOWNBEAT will deliver the Downbeat Content to JAMtv and
grant the DOWNBEAT Licenses to JAMtv;
(iv) DOWNBEAT will provide certain advertising and promotion
services and opportunities to JAMtv in connection with
DOWNBEAT magazine, as well as access to certain promotional
programs;
(v) JAMtv will pay certain fees to DOWNBEAT based on Net
Revenues; and
(vi) from and after the Launch Date, among other things, the
Downbeat URL will be integrated into and will point to the
JAMtv Music Network.
NOW, THEREFORE, in consideration of the Recitals (which are incorporated
herein by this reference), the mutual promises contained herein, and other
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, JAMtv and DOWNBEAT hereby agree as follows:
<PAGE>
1. DEFINED TERMS. As used in this Agreement, the
following capitalized terms shall have the meanings set forth
below unless otherwise defined herein.
"Archival Downbeat Content" means the archival and
historical Downbeat Content or derivatives thereof which are or
will be digitized, formatted, modified, recorded, or otherwise
manipulated or stored by JAMtv to render such Downbeat Content
suitable for use with the Downbeat Website in accordance with
Section 2.
"Confidential Information" means the trade secrets or other
information of a confidential nature of a party hereto, including,
without limitation, such information, arising from such party's
business, customers, or Proprietary Rights, and whether or not
owned by such party or held in confidence by such party under an
obligation of confidentiality with a third party.
"Default" means a default by a party under this Agreement
as specified in Section 17.
"Downbeat Content" means all of Downbeat's (a) copyrights,
whether or not registered, registrations thereof, applications for
registration thereof, and all secondary and subsidiary rights
therein, (b) the Downbeat URL, service marks, trademarks, trade
dress, registrations thereof, and applications for registration
thereof, together with the goodwill symbolized thereby and
connected therewith, (c) art, audiovisual works, animations,
cartoons, characters, choreography, compilations, collective
works, computer software and programs, data, designs, emblems,
films, film clips, graphics, images, illustrations, likenesses,
literary works, logos, motion pictures, musical compositions,
music videos, performances, photographs, pictorial works, songs,
song lyrics, sound recordings, scripts, screenplays, templates,
text, video recordings, copyrightable subject matter, works of
authorship, and other proprietary rights, (d) all rights under
copyright and moral rights associated with the foregoing, (e) all
renewals, extensions, continuations, derivative works,
enhancements, improvements, modifications, updates, new releases
or other revisions of the foregoing, (f) all publicity rights or
privacy rights (or waivers or quitclaims thereof) of any person or
entity, and (g) all rights corresponding to the foregoing
throughout the world; all of the foregoing which any of DOWNBEAT
or its employees, consultants or representatives has created or
may hereafter create, has licensed or may hereafter license, or
has acquired or may hereafter acquire, in any form and on any
medium now known or hereafter developed, whether tangible,
printed, recorded, digitized, fixed, stored, electronic, or
otherwise
2
<PAGE>
embodied; including, without limitation, the content of DOWNBEAT
magazine and the rights of DOWNBEAT described on SCHEDULE 2 hereto.
"Downbeat Merchandise" means merchandise (including without
limitation books, magazine back issues, compact disks, and
clothing) incorporating, embodying or displaying Downbeat Content
or Downbeat Trademarks, and such other merchandise as may be
selected by Downbeat in its reasonable discretion to be sold at
the Downbeat Website.
"Downbeat Trademarks" means the Downbeat URL and the
trademarks, service marks and logos listed on SCHEDULE 3 hereto.
"Downbeat URL" means the uniform resource locator
'http://www.downbeatjazz.com' and any and all variations or
extensions thereof used to identify or locate the Downbeat
Website, including, without limitation, 'http://www.downbeat.com'
to the extent rights to use such URL are obtained by Downbeat.
"Downbeat Website" means the World Wide Website at the
Downbeat URL (or any other of JAMtv's alternatively named
interactive multimedia site(s) available on the Interactive
Network featuring primarily Downbeat Content) and on which JAMtv
shall after the Launch Date, pursuant hereto, place, broadcast,
download, transmit, or distribute Downbeat Content (and JAMtv
Content pursuant hereto), as updated, modified, or supplemented
from time to time.
"Downbeat Licenses" means the licenses and rights granted
to JAMtv pursuant to this Agreement.
"DOWNBEAT Magazine" means a reference to DOWNBEAT Magazine.
"Interactive Network" means the Internet, the World Wide
Web, and any other interactive electronic means of distribution or
transmission now or hereafter known, including without limitation
computer networks, cable networks, fiber optic networks, satellite
networks, network dependent or enabled CDs, CD-ROMs and DVDs, and
wireless interactive networks.
"Initial Term" means the initial two (2) year term of this
Agreement specified in paragraph (a) of Section 16.
"JAMtv Content" means (exclusive of JAMtv's rights in the
Downbeat Content) all of JAMtv's: (a) copyrights, whether or not
registered, registrations thereof, applications for registration
thereof, and all secondary and subsidiary rights therein, (b)
service marks, trademarks,
3
<PAGE>
trade dress, registrations thereof, and applications for registration
thereof, together with the goodwill symbolized thereby and connected
therewith, (c) art, audiovisual works, animations, cartoons, characters,
choreography, compilations, collective works, computer software and
programs, data, designs, emblems, films, film clips, graphics, images,
illustrations, likenesses, literary works, logos, motion pictures,
musical compositions, music videos, performances, photographs,
pictorial works, songs, song lyrics, sound recordings, scripts,
screenplays, templates, text, video recordings, copyrightable
subject matter, works of authorship, trade secrets (including
without limitation customer and vendor lists), and other
proprietary rights, (d) all rights under copyright and moral
rights associated with the foregoing, (e) all renewals,
extensions, continuations, derivative works, enhancements,
improvements, modifications, updates, new releases or other
revisions of the foregoing, (f) all publicity rights or privacy
rights (or waivers or quitclaims thereof) of any person or entity,
and (g) all rights corresponding to the foregoing throughout the
world; all of the foregoing which any of JAMtv or its employees,
consultants or representatives has created or may hereafter
create, has licensed or may hereafter license, or has acquired or
may hereafter acquire, in any form and on any medium now known or
hereafter developed, whether tangible, printed, recorded,
digitized, fixed, stored, electronic, or otherwise embodied. Without
limiting the generality of the foregoing, JAMtv
Content shall include original and licensed content which was
developed or licensed by JAMtv (other than Downbeat Content) for
use in connection with the Downbeat Website.
"JAMtv Hosting Services" means the services provided by
JAMtv in accordance with Section 2.
"JAMtv Music Network" means the interactive multimedia site
on the Interactive Network currently hosted by JAMtv at the JAMtv
URL or any other location or site on the Interactive Network
through which JAMtv places, broadcasts, downloads, transmits, or
distributes JAMtv Content or, after the Launch Date, any Downbeat
Content pursuant hereto, together with any affiliated radio
station sites and participating venue or affiliate sites on the
Interactive Network.
"JAMtv URL" means the uniform resource locator
'http://www.jamtv.com' and any and all extensions thereof.
"Launch Date" means the completion date of the initial
integration of the Downbeat Content into the Downbeat Website, as
mutually accepted by JAMtv and DOWNBEAT.
4
<PAGE>
"Launch Schedule" means the tasks to be performed by JAMtv
and DOWNBEAT to commence and consummate the integration of the
Downbeat Trademarks and the Downbeat Content into the JAMtv Music
Network and the Downbeat Website and the time line therefor, as
such tasks and time line are more particularly described in
Section 2 and on SCHEDULE 1.
"Net Revenue" means total gross invoice amounts for sales
of Downbeat Merchandise and sales of advertising or sponsorships
directly attributable to or arising by reason of the Downbeat
Website, less the following amounts to the extent directly
attributable to the Downbeat Website:
(i) (A) actual amounts paid as
commissions, fees or similar fees or
compensation, and related costs paid to third
party agencies in connection with the sale of
advertisement or sponsorships, or (B) twenty
percent (20%), in the event either JAMtv or
Downbeat has sold the advertisement or
sponsorship directly;
(ii) actual costs of Downbeat
Merchandise sold, the revenue relating to
which is included in Net Revenues, and costs
associated with the fulfillment of such sales
of Downbeat Merchandise;
(iii) the amounts expended by JAMtv
on in-store, point of sale, traditional
media, and similar promotions; and
(iv) cooperative advertising and
similar promotional amounts (such as credits,
cash discounts, rebates, promotional
allowances or similar items to customers), as
well as any invoiced amounts for copies
supplied for promotional purposes to the
press, trade, sales representatives or
potential customers.
In determining Net Revenues, amounts invoiced or received by JAMtv
in foreign currencies will be deemed converted into United States
dollars at the average exchange rates used by JAMtv in its
financial statements for the month of invoice or receipt, as
appropriate.
"Network Icon" means a printed icon or logo of type, style,
and design to be mutually agreed upon between the parties for
placement at
5
<PAGE>
certain designated locations in DOWNBEAT magazine which will refer to
related supplementary materials and multimedia assets available on
the Downbeat Website in accordance with Section 7.
"Proprietary Rights" means any copyright, trademark, trade
name, trade dress, service mark, domain name, invention,
discovery, patent, patent applications, trade secret, rights of
publicity, and any other proprietary interests, including but not
limited to rights in assets such as HTML and/or VRML code, CGI
and/or Perl scripts, JavaScript code and Java code or applets and
tools or techniques developed, page designs, layouts, graphic
images, and/or styles, and page and/or form templates developed.
"Recoupable Amounts" means the amounts set forth in
Paragraph 8 (c) that may be setoff or recouped against Net Revenue
as provided in such paragraph.
"Term" means the Initial Term or any Renewal Term.
"Third Party Restrictions" means the restrictions imposed
by third parties on DOWNBEAT's rights in Downbeat Content provided
by third parties, as such restrictions are more particularly
described in paragraph (b) of Section 4.
2. JAMTV HOSTING SERVICES. JAMtv will install and host, at no
cost to DOWNBEAT, the Downbeat Website on JAMtv's Internet servers in Chicago
(or elsewhere). In accordance therewith, JAMtv will: (a) migrate and integrate
Downbeat Content into the Downbeat Website and the JAMtv Music Network; (b)
digitize and integrate existing and future Downbeat Content as it deems
appropriate for use on the Downbeat Website; (c) maintain, support and further
develop the Downbeat Website; and (d) at the direction of DOWNBEAT, promote and
offer to sell Downbeat Merchandise on the Downbeat Website (provided that the
fulfillment of all Downbeat Merchandise sold on the Downbeat Website shall be
the sole responsibility of DOWNBEAT). JAMtv may, at any time, in its sole
discretion after the Launch Date, change, expand, alter or redesignate the
physical server(s) for the Downbeat Website and associated servers for the JAMtv
Music Network as well as their physical locations in order to enhance, optimize,
simplify, consolidate or otherwise integrate the performance and other operating
characteristics of all of the sites on the Interactive Network which
collectively constitute the JAMtv Music Network. If the quality of the primary
features and functions of the Downbeat Website (including frequency of updates,
breadth and depth of coverage, usability, etc.) are not least substantially
equal to the analogous functions and features provided by JAMtv to its other
sites on the JAMtv Music Network, e.g., the Rolling Stone Network, then DOWNBEAT
may so notify JAMtv in writing of such deficiencies, including a description of
how the Downbeat Website is deficient. Within thirty (30) days of receiving
such notice, JAMtv will provide DOWNBEAT with a reasonable plan
6
<PAGE>
for rectifying such deficiencies. Such plan must be completed as soon as
possible and in no event later than ninety (90) days after the date JAMtv
received the notice of deficiency. Except as specifically set forth in this
Agreement or as specifically agreed to by Downbeat, the services of JAMtv as
they relate to the Downbeat Website shall be without additional charge.
3. DOWNBEAT CONTENT. In accordance with and subject to the following
terms and the terms more particularly described on SCHEDULE 2 attached hereto,
DOWNBEAT will develop, create, acquire, deliver, and make available to JAMtv to
the extent not prohibited by Third Party Restrictions, the Downbeat Content at
no cost to JAMtv other than as expressly provided in this Agreement.
(a) ACCESS AND DELIVERY. DOWNBEAT shall provide JAMtv,
at reasonable times and from time to time, access to the
facilities where Downbeat Content is or may be stored in order to
access, copy, duplicate, digitize, retrieve, and utilize the
Downbeat Content. DOWNBEAT shall provide JAMtv with reasonable
assistance and technical support pursuant thereto including,
without limitation, provision and shipping to JAMtv of recordings,
CDs or other copies of the Downbeat Content or transmission
thereof by electronic, satellite, Internet, or telecommunications
means to JAMtv. JAMtv will have access to such new Downbeat
Content to be published in DOWNBEAT magazine on or about the
earlier of seven (7) days prior to the initial mailing of
subscription copies of or seven (7) days prior to the initial
distribution to newsstands of the issue of DOWNBEAT magazine in
which such Downbeat Content is to appear. Notwithstanding the
foregoing, the schedule for publication of such Downbeat Content
on the Downbeat Website shall be mutually agreed upon by the
parties. DOWNBEAT and JAMtv will provide to each other, at no
cost to the other, access to and appropriate copies of statistics,
charts, lists, sales figures, and other data related to activities
on the Downbeat Website which each of them may obtain, purchase,
develop or otherwise possess.
(b) FORM. To the extent available, DOWNBEAT will
provide JAMtv with (1) electronic, CD, or digital copies of
Downbeat Content in server ready format and (2) color copies, of
typeset quality, of all trademarks, service marks, design logos,
and artwork comprising Downbeat Content. Archival Downbeat Content
that is not in digital format may be provided or delivered in
whatever form it is presently available.
(c) ACQUISITION AND CREATION OF DOWNBEAT CONTENT. To
the extent consistent with DOWNBEAT's agreements with
contributors, writers, photographers, promoters, artists,
musicians, and other originators, creators, owners, and licensors
of Downbeat Content, DOWNBEAT will in good faith and with
reasonable diligence develop, create, and acquire
7
<PAGE>
additional Downbeat Content on a basis consistent with past
practices with respect to the creation or acquisition of content
for DOWNBEAT magazine. DOWNBEAT will, in good faith, use reasonable
efforts to acquire such incremental or incidental rights necessary
to use Downbeat Content on the Downbeat Website to which it does not
otherwise have Proprietary Rights therein sufficient to permit
such use, whenever an opportunity to acquire such rights arises by
virtue of any contract negotiations or discussions between
DOWNBEAT and any originator, creator, owner, or licensor (or any
agent or manager thereof) of rights covered by the definition of
Downbeat Content (including without limitation such rights
relating to any literary, artistic, or photographic contribution,
interview, live performance, or studio session); provided,
however, that notwithstanding the foregoing, DOWNBEAT shall not be
required to pay any additional amounts in order to secure such
additional rights. DOWNBEAT shall promptly notify JAMtv upon
DOWNBEAT's acquisition of any significant new Downbeat Content
relating to jazz or blues music out of the ordinary course of
business and, provided it possesses Proprietary Rights thereto
sufficient to permit use thereof on the Downbeat Website, will
make all such Downbeat Content readily available to JAMtv in
accordance with paragraph (a) above; provided, however, that to
the extent that DOWNBEAT in its reasonable judgment determines
that such new Downbeat Content is best exploited by DOWNBEAT
through media other than through the Interactive Network, e.g.,
sales of books or CDs, then DOWNBEAT will provide JAMtv such
amount of the Downbeat Content for use on the Downbeat Website as
it reasonably determines will not dilute Downbeat's economic
exploitation of such Downbeat Content. DOWNBEAT will also assist
JAMtv in identifying, soliciting and contracting with writers and
other talent which the parties believe can make substantial
contributions to the content on the Downbeat Website. DOWNBEAT
and the DOWNBEAT magazine staff will assist JAMtv in developing
new sections, areas, features, and other elements for the Downbeat
Website including, without limitation, weekly events, photography,
trivia, games and quizzes, personals and polls online, celebrity
chats, music critics round tables, and gossip columns. In
addition, DOWNBEAT and the DOWNBEAT magazine staff will assist
JAMtv in developing new brand opportunities, products and services
for items such as branded Downbeat Website webcasts for Yahoo,
branded Downbeat Website interviews, and branded Downbeat Website
online celebrity chats.
(d) DOWNBEAT STAFFING. DOWNBEAT will maintain and make
available a staff of sufficient size, experience and capability
throughout the Term to meet its content production
responsibilities under this Agreement. DOWNBEAT will direct
appropriate senior members of the DOWNBEAT magazine staff to visit
JAMtv offices in Chicago on a regular
8
<PAGE>
basis to plan and coordinate the activities of the parties in
providing the content for the Downbeat Website.
4. CONTENT LICENSE.
(a) GRANT. Subject to the Third Party Restrictions,
DOWNBEAT hereby grants to JAMtv for the Term only (as may be
modified, extended or shortened pursuant hereto) an exclusive,
irrevocable, paid-up and royalty-free worldwide license to and
right to use and exploit the Downbeat Content (including without
limitation through the reproduction, translation, printing,
adaptation, modification, reformatting, publishing, alteration,
digitizing, capturing, editing, cropping, combination,
synchronization, exhibition, performance, display, and
transmission thereof in any form and through any medium now known
or later developed) in connection with the Downbeat Website and on
the JAMtv Music Network, and the design, operation, distribution,
display, transmission, marketing, advertising, and promotion
thereof. Notwithstanding the foregoing, JAMtv shall limit the use
of Downbeat Content on the JAMtv Music Network (other than the
Downbeat Website itself) to items such as headlines, teasers, and
links to the Downbeat Website, where the primary purpose of the
use of such content is to drive additional traffic to the Downbeat
Website. JAMtv agrees that it shall not use Downbeat Content on
JAMtv's Rollingtone.com and TheSource.com websites without the
prior written consent of DOWNBEAT.
(b) THIRD PARTY RESTRICTIONS. JAMtv acknowledges that
DOWNBEAT does not possess all of the Proprietary Rights necessary
to provide and license certain Downbeat Content for use on the
Downbeat Website because certain Downbeat Content is subject to
Third Party Restrictions. DOWNBEAT will provide JAMtv with copies
of documentation setting forth any Third Party Restrictions or
will disclose to JAMtv the nature, duration, scope, and other
material terms of any Third Party Restrictions in reasonable
detail. Provided that DOWNBEAT has provided to JAMtv sufficient
information regarding Third Party Restrictions and the permitted
use of Downbeat Content subject thereto, JAMtv shall use such
Downbeat Content in a manner consistent with such Third Party
Restrictions. DOWNBEAT shall have no obligation to obtain all
necessary rights to use such Downbeat Content in connection with
the Downbeat Website unless it does so in the ordinary course of
business in connection with DOWNBEAT magazine; provided that
DOWNBEAT will in good faith use reasonable efforts to obtain such
rights if JAMtv has previously consented in writing to pay the
incremental reasonable out-of-pocket costs of DOWNBEAT associated
therewith, which costs DOWNBEAT would not otherwise have incurred
in the ordinary course of business for DOWNBEAT magazine.
9
<PAGE>
(c) FIRST OFFER TO JAMTV. If DOWNBEAT is unable,
despite its reasonable efforts, to acquire or license the rights
covered by the definition of Downbeat Content pursuant to the
preceding paragraphs, DOWNBEAT will reasonably cooperate with
JAMtv to assist JAMtv in acquiring or licensing such rights.
(d) DOWNBEAT URL. Subject to the licenses granted
hereunder, DOWNBEAT shall at all times own the Downbeat URL.
5. TRADEMARK LICENSE.
(a) GRANT. Subject to the terms and conditions of this
Agreement, DOWNBEAT hereby grants to JAMtv for the Term only (as
may be modified, extended or shortened pursuant hereto) an
exclusive, irrevocable, paid-up and royalty-free right and license
to use the Downbeat Trademarks and the Downbeat URL solely in
connection with the Downbeat Website and the JAMtv Music Network
and the design, operation, distribution, display, transmission,
marketing, advertising and promotion of the Downbeat Website.
(b) QUALITY CONTROL. DOWNBEAT shall have the right to
exercise quality control over the Downbeat Content and JAMtv's use
of the Downbeat Trademarks to that degree necessary, in the
reasonable opinion of DOWNBEAT, to ensure a high quality product
consistent with the editorial principles of DOWNBEAT, to maintain
the validity and enforceability of the Downbeat Trademarks and to
protect the goodwill associated therewith. JAMtv shall, in its
design, operation, distribution, display, transmission, marketing,
advertising and promotion of the Downbeat Website, adhere to such
reasonable standards and specifications as shall be provided by
DOWNBEAT to JAMtv from time to time.
(c) TRADEMARK USAGE. JAMtv shall use the
Downbeat Trademarks in accordance with sound trademark and trade
name usage principles and in material compliance with all
applicable laws and regulations of the United States, including
without limitation all laws and regulations relating to the
maintenance of the validity and enforceability of the Downbeat
Trademarks. JAMtv shall use, in connection with the Downbeat
Trademarks, all legends, notices and markings as reasonably
requested by Downbeat. Any use by JAMtv of Downbeat Content and
Downbeat Trademarks shall be approved in final form by Downbeat.
Failure by Downbeat to expressly approve or disapprove JAMtv's use
of Downbeat Content and Downbeat Trademarks within two (2)
business days of Downbeat's receipt from JAMtv of a request for
approval of such
10
<PAGE>
proposed usage of Downbeat Content and Downbeat Trademarks shall be
deemed acceptance by Downbeat of such usage.
(d) CONFORMANCE WITH STANDARDS. JAMtv shall, upon the
request of DOWNBEAT, submit to DOWNBEAT representative samples of
all publicly distributed advertising materials using the Downbeat
Trademarks prior to their initial distribution. Within two (2)
business days of Downbeat's receipt of the aforementioned
representative samples, Downbeat may disapprove such
representative samples for reasonable cause or basis. Failure by
Downbeat to disapprove such representative samples within two (2)
business days of Downbeat's receipt of them shall be deemed
approval by Downbeat. Such advertising materials and Downbeat
Content included on the Downbeat Website shall reasonably conform
to the standards and specifications provided to JAMtv by DOWNBEAT,
which shall not be more onerous than the standards of quality
associated with DOWNBEAT magazine prior to the Launch Date.
(e) COOPERATION. JAMtv shall comply with such other
reasonable requests as are made by DOWNBEAT to enable DOWNBEAT to
assure the quality of any materials on the Downbeat Website.
JAMtv agrees that it shall cooperate with DOWNBEAT to avoid likely
confusion or conflict arising out of DOWNBEAT's or any other
licensee's simultaneous use of the Downbeat Trademarks in
connection with other products or services outside of the
Interactive Network.
(f) DOWNBEAT URL. Subject to the licenses granted
hereunder, DOWNBEAT shall at all times own the Downbeat URL.
6. ALLOCATION OF CREATIVE AND EDITORIAL CONTROL.
(a) DOWNBEAT. DOWNBEAT shall have creative, editorial,
and quality control over all content of the Downbeat Website
(including the JAMtv Content to the extent provided below) which
shall be subject to the final review and edit of the current
editorial management of DOWNBEAT magazine. Without limiting the
foregoing, the initial layout and design of the Downbeat Website
site (as of the Launch Date) and any subsequent changes thereto
shall be subject to the artistic approval of DOWNBEAT which shall
not be unduly delayed or unreasonably withheld. Downbeat reserves
the right to request JAMtv to remove or disable any image,
description, or advertisement on the Downbeat Website if such
content is deemed by Downbeat in its sole discretion to be
objectionable for any reason. In the event Downbeat so requests,
JAMtv shall, promptly upon demand by Downbeat, remove the
objectionable content.
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(b) JAMTV. Except as set forth in paragraph (a) above,
JAMtv shall have editorial and creative control over the JAMtv
Content contained in the Downbeat Website, subject to paragraph
(d) of Section 5and subject to DOWNBEAT's creative and editorial
control. In the event DOWNBEAT reasonably objects to any JAMtv
Content on the Downbeat Website, DOWNBEAT shall provide JAMtv
notice of its objection and the basis of such objection. JAMtv
shall use commercially reasonable efforts exercised in good faith
and in a timely matter to remove any objectionable JAMtv Content
from the Downbeat Website. JAMtv may use the JAMtv trademarks on
or in connection with the Downbeat Website solely to identify
JAMtv as "producer," "distributor," "syndicator," or "host" of the
Downbeat Website. JAMtv may, in its sole discretion, at any time,
add, modify, change, delete, substitute or reschedule in whole or
in part from time to time any and all aspects of the JAMtv
Content, subject to paragraph (d) of Section 5.
7. PROMOTION AND ADVERTISING.
(a) In accordance with and in consideration of the terms
more particularly described on SCHEDULE 4 attached hereto,
DOWNBEAT will in good faith promote the Downbeat Website, and the
programming contained thereon. Such promotion duties shall
include, without limitation, the preparation and inclusion in
every issue of DOWNBEAT magazine of an editorial column to be
written and edited by DOWNBEAT, as more fully described on
SCHEDULE 4 attached hereto. DOWNBEAT will produce advertising
copy for any commercial messages as DOWNBEAT uses to promote the
foregoing. DOWNBEAT shall submit examples of all proposed
advertisements and other promotional materials for the Downbeat
Website to JAMtv for inspection, provided that DOWNBEAT will have
the final right of approval with respect thereto.
(b) DOWNBEAT shall place an explanation of the Network
Icon and examples of the Network Icon in each issue of DOWNBEAT
magazine, in a manner designed to encourage readers to access the
Downbeat Website. A Network Icon shall be placed at such
locations in the magazine as DOWNBEAT elects in its sole
discretion, provided that at a minimum DOWNBEAT shall place a
Network Icon at the end of the music review section of DOWNBEAT
magazine.
(c) JAMtv and DOWNBEAT shall cooperate in good faith to
jointly develop promotions in the field, on the Downbeat Website,
in DOWNBEAT magazine, and in other publications of DOWNBEAT, which
are designed to increase the visibility, prominence, awareness and
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popularity of the Downbeat Website so as to increase traffic and
attract advertisers to the Downbeat Website.
(d) JAMtv and DOWNBEAT shall cooperate and participate
in the following types of marketing promotions and co-marketing
opportunities: (i) online promotions; (ii) press releases and
public announcements (subject to paragraph (g) of Section 11); and
(iii) reasonable inclusion in the other party's booths,
presentations, presences, and promotions at trade shows,
conferences, conventions, in print and on radio and/or television,
and in marketing materials and advertising campaigns.
(e) The services provided by DOWNBEAT magazine staff in
connection with the advertising and promotional services of
DOWNBEAT described in the preceding paragraphs of this Section
shall be without charge to JAMtv.
8. ADVERTISING, SPONSORSHIP AND MERCHANDISE REVENUE. In consideration for
the DOWNBEAT Licenses and the obligations of DOWNBEAT under this Agreement,
provided no Default by DOWNBEAT exists, JAMtv will pay to DOWNBEAT after
deducting any Recoupable Amounts:
(a) ADVERTISING AND SPONSORSHIP REVENUE. JAMtv shall
pay DOWNBEAT a fee equal to fifty percent (50%) of the Net
Revenues of JAMtv derived from advertisements and/or sponsorships
obtained by, directed by, or otherwise placed on pages of the
Downbeat Website.
(b) MERCHANDISING REVENUE. JAMtv shall pay DOWNBEAT a
fee equal to eighty (85%) of the Net Revenue of JAMtv derived from
Downbeat merchandise sold on pages of the Downbeat Website.
(c) PAYMENT SCHEDULE. Subject to subparagraph (d) below,
the payments set forth in subparagraphs (a) and (b) above will be
due and payable within thirty (30) days following the month in
which Net Revenue giving rise to a payment hereunder was actually
received by JAMtv.
(d) RECOUPABLE AMOUNTS. During the first two years of
the Term of this Agreement, JAMtv will offset its development and
operating expenses relating to the Downbeat Website against
monthly Net Revenues generated from the Downbeat Website at the
rate of $10,000 per month in Year One of the Initial Term and
$12,500 per month in Year Two of the Initial Term. From time to
time, but not more frequently than once each calendar quarter,
DOWNBEAT may request, and within 20 business days of such request
JAMtv shall provide, a statement reasonably identifying its
development and operating costs relating to the Downbeat Website
for the
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fiscal period requested (which period shall not exceed a one year
period). The parties acknowledge that the offsets contemplated
by this Section are not intended to permit JAMtv to offset its
general overhead and administrative costs against such Net
Revenues. In addition, upon the written consent of DOWNBEAT,
JAMtv shall be entitled to recoup and recover expenses that JAMtv
may incur in securing the right to use the www.downbeat.com URL
on behalf of DOWNBEAT against Net Revenues generated from
advertising sold on the Downbeat Website; provided, that such
recoupable expenses shall not exceed $5,000 without the specific
consent of Downbeat.
(e) AUDIT. Either party may have its auditors audit the
other's books and records related to payments under this Agreement
only with respect to the proceeding twelve (12) month period not
more than twice in any twelve month period, during business hours
and upon ten (10) business days written notice. Each party agrees
to reimburse the other for the reasonable costs of the audit if
the audit discloses an underpayment of ten percent (10%) or more.
9. TAXES. Each party shall be responsible for any sales, use or
other tax assessed in connection with the merchandise sold, services performed,
licenses granted, or programming made available by such party hereunder.
10. EXCLUSIVITY. JAMtv shall be the exclusive provider of Downbeat
Content on the Interactive Network and DOWNBEAT shall not use and shall not
license, grant any right to use, sublicense, or otherwise transfer any right,
title or interest in or to the Downbeat Content to any other person or entity
for use in connection with the Interactive Network or in the design, operation,
distribution, display, transmission, marketing, advertising, or promotion of
goods and services thereon. JAMtv shall be the exclusive merchandiser of
Downbeat Merchandise on the Interactive Network. DOWNBEAT and JAMtv acknowledge
that from time to time either or both parties may be requested by third parties
to enter into certain promotion, marketing, licensing, and/or advertising
opportunities, which would propose to use certain of the Downbeat Content on the
Interactive Network or certain of the features or functionality of the Downbeat
Website on the Interactive Network, and DOWNBEAT acknowledges that, in
accordance with its exclusivity obligations under this Section above, DOWNBEAT
is prohibited from entering into such third party opportunities without the
written consent of JAMtv. During the term of this Agreement, JAMtv shall not
provide website hosting services to any other off-line magazine publisher of
jazz music editorial content without the prior consent of Downbeat. Downbeat
hereby acknowledges and agrees that the foregoing shall not limit JAMtv's
ability to present music content (other than Downbeat Content) relating to jazz
music and musicians (e.g., music clips, reviews, videos) on the JAMtv Music
Network in a manner substantially similar to how such content is currently
presented or proposed to be presented on the JAMtv Music Network.
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11. PROPRIETARY RIGHTS.
(a) RIGHTS CLEARANCES. DOWNBEAT shall obtain the
necessary rights clearances and shall be responsible for payment
of any license fees or royalties for such rights clearances,
including, without limitation, copyright or public performance
(including digital performance) music license fees (through, for
example, ASCAP, BMI, SESAC, or RIAA) or any union clearance fees
for any merchandise or Downbeat Content made available by
DOWNBEAT to JAMtv pursuant to this Agreement. JAMtv shall obtain
the necessary rights clearances and shall be responsible for
payment of any license fees or royalties for such rights
clearances, including, without limitation, copyright or public
performance (including digital performance) music license fees
(through, for example, ASCAP, BMI, SESAC, or RIAA) for any content
other than Downbeat Content to be used on the Downbeat Website.
(b) JAMTV CONTENT. DOWNBEAT acknowledges that all
right, title and interest in the JAMtv Content and other
Proprietary Rights embodied therein are and shall remain in JAMtv
and its licensors. DOWNBEAT shall not acquire any right, title,
or interest in the Proprietary Rights created or developed by
JAMtv (whether or not incorporating the Downbeat Content or
Downbeat Trademarks) in connection with this Agreement, other than
as expressly reserved herein. If any JAMtv Content or segment
thereof is provided to DOWNBEAT on disc, tape or other tangible
embodiment, such disc, tape or other tangible embodiment shall
remain the property of JAMtv and shall be returned promptly upon
JAMtv's request therefor. Except as expressly provided in this
Agreement, DOWNBEAT is not authorized to, shall not, and shall not
authorize any access, transmission, duplication, or any other use
whatsoever of any JAMtv Content, any portion thereof, or any
derivative work thereof or any other programs or broadcast
material which may have been transmitted or distributed by JAMtv
to DOWNBEAT, the Downbeat Website or otherwise. DOWNBEAT will not
authorize, cause, permit, or enable any JAMtv Content or portion
thereof to be recorded, stored, duplicated, rebroadcast, or
otherwise transmitted or distributed or used for any purpose.
(c) DOWNBEAT CONTENT. JAMtv acknowledges that all
right, title and interest in the Downbeat Content and other
Proprietary Rights embodied therein are and shall remain in
DOWNBEAT and its licensors. JAMtv shall not acquire any right,
title, or interest in the Proprietary Rights created or developed
by DOWNBEAT (whether or not incorporating the JAMtv Content) in
connection with this Agreement, other than as expressly granted
herein. If any Downbeat Content or segment thereof is provided to
JAMtv on disc, tape or other tangible
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embodiment, such disc, tape or other tangible embodiment shall
remain the property of DOWNBEAT and shall be returned promptly
upon termination of this Agreement, except as otherwise provided
herein. JAMtv shall not challenge DOWNBEAT's right, title or
interest in the Downbeat Content or otherwise interfere with
DOWNBEAT's use thereof, except as such use may be inconsistent
with any exclusive rights of JAMtv granted pursuant to this
Agreement.
(d) USER DATA. Each party shall be deemed a co-owner of
any data collected from the Downbeat Website, including without
limitation any information provided by or concerning users of the
Downbeat Website. Neither party shall have the right to license,
rent or lease such data to third parties without the consent of
the other.
(e) CONFIDENTIAL INFORMATION. Each party will, to the
extent and in accordance with the policies used to protect its own
information of similar importance, use its best efforts to refrain
from and prevent the use, duplication, or disclosure of during or
after the Term any Confidential Information of the other party,
disclosed or obtained by such party while performing its
obligations under this Agreement, except when such use or
disclosure is for the limited purpose of performing obligations
under this Agreement. Neither party will have an obligation of
confidentiality with regard to any information insofar as the same
(i) was known to such party prior to disclosure; (ii) is at the
time of disclosure publicly available or becomes publicly
available other than as a result of a breach of this Agreement; or
(iii) is disclosed to such party by a third party not under a duty
not to disclose such information. In addition, the
confidentiality obligations set forth above will not apply to any
Confidential Information which is disclosed pursuant to any law of
the United States or any state thereof; the order of any court or
governmental agency; or the rules and regulations of any
governmental agency. Prior to any disclosure required by law or
order of any court or government agency, the disclosing party will
notify the other party of the required disclosure. If the
required disclosure is to be made within ten (10) days after the
disclosing party becoming aware or informed of the obligation to
disclose, the disclosing party will notify the other party by the
end of the next business day following the day the disclosing
party became aware of its disclosure obligation. The parties
agree that an impending or existing violation of any provision of
this Section by one party would cause the other party irreparable
injury for which it would have no adequate remedy at law, and
agree that such other party will be entitled to obtain immediate
injunctive relief prohibiting such violation, in addition to any
other rights and remedies available to it. The nclusion of
copyright notices on any software licensed hereunder does not
constitute publication thereof.
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(f) DOWNBEAT TRADEMARKS. JAMtv acknowledges that the
Downbeat Trademarks and all rights therein (with the exception of
those rights expressly granted to JAMtv hereunder) and the
goodwill pertaining thereto belong exclusively to DOWNBEAT.
JAMtv's use of the Downbeat Trademarks shall inure to the benefit
of DOWNBEAT for all purposes, including without limitation, any
trademark registration. Without limiting the generality of the
foregoing, JAMtv shall not challenge the validity of DOWNBEAT's
ownership of any Downbeat Trademark or any registration or
application for registration thereof or contest the fact that
JAMtv's rights under this Agreement are those of a licensee.
(g) PUBLICITY. This Agreement constitutes Confidential
Information. Accordingly, each party shall submit to the other
all advertising, written sales promotion, press releases, and
other publicity matters relating to this Agreement in which the
other party's name or trademark is mentioned or language from
which the connection of said name or trademark may be inferred or
implied, and neither party shall publish or use such advertising,
sales promotion, press releases, or publicity matters without the
prior written approval of the other party, which shall not be
unreasonably withheld or delayed. However, either party may
include the other party's name and a mutually agreed factual
description of the work performed under this Agreement in employee
communications, in internal business planning documents, in its
reports to stockholders, and whenever required by reason of legal,
accounting, or regulatory requirements (including SEC regulations,
state blue sky laws, and the rules of public stock exchanges);
provided that prior to such disclosure the party whose name is
mentioned has not less than seven (7) days to review and comment
on such disclosure.
12. REGISTRATION AND PROTECTION.
(a) COPYRIGHT REGISTRATION. Except as otherwise
expressly authorized by DOWNBEAT, all registrations and
applications for registration of copyright in the Downbeat Content
shall be in the name of DOWNBEAT. JAMtv, when requested by
DOWNBEAT, shall assist and cooperate with DOWNBEAT in connection
with any such filings at DOWNBEAT's expense.
(b) ACTIONS AFFECTING VALIDITY. DOWNBEAT shall not take
any action, not fail to take any action, and use its best efforts
not to permit any action to be taken by others, which would in any
respect affect the validity or enforcement of the DOWNBEAT
Licenses or the rights in the Downbeat Content granted to JAMtv
herein.
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(c) COPYRIGHT NOTICE. JAMtv shall (i) place notices of
copyright in a manner consistent with DOWNBEAT's placement thereof
on the Downbeat Content which is published by JAMtv, (ii)
displaying on one or more screens of any web site operated by
JAMtv a legend reasonably calculated to warn users that such web
site contains proprietary material which may not be copied without
permission, and (iii) display artist attribution or credits as
reasonably requested by DOWNBEAT on the Downbeat Content which is
published by JAMtv.
(d) TRADEMARK REGISTRATION. DOWNBEAT shall be
responsible for the prosecution and maintenance of trademark
registrations of the Downbeat Trademarks. JAMtv shall cooperate
with DOWNBEAT at DOWNBEAT's expense, and shall execute any
documents required by DOWNBEAT and supply DOWNBEAT with a
reasonable number of specimens to assist DOWNBEAT, in the
registration, enforcement, or maintenance of any Downbeat
Trademark or recording of JAMtv as a registered user or licensee.
JAMtv agrees not to register, or attempt to register, any Downbeat
Trademark or any confusingly similar mark in its own name or any
other name, or to use any Downbeat Trademark or any confusingly
similar mark in commerce other than as provided herein.
(e) THIRD PARTY INFRINGEMENT. If either party discovers
any infringement or misappropriation of (i) any of the Downbeat
Trademarks in connection with the Downbeat Website or similar
products or services, or (ii) any of the Downbeat Content, then
the party with knowledge of such infringement or misappropriation
shall promptly notify the other party thereof. DOWNBEAT shall
take such actions which it determines are reasonably necessary or
desirable in its sole discretion in connection with any
infringement or misappropriation by a third party of any portion
of the Downbeat Content or the Downbeat Trademarks. JAMtv shall
not undertake any action in response to any infringement or
misappropriation of the DOWNBEAT Content without the prior written
consent of DOWNBEAT, which consent shall not be unreasonably
withheld with respect to any infringement or misappropriation of
the Downbeat Content or the Downbeat Trademarks in connection with
the Interactive Network or similar products or services. DOWNBEAT
shall promptly notify JAMtv whether DOWNBEAT wishes to prosecute
or settle any action with respect thereto. JAMtv agrees to
cooperate with and assist DOWNBEAT in taking whatever action
(including consenting to being named as a party to any suit or
other proceeding) which DOWNBEAT determines to be reasonably
necessary to desirable. DOWNBEAT shall reimburse JAMtv for its
reasonable out of pocket attorneys fees and other costs incurred
in connection with investigating, prosecuting, or settling any
such claim, suit, damage, or loss if such fees were incurred at
the request of Downbeat.
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(f) THIRD PARTY CLAIMS. If any claim is asserted
against either party hereto alleging that any of the Downbeat
Content or Downbeat Trademarks infringes, misappropriates, or
otherwise violates a third party's rights, then the party with
knowledge of such claim shall promptly notify the other party. If
such a claim is asserted against JAMtv, DOWNBEAT shall promptly
notify JAMtv whether DOWNBEAT wishes to conduct a defense or
settlement of any such claim on behalf of JAMtv. Should DOWNBEAT
elect to conduct such a defense or settlement, DOWNBEAT shall be
permitted to control fully the defense and any settlement of such
claim. JAMtv shall afford DOWNBEAT every reasonable assistance in
regard to DOWNBEAT's defense of any such claim and JAMtv may
appear in any such action.
(g) THIRD PARTY INFRINGEMENT OF JAMTV TRADEMARKS OR JAMTV
CONTENT. If either party discovers any infringement or
misappropriation of (i) any of the JAMtv Trademarks in connection
with the Downbeat Website or similar products or services, or (ii)
any of the JAMtv Content, then the party with knowledge of such
infringement or misappropriation shall promptly notify the other
party thereof. JAMtv shall take such actions which it determines
are reasonably necessary or desirable in its sole discretion in
connection with any infringement or misappropriation by a third
party of any portion of the JAMtv Content or the JAMtv Trademarks.
DOWNBEAT shall not undertake any action in response to any
infringement or misappropriation of the JAMtv Content or the JAMtv
Proprietary Rights without the prior written consent of JAMtv.
JAMtv shall promptly notify DOWNBEAT whether JAMtv wishes to
prosecute or settle any action with respect thereto. DOWNBEAT
agrees to cooperate with and assist JAMtv in taking whatever
action (including consenting to being named as a party to any suit
or other proceeding) which JAMtv determines to be reasonably
necessary or desirable.
(h) THIRD PARTY CLAIMS WITH RESPECT TO JAMTV TRADEMARKS
OR JAMTV CONTENT OR JAMTV USE OF PATENTS AND TECHNOLOGY. If any
claim is asserted against either party hereto alleging that any of
the JAMtv Content or JAMtv Trademarks or JAMtv's use of any
technology or patents infringes, misappropriates, or otherwise
violates a third party's rights, then the party with knowledge of
such claim shall promptly notify the other party. If such a claim
is asserted against DOWNBEAT, JAMtv shall promptly notify DOWNBEAT
whether JAMtv wishes to conduct a defense or settlement of any
such claim on behalf of DOWNBEAT. Should JAMtv elect to conduct
such a defense or settlement, JAMtv shall be permitted to control
fully the defense and any settlement of such claim. DOWNBEAT
shall afford JAMtv every reasonable assistance in regard to
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JAMtv's defense of any such claim and DOWNBEAT may appear in any
such action.
13. REPRESENTATIONS AND WARRANTIES OF DOWNBEAT.
(a) CORPORATE EXISTENCE AND STANDING. DOWNBEAT is duly
organized and existing in good standing under the laws of the
state of Illinois and has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its
property and to execute, deliver and perform all of its
obligations under this Agreement.
(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement by DOWNBEAT have been duly authorized
by proper corporate proceedings, and this Agreement, upon their
execution and delivery, will constitute legal, valid and binding
obligations of DOWNBEAT, enforceable in accordance with their
respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and similar laws affecting the validity or enforcement
of creditors' rights generally.
(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement by DOWNBEAT, the consummation by
DOWNBEAT of the transactions contemplated therein, and compliance
by DOWNBEAT with the provisions thereof (including, without
limitation, its exclusivity obligations hereunder), will not
violate any existing law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on DOWNBEAT or its articles of
incorporation or its bylaws or the provisions of any instrument or
agreement to which DOWNBEAT is a party or is subject, or by which
it, or its property, is bound, or conflict with or constitute a
default thereunder; and the execution, delivery and performance of
this Agreement, the consummation of the transactions contemplated
therein, and compliance with the provisions thereof, in each case
by DOWNBEAT, will not require the consent of any party or the
giving of notice to, the exemption by, any registration, or filing
with any governmental authority, to the extent not previously
obtained or made.
(d) INTELLECTUAL PROPERTY. DOWNBEAT represents and
warrants that (i) it has the full power and authority to grant the
DOWNBEAT Licenses (as limited by the Third Party Restrictions) and
the other rights granted hereunder, (ii) it is not aware of and
has not received any oral or written notice of any claims adverse
to DOWNBEAT's rights in the Downbeat Content or Downbeat
Trademarks, or that the Downbeat Content or Downbeat Trademarks
infringe upon the proprietary rights of any third party, (iii) it
has not granted to any other party any rights to use the Downbeat
Content or Downbeat Trademarks in
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connection with the Interactive Network, (iv) subject to the Third
Party Restrictions, the exercise of the rights granted JAMtv
hereunder will not now or hereafter in any manner constitute an
infringement or other violation of any trademark, trade name,
service mark, copyright, trade secret, patent, or other intellectual
property or proprietary rights of any person, or the publicity,
publication, display, attribution, integrity, approval, performance,
moral, or privacy rights of any person or entity and (v) the Downbeat
Content is not obscene.
14. REPRESENTATIONS AND WARRANTIES OF JAMTV.
(a) CORPORATE EXISTENCE AND STANDING. JAMtv is duly
organized and existing in good standing under the laws of the
state of Delaware and has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its
property and to execute, deliver and perform all of its
obligations under this Agreement.
(b) AUTHORIZATION AND VALIDITY. The execution and
delivery of this Agreement by JAMtv have been duly authorized by
proper corporate proceedings, and this Agreement, upon their
execution and delivery, will constitute legal, valid and binding
obligations of JAMtv, enforceable in accordance with their
respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and similar laws affecting the validity or enforcement
of creditors' rights generally.
(c) NO CONFLICT; APPROVALS. The execution, delivery and
performance of this Agreement by JAMtv, the consummation by JAMtv
of the transactions contemplated therein, and compliance by JAMtv
with the provisions thereof, will not violate any existing law,
rule, regulation, order, writ, judgment, injunction, decree or
award binding on JAMtv or its articles of incorporation or its
by-laws or the provisions of any instrument or agreement to which
JAMtv is a party or is subject, or by which it, or its property,
is bound, or conflict with or constitute a default thereunder; and
the execution, delivery and performance of this Agreement, the
consummation of the transactions contemplated therein, and
compliance with the provisions thereof, in each case by JAMtv,
will not require the consent of any party or the giving of notice
to, the exemption by, any registration, or filing with any
governmental authority, to the extent not previously obtained or
made.
(d) INTELLECTUAL PROPERTY. JAMtv represents and
warrants that (i) it has the full power and authority to provide
the JAMtv Content to the Downbeat Website, (ii) it is not aware of
and has not received any oral or written notice of any claims
adverse to JAMtv's rights in the JAMtv
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Content, or that the JAMtv Content infringes upon the proprietary
rights of any third party, (iii) the use of the JAMtv Content on
the Downbeat Website as contemplated hereunder will not now or
hereafter in any manner constitute an infringement or other
violation of any trademark, trade name, service mark, copyright,
trade secret, patent, or other intellectual property or proprietary
rights of any person, or the publicity, publication, display,
attribution, integrity, approval, performance, moral, or privacy
rights of any person or entity and (v) the JAMtv Content is
not obscene.
15. CONDITIONS PRECEDENT. The obligations of JAMtv and DOWNBEAT
hereunder shall be subject to the satisfaction of the following conditions
precedent.
(a) JAMTV. JAMtv shall have executed and delivered this
Agreement to DOWNBEAT; and
(b) DOWNBEAT. DOWNBEAT shall have executed and
delivered this Agreement to JAMtv.
16. TERM.
(a) INITIAL TERM. The Initial Term of this Agreement shall
be two (2) years which shall commence on the date
hereof and continue until the second anniversary
date hereof, unless earlier terminated as provided
in Section 18.
(b) OPTIONAL RENEWAL TERM(S) This Agreement may continue
after the Initial Term for Optional Renewal Term(s) upon
the mutual agreement of the parties hereto. Six
months prior to the expiration of the Initial Term,
JAMtv and DOWNBEAT shall begin to negotiate in good
faith in order to determine whether to enter into an
Optional Renewal Term of two (2) years.
17. DEFAULT. As used in this Agreement, "Default" means the
occurrence of any of the following:
(a) JAMTV. JAMtv fails to pay any amounts due under
Section 8 required to be paid to DOWNBEAT hereunder within 30 days
after the date such fee or payment became due hereunder. JAMtv
breaches any of its representations, warranties, covenants or its
other obligations set forth herein and shall not have remedied,
corrected, and/or materially improved its performance or cured
such breach within 30 days after receiving written notice thereof
from DOWNBEAT.
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(b) DOWNBEAT. Subject to DOWNBEAT's exercise of
its editorial control as set forth in Section 6 of this Agreement,
DOWNBEAT fails to provide any or all of the Downbeat Content in a
timely fashion and in the form and manner specified herein or
breaches any of its representations, warranties, covenants or its
other obligations set forth herein and shall not have remedied,
corrected, and/or materially improved its performance or cured
such breach within 30 days after receiving written notice thereof
from JAMtv.
18. EFFECT OF DEFAULT.
(a) TERMINATION BY JAMTV. JAMtv may terminate this
Agreement if a Default by DOWNBEAT occurs and is continuing, which
termination shall be effective immediately upon written notice to
DOWNBEAT from JAMtv.
(b) TERMINATION BY DOWNBEAT. DOWNBEAT may terminate
this Agreement if a Default by JAMtv occurs and is continuing,
which termination shall be effective immediately upon written
notice to JAMtv from DOWNBEAT.
(c) EFFECT OF TERMINATION. Upon termination of this
Agreement, (i) the DOWNBEAT Licenses shall terminate and JAMtv
shall no longer be entitled to receive from DOWNBEAT any
additional Downbeat Content and shall no longer use any Downbeat
Trademarks and (ii) subject to JAMtv's right to recoupment, JAMtv
shall pay any amounts due and owing to DOWNBEAT pursuant to
Section 8 of this Agreement. In the event that the license is not
renewed, so long as JAMtv has been paid all sums due and owing to
(and/or recoupable by) it from Downbeat, JAMtv shall cooperate
with Downbeat and shall promptly transfer a complete copy of all
of the pages of Downbeat Content from the Downbeat Website and of
all the underlying information to an ISP or other provider
designated by DOWNBEAT within a reasonable time after the
expiration of the license. Nothing in the foregoing shall be
deemed in any way a limitation on JAMtv's right to use of JAMtv
Content, regardless of whether such content was developed
primarily or exclusively for inclusion on the Downbeat Website,
provided that JAMtv does so without referencing DOWNBEAT or using
any of the Downbeat Trademarks.
(d) TERMINATION NOT EXCLUSIVE REMEDY. Termination of
this Agreement by either party hereunder shall not preclude any
other rights or remedies to which such party may be entitled.
19. FORCE MAJEURE. Neither party will have any liability hereunder if
performance by such party shall be prevented, interfered with or omitted because
of labor
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dispute, failure of facilities, act of God, natural disaster, laws,
government or court action, or any other cause beyond the control of the
party so failing to perform hereunder.
20. LIMITATION OF LIABILITY; INDEMNIFICATION.
(a) LIMITATION OF LIABILITY. Neither JAMtv nor DOWNBEAT will be
liable to the other or any third party, under any legal or
equitable theory, for any consequential, incidental, special or
indirect damages of any kind, suffered by or otherwise compensable
to the other, arising out of, under or relating to this Agreement,
whether or not advised of the possibility of such damages. In no
event will either party have any liability of any nature or amount
whatsoever to the other or any third party arising out of, under
or relating to any failure of the distribution of the DOWNBEAT
Content or any part thereof or any software program, software or
web site link or link mechanism, or other material or items
through the JAMtv Music Network or otherwise. Neither party shall
be liable to the other party or any other person or entity for
direct damages in excess of the aggregate fees paid or due and
owing by the parties under this Agreement. The limitations in this
Section 20(a) shall not apply to a party's obligation to indemnify
the other for claims of infringement as provided in Section
20(c)(i)(A) below in the case of JAMtv and in Section 20(c)(ii)(A)
below in the case of Downbeat.
(b) LIMITATION OF WARRANTIES. JAMTV WILL MAKE THE JAMTV
CONTENT, THE JAMTV HOSTING SERVICES, AND OTHER SERVICES AVAILABLE
IN ACCORDANCE WITH THE TERMS HEREOF ON A COMMERCIALLY REASONABLE
BASIS, AND DOES NOT WARRANT OR GUARANTY THAT THE AVAILABILITY
THEREOF WILL BE FREE FROM ERRORS IN COMMUNICATIONS OR
TRANSMISSION. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
JAMTV EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC
PURPOSE. JAMTV DOES NOT ENDORSE, WARRANT, OR GUARANTEE ANY
PRODUCT OR SERVICE OF ANY THIRD PARTY OFFERED THROUGH JAMTV AND
WILL NOT BE A PARTY TO OR IN ANY WAY MONITOR ANY TRANSACTION
BETWEEN ANY PERSON AND ANY THIRD PARTY PROVIDERS OF PRODUCTS OR
SERVICES.
(c) INDEMNIFICATION.
(i) INDEMNIFICATION BY JAMTV. JAMtv will
indemnify, defend and hold harmless DOWNBEAT and its officers,
directors, employees, agents, successors and assignees, in
accordance with the procedures set forth in subparagraph (iii)
below, from any and all losses, liabilities, damages and claims,
and all related costs and expenses (including reasonable
attorneys' fees and costs) ("LOSSES"), arising from or
24
<PAGE>
in connection with (A) any claims of infringement made against
DOWNBEAT of any United States patent, or a trade secret, or any
copyright, trademark, service mark, trade name or similar
proprietary rights conferred by contract or by common law or by
any law of the United States or of any state, alleged to have
occurred because of the use of JAMtv Content on the DOWNBEAT
Website hereunder, (B) any claims made against DOWNBEAT arising
out of JAMtv's breach of any law, regulation, or contract, or
(C) any claims made against DOWNBEAT arising out of the breach of
any representation, warranty or covenant of JAMtv under this
Agreement.
(ii) INDEMNIFICATION BY DOWNBEAT. DOWNBEAT will
indemnify, defend and hold harmless JAMtv and its officers,
directors, employees, agents, successors and assignees, in
accordance with the procedures set forth in subparagraph (iii)
below, from any and all Losses arising from or in connection with
(A) any claims of infringement made against JAMtv of any United
States patent, or a trade secret, or any copyright, trademark,
service mark, trade name or similar proprietary rights conferred
by contract or by common law or by any law of the United States or
of any state, alleged to have occurred because of any rights or
resources or items, including without limitation, DOWNBEAT Content
and the Downbeat Trademarks, provided to and the license rights
granted to JAMtv by DOWNBEAT hereunder, (B) any claims made
against JAMtv arising out of DOWNBEAT's breach of any law,
regulation, or contract; (C) any claims made against JAMtv arising
out of the breach of any representation, warranty or covenant of
DOWNBEAT under this Agreement, or (D) any product liability claims
made by any party with respect to the Downbeat Merchandise.
(iii) MATTERS INVOLVING THIRD PARTIES. If any third
party notifies a party hereto (the "INDEMNIFIED PARTY") with
respect to any matter which may give rise to a claim for
indemnification against any other party (the "INDEMNIFYING PARTY")
under this Section, then the Indemnified Party will notify each
Indemnifying Party thereof promptly; PROVIDED, that no delay on
the part of the Indemnified Party in notifying any Indemnifying
Party will relieve the Indemnifying Party from any liability or
obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is damaged. If any Indemnifying Party
notifies the Indemnified Party is assuming the defense thereof,
(1) the Indemnifying Party will defend the Indemnified Party
against the matter with counsel of its choice reasonably
satisfactory to the Indemnified Party, (2) the Indemnified Party
may retain separate co-counsel at its sole cost and expense
(except that the Indemnifying Party will be responsible for the
fees and expenses of the separate co-counsel to the extent the
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<PAGE>
Indemnified Party concludes reasonably that the counsel the
Indemnifying Party has selected has a conflict of interest),
(3) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the matter
without the written consent of the Indemnifying Party which
consent will not be withheld or delayed unreasonably, and (4) the
Indemnifying Party will not consent to the entry of any judgment
with respect to the matter, or enter into any settlement which
does not include a provision whereby the plaintiff or claimant in
the matter releases the Indemnified Party from all liability with
respect thereto, without the written consent of the Indemnified
Party, which consent will not be withheld or delayed unreasonably.
21. MISCELLANEOUS.
(a) GOVERNING LAW. Any question as to the validity,
construction or performance of this Agreement shall be construed
in accordance with and subject to the substantive laws (as opposed
to the conflicts of laws provisions) of the State of Illinois and,
where applicable, the laws of the United States.
(b) JURISDICTION. JAMtv and DOWNBEAT agree that all
claims, disputes, or controversies between them arising out of,
connected with, related to, or incidental to the relationship
established between them in connection with this Agreement,
whether arising at law or equity in contract, tort, equity, or
otherwise, if pursued in court shall be resolved only by state or
federal courts located in Cook County, Illinois, but each party
hereto acknowledges that any appeals from those courts may have to
be heard by a court located outside of Cook County, Illinois.
Each party hereto waives in all disputes any objection that it may
have to the location of the court considering the dispute.
(c) UNFORESEEN CIRCUMSTANCES. Due to the rate of change
in Internet businesses and the high degree of uncertainty as to
the competitive environment, the parties agree to use their
reasonable good faith efforts in the event of unforeseen
circumstances or other material external changes which may require
further discussions and negotiations leading to amendments to this
Agreement, if any, to be mutually agreed upon between the parties.
(d) DISPUTE RESOLUTION. All claims, dispute and
controversies of every kind and nature arising out of or in
connection with this Agreement shall be resolved by arbitration in
Chicago, Illinois, in accordance with the rules of the American
Arbitration Association; provided, however, that in any
arbitration, discovery will be allowed as
26
<PAGE>
provided by the Federal Rules of Civil Procedure. The determination
of the arbitrator(s) shall be accompanied by a written opinion and
shall be final, binding and conclusive on the parties, and judgment
on the arbitrator's award may be entered in any court having
jurisdiction thereof. Notwithstanding the foregoing, if interim
judicial relief is necessary prior to rendition of any arbitral award
in order to avoid irreparable injury to either party, then such party
may seek interim measures of protection, including without
limitation orders of injunction, specific performance or other
equitable relief, from any court of competent jurisdiction,
provided that the foregoing shall not be deemed to preclude the
arbitrators from awarding similar or other interim relief or
entering interim arbitration awards. Each party shall bear its
own arbitration costs and expenses, unless the arbitrators, in
consideration of fairness to the parties, determine otherwise.
(e) ENTIRE AGREEMENT. This Agreement contains the
entire understanding between JAMtv and DOWNBEAT with respect to
its subject matter, supersedes all previous oral or written
agreements or understandings between them with respect thereto,
and shall not be modified except by a writing signed by all
parties hereto.
(f) NO WAIVER. No waiver by either party or any breach
of this Agreement by the other shall be deemed to be a waiver of
any preceding, or subsequent breach thereof. Any waiver must be
in writing executed by the waiving party.
(g) PARTIAL INVALIDITY. If any portion of the Agreement
shall be held to be illegal, invalid or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
affect any other provision hereof, and this Agreement shall be
constructed as if such invalid, illegal or unenforceable provision
had never been contained herein. Additionally, in lieu of each
such illegal, invalid or unenforceable provision, there shall be
added automatically as part of this Agreement a provision as
similar to such former provision as shall be legal, valid and
enforceable.
(h) NOTICES. Except as otherwise expressly provided
herein, all notices and other communications required or desired
to be served, given, or delivered hereunder shall be made in
writing or by a telecommunications device capable of creating a
written record and shall be addressed to the party to be notified
at the respective addresses set forth on the signature page hereto
or, as to each party, at such other address as designated by such
party in a written notice to the other party. Notices shall be
deemed to have been duly given (i) if delivered personally or
otherwise actually received, (ii) if sent by overnight delivery
service, (iii)
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<PAGE>
if mailed by first class United States mail, postage prepaid,
registered or certified, with return receipt requested, or
(iv) if sent by telecopy. Notice mailed as provided in clause
(iii) above shall be effective upon the expiration of seven
(7) days after its deposit in the United States mail and
notice sent as provided in clause (iv) above shall be effective
upon transmission. Notice given in any other manner described in
this paragraph shall be effective upon receipt by the addressee
thereof; PROVIDED, HOWEVER, that if any notice is tendered to an
addressee and delivery thereof is refused by such addressee, such
notice shall be effective upon such tender.
(i) SECTION HEADINGS. Section and Paragraph headings
used herein are for informational purposes only and shall not
define nor limit the provisions of this Agreement. Each use
herein of "including" shall mean a reference to "including,
without limitation," and shall not be exclusive.
(j) SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of JAMtv and its successors
and assignees and DOWNBEAT and its successors and assignees
permitted hereunder; provided, however, that neither party hereto
shall assign, subcontract or otherwise delegate its obligations
hereunder without the prior written consent of the other party,
which consent shall not be unreasonably withheld.
(k) INDEPENDENT CONTRACTORS. Each party agrees it is
and will be an independent contractor as to the other party and
not an agent, employee, partner or joint venturer of or with the
other party. Without limiting the foregoing, neither party nor
any officer or employee of such will have any right to bind the
other party, to make any representations or warranties on behalf
of the other, to accept service of process, to receive notice, or
to perform any act or thing on behalf of the other party other
than as expressly authorized by such other party in its sole
discretion. JAMtv shall not be obligated to pay any fees or other
compensation to DOWNBEAT in connection with the transactions
contemplated by this Agreement other than as expressly
contemplated by Section 8 of this Agreement.
[SIGNATURE PAGE IMMEDIATELY FOLLOWS]
28
<PAGE>
[SIGNATURE PAGE TO AFFILIATION AGREEMENT BETWEEN JAMTV CORPORATION AND MAHER
PUBLICATIONS, INC.]
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Affiliation Agreement as of the day and year first above written.
MAHER PUBLICATIONS, INC.
By: /s/ Kevin Maher
-----------------------------
Name: Kevin Maher
Title: Publisher
102 North Haven Road
Elmhurst, Illinois 60126
Attn.: Kevin Maher
Facsimile: (630) 941-3210
JAMTV CORPORATION
By: /s/ Howard A. Tullman
-----------------------------
Howard A. Tullman,
Chief Executive Officer
640 N. LaSalle Street
Suite 560
Chicago, IL 60610
Attn.: Howard A. Tullman
Facsimile: (312) 642-0616
<PAGE>
SCHEDULE 1
LAUNCH SCHEDULE
-------------------------------
The proposed initial Launch Schedule for the Downbeat Website shall be as
follows:
All of the Launch Schedule Requirements have been met and satisfied as of
the date of execution of this Agreement.
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<PAGE>
SCHEDULE 2
DOWNBEAT CONTENT
-------------------------------
Feature articles, graphics and other content from various sections of
Downbeat magazine;
Reviews, columns, cover art, logos, artwork, illustrations, photos, print
and audio interviews, excerpts, charts, etc. from Downbeat magazine and
archives;
Other select archival material, compilations, special inserts, sections,
etc.;
All material prepared specifically for electronic distribution on the
Downbeat Website;
Access to all DVDs, CDs, videos, tapes, cassettes, etc. supplied to
Downbeat by any artists, labels, promotions, etc. for the purpose of
Website/Internet promotion, advertising, etc, which subject to consents
of holders of intellectual property rights may be used by JAMTV to
create clips and other multimedia assets for digital inclusion in the
Downbeat Website; and
Such other selected music-related material of whatever nature which The
Downbeat obtains, creates, licenses, or otherwise has the right to use,
publish and distribute on the Internet and through its Website.
Exclusive feature stories prepared on a regular basis solely for the
Downbeat Website by the DOWNBEAT magazine staff, with substantial
multimedia components.
The contents of and information contained in concert reviews, record
reviews, artists' questions and answers, artists' picks, college reports,
and any charts, polls (such as readers' and critics' polls) or
compilations contained in DOWNBEAT magazine along with exclusive record
reviews and charts prepared and developed by the DOWNBEAT magazine staff
for the Downbeat Website;
All available photography, audio assets, video assets, art, interviews,
transcripts, digital material, images, illustrations, animations, books,
etc. in the possession and control of DOWNBEAT which may be used to
create new and/or supplementary or repurposed audio/visual and multimedia
material for the Downbeat Website;
All available illustrations, photographs, and artwork contained in
DOWNBEAT magazine, which is in the possession and control of DOWNBEAT
and which may be used to create new and/or supplementary multimedia
material for the Downbeat Website.
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<PAGE>
SCHEDULE 3
DOWNBEAT TRADEMARKS
-------------------------------
DOWNBEAT TRADEMARKS
THE FOLLOWING TRADEMARKS AND SERVICE MARKS AND ALL TRADEMARKS AND SERVICE MARKS
CONTAINING OR DERIVED FROM THE FOLLOWING MARKS:
DOWNBEAT.COM
ALL REGISTRATIONS AND APPLICATIONS FOR REGISTRATION OF THE FOREGOING TRADEMARKS
AND SERVICE MARKS, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING:
APPLICATIONS WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE:
REGISTRATIONS WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE:
32
<PAGE>
SCHEDULE 4
PROMOTION AND ADVERTISING AND OTHER OPPORTUNITIES
-----------------------------------------
One or more full page ads for the Downbeat Website in each issue of Downbeat
Magazine.
A regular column or article in each issue of Downbeat Magazine which describes
the contents of and new features and/or additions to the Downbeat Website.
Encode and distribute on a regular basis music programming to be made available
through the Downbeat website (and through our various affiliate networks)
consisting of live streaming audio and video webcasts (and archived
performances) from leading Jazz artists as well as interviews, chat sessions,
special event coverage, etc. on a national and, ultimately, world wide basis.
Use commercially reasonable efforts to promote and drive traffic to the Downbeat
website in and through all media channels, including the Jazz club at Universal
Citywalk in Orlando, so as to increase the advertising and other revenue
opportunities of the website.
To promote the website in connection with the opening of the Downbeat Hall of
Fame in Orlando, Florida. At launch we would like to have artist pages for
all 90 members of the Hall of Fame as well as some pages dedicated to the
Hall of Fame itself. Most of the "archived" content for the site at this
time will be pulled from the already digitized version of the Downbeat 60th
Anniversary Book. At launch there will also be a mechanism in place whereby
people may order subscriptions to Downbeat magazine as well as a number of
Downbeat branded merchandise items. Also cooperate with JAMTV to try to
schedule one or more webcasts in connection with the opening of the Hall of
Fame.
Develop and distribute supplemental print media in support of the Downbeat
website and the live internet webcast performances to be delivered to
users--along with JAMTV Connected CDs in various concert venues throughout
the year, etc.--both on behalf of specific advertisers and as an
advertiser-supported premium give-away and also deliver Connected CDs through
Downbeat magazine.
To develop data and profiling information on all site visitors with associated
databases to permit the development and use of integrated marketing programs
targeted to specific virtual music communities and sectors of the online
population.
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<PAGE>
EXHIBIT 10.4
EXODUS COMMUNICATIONS, INC.
INTERNET DATA CENTER SERVICES AGREEMENT
THIS INTERNET DATA CENTER SERVICES AGREEMENT (this "AGREEMENT") is made
effective as of the Submission Date (___________ ___, 199__) indicated in the
initial Internet Data Center Services Order Form accepted by Exodus, by and
between Exodus Communications, Inc. ("EXODUS") and the customer identified below
("CUSTOMER").
PARTIES:
CUSTOMER NAME: JAMTV CORPORATION
ADDRESS: _________________________________________________________
_________________________________________________________
PHONE: _________________________________________________________
FAX: _________________________________________________________
EXODUS COMMUNICATIONS, INC.
2650 San Tomas Expressway
Santa Clara, CA 95051
Phone: (408) 346-2200
Fax: (408) 346-2206
1. INTERNET DATA CENTER SERVICES.
Subject to the terms and conditions of this Agreement, during the term of this
Agreement, Exodus will provide to Customer the services described in the
Internet Data Center Services Order Form(s) ("IDC SERVICES ORDER FORM(S)")
accepted by Exodus, or substantially similar services if such substantially
similar services would provide Customer with substantially similar benefits
("INTERNET DATA CENTER SERVICES"). All IDC Services Order Forms accepted by
Exodus are incorporated herein by this reference, each as of the Submission Date
indicated in such form.
2. FEES AND BILLING.
2.1 FEES. Customer will pay all fees due according to the IDC Services Order
Form(s).
2.2 BILLING COMMENCEMENT. Billing for Internet Data Center Services, other
than Setup Fees, indicated in the initial IDC Services Order Form shall commence
on the earlier to occur of (i) the "Installation Date" indicated in the initial
IDC Services Order Form, regardless of whether Customer has commenced use of the
Internet Data Center Services, unless Customer is unable to install the Customer
Equipment and/or use the Internet Data Center Services by the Installation Date
due to the fault of Exodus, then billing will not begin until the date Exodus
has remedied such fault and (ii) the date the "CUSTOMER EQUIPMENT" (Customer's
computer hardware and other tangible equipment, as identified in the Customer
Equipment List which is incorporated herein by this reference) is placed by
Customer in the "CUSTOMER AREA" (the portion(s) of the Internet Data Centers, as
defined in Section 3.1 below, made available to Customer hereunder for the
placement of Customer Equipment) and is operational. All Setup Fees will be
billed upon receipt of a Customer signed IDC Services Order Form. In the event
that Customer orders additional Internet Data Center Services, billing for such
services shall commence on the date Exodus first provides such additional
Internet Data Center Services to Customer or as otherwise agreed to by Customer
and Exodus.
2.3 BILLING AND PAYMENT TERMS. Customer will be billed monthly in advance of
the provision of Internet Data Center Services, and payment of such fees will be
due within thirty (30) days of the date of each Exodus invoice. All payments
will be made in U.S. dollars. Late payments hereunder will accrue interest at a
rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed
by applicable law, whichever is lower. If in its judgment Exodus determines that
Customer is not creditworthy or is otherwise not financially secure, Exodus may,
upon written notice to Customer, modify the payment terms to require full
payment before the provision of Internet Data Center Services or other
assurances to secure Customer's payment obligations hereunder.
2.4 TAXES. All payments required by this Agreement are exclusive of all
national, state, municipal or other governmental excise, sales, value-added,
use, and Customer's personal property taxes, occupational taxes relating to
Exodus' businessand obligations and other levies now in force or enacted in the
future, all of which Customer will be responsible for and will pay in full,
except for taxes based on Exodus' net income. To the extent Customer incurs
additional taxes not currently contemplated by this Agreement, Customer may pay
the additional taxes or terminate this Agreement.
3. CUSTOMER'S OBLIGATIONS.
3.1 COMPLIANCE WITH LAW AND RULES AND REGULATIONS. Customer agrees that
Customer will comply at all times with all applicable laws and regulations and
Exodus' general rules and regulations relating to its provision of Internet Data
Center Services, as updated by Exodus from time to time ("RULES AND
REGULATIONS"). Customer acknowledges that Exodus exercises no control whatsoever
over the content of the information passing through its sites containing the
Customer Area and equipment and facilities used by Exodus to provide Internet
Data Center Services ("INTERNET DATA CENTERS"), and that it is the sole
responsibility of Customer to ensure that the information it transmits and
receives complies with all applicable laws and regulations.
3.2 CUSTOMER'S COSTS. Customer agrees that it will be solely responsible, and
at Exodus's request will reimburse Exodus, for all costs and expenses (other
than those included as part of the Internet Data Center Services and except as
otherwise expressly provided herein) it incurs in connection with this
Agreement.
3.3 ACCESS AND SECURITY. Customer will be fully responsible for any charges,
costs, expenses (other than those included in the Internet Data Center
Services), and third party claims that may result from its use of, or access to,
the Internet Data Centers and/or the Customer Area including but not limited to
any unauthorized use of any access devices provided by Exodus hereunder. Except
with the advanced written consent of Exodus, Customer's access to the Internet
Data Centers will be limited solely to the individuals identified and authorized
by Customer to have access to the Internet Data Centers and the Customer Area in
accordance with this Agreement, as identified in the Customer Registration Form,
as amended from time to time, which is hereby incorporated by this reference
("REPRESENTATIVES").
3.4 NO COMPETITIVE SERVICES. Customer may not at any time permit any Internet
Data Center Services to be utilized for the provision of any services that
compete with any Exodus services, without Exodus' prior written consent.
3.5 INSURANCE.
(a) MINIMUM LEVELS. Customer will keep in full force and effect during the
term of this Agreement: (i) comprehensive general liability insurance in an
amount not less than $5 million per occurrence for bodily injury and property
damage; (ii) employer's liability insurance in an amount not less than $1
million per occurrence; and (iii) workers' compensation insurance in an amount
not less than that required by applicable law. Customer also agrees that it
will, and will be solely responsible for ensuring that its agents (including
contractors and subcontractors) maintain, other insurance at levels no less than
those required by applicable law and customary in Customer's and its agents'
industries.
(b) CERTIFICATES OF INSURANCE. Prior to installation of any Customer
Equipment in the Customer Area, Customer will furnish Exodus with certificates
of insurance which evidence the minimum levels of insurance set forth above.
(c) NAMING EXODUS AS AN ADDITIONAL INSURED. Customer agrees that prior to the
installation of any Customer Equipment, Customer will cause its insurance
provider(s) to name Exodus as an additional insured and notify Exodus in writing
of the effective date thereof.
4. CONFIDENTIAL INFORMATION.
4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have
access to certain confidential information of the other party concerning the
other party's business, plans, customers, technology, and products, including
the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION").
Confidential Information will include, but not be limited to, each party's
proprietary software and customer information. Each party agrees that it will
not use in any way, for its own account or the account of any third party,
except as expressly permitted by this Agreement, nor disclose to any third party
(except as required by law or to that party's attorneys, accountants and other
advisors as reasonably necessary), any of the other party's Confidential
Information and will take reasonable precautions to protect the confidentiality
of such information.
4.2 EXCEPTIONS. Information will not be deemed Confidential Information
hereunder if such information: (i) is known to the receiving party prior to
receipt from the disclosing party directly or indirectly from a source other
than one having an obligation of confidentiality to the disclosing party; (ii)
becomes known (independently of disclosure by the disclosing party) to the
receiving party directly or indirectly from a source other than one having an
obligation of confidentiality to the disclosing party; (iii) becomes publicly
known or otherwise ceases to be secret or confidential, except through a breach
of this Agreement by the receiving party; or (iv) is independently developed by
the receiving party.
5. REPRESENTATIONS AND WARRANTIES.
5.1 WARRANTIES BY CUSTOMER.
(a) CUSTOMER EQUIPMENT. Customer represents and warrants that it owns or has
the legal right and authority, and will continue to own or maintain the legal
right and authority during the term of this Agreement, to place and use the
Customer Equipment as contemplated by this Agreement. Customer further
represents and warrants that its placement, arrangement, and use of the Customer
Equipment in the Internet Data Centers complies with the Customer Equipment
Manufacturer's environmental and other specifications.
(b) CUSTOMER'S BUSINESS. Customer represents and warrants that Customer's
services, products, materials, data, information and Customer Equipment used by
Customer in connection with this Agreement as well as Customer's and its
permitted customers' and users' use of the Internet Data Center Services
(collectively, "CUSTOMER'S BUSINESS") does not as of the Installation Date, and
will not during the term of this Agreement operate in any manner that would
violate any applicable law or regulation.
(c) RULES AND REGULATIONS. Customer has read the Rules and Regulations and
represents and warrants that Customer and Customer's Business are currently in
full compliance with the Rules and Regulations, and will remain so at all times
during the term of this Agreement.
(d) BREACH OF WARRANTIES. In the event of any breach, or reasonably
anticipated breach, of any of the foregoing warranties, in addition to any other
remedies available at law or in equity, Exodus will have the right immediately,
in Exodus' sole discretion, to suspend any
<PAGE>
related Internet Data Center Services if deemed reasonably necessary by
Exodus to prevent any harm to Exodus and its business.
5.2 Warranties and Disclaimers by Exodus.
5.2(a) SERVICE LEVEL WARRANTY. In the event Customer experiences any of
the following and Exodus determines in its reasonable judgment that such
inability was caused by Exodus' failure to provide Internet Data Center Services
for reasons within Exodus' reasonable control and not as a result of any actions
or inactions of Customer or any third parties (including Customer Equipment and
third party equipment), Exodus will, upon Customer's request in accordance with
paragraph (iii) below, credit Customer's account as described below:
(i) INABILITY TO ACCESS THE INTERNET (DOWNTIME). If Customer is unable
to transmit and receive information from Exodus' Internet Data Centers (i.e.,
Exodus' LAN and WAN) to other portions of the Internet because Exodus failed to
provide the Internet Data Center Services for more than fifteen (15) consecutive
minutes, Exodus will credit Customer's account the pro-rata connectivity charges
(i.e., all bandwidth related charges) for one (1) day of service, up to an
aggregate maximum credit of connectivity charges for seven (7) days of service
in any one calendar (1) month. Exodus' scheduled maintenance of the Internet
Data Centers and Internet Data Center Services, as described in the Rules and
Regulations, shall not be deemed to be a failure of Exodus to provide Internet
Data Center Services. For purposes of the foregoing, "unable to transmit and
receive" shall mean sustained packet loss in excess of 50% based on Exodus'
measurements.
(ii) PACKET LOSS AND LATENCY. Exodus does not proactively monitor the
packet loss or transmission latency of specific customers. Exodus does, however,
proactively monitor the aggregate packet loss and transmission latency within
its LAN and WAN. In the event that Exodus discovers (either from its own efforts
or after being notified by Customer) that Customer is experiencing packet loss
in excess of one percent (1%) ("EXCESS PACKET LOSS") or transmission latency in
excess of 120 milliseconds round trip time (based on Exodus' measurements)
between any two Internet Data Centers within Exodus' U.S. network (collectively,
"EXCESS LATENCY", and with Excess Packet Loss "EXCESS PACKET LOSS/LATENCY"), and
Customer notifies Exodus (or confirms that Exodus has notified Customer), Exodus
will take all actions necessary to determine the source of the Excess Packet
Loss/Latency.
(A) TIME TO DISCOVER SOURCE OF EXCESS PACKET LOSS/LATENCY;
NOTIFICATION OF CUSTOMER. Within two (2) hours of discovering the existence of
Excess Packet Loss/Latency, Exodus will determine whether the source of the
Excess Packet Loss/Latency is limited to the Customer Equipment and the Exodus
equipment connecting the Customer Equipment to Exodus' LAN ("CUSTOMER SPECIFIC
PACKET LOSS/LATENCY"). If the Excess Packet Loss/Latency is not a Customer
Specific Packet Loss/Latency, Exodus will determine the source of the Excess
Packet Loss/Latency within two (2) hours after determining that it is not a
Customer Specific Packet Loss/Latency. In any event, Exodus will notify Customer
of the source of the Excess Packet Loss/Latency within sixty (60) minutes after
identifying the source.
(B) REMEDY OF EXCESS PACKET LOSS/LATENCY. If the Excess Packet
Loss/Latency remedy is within the sole control of Exodus, Exodus will remedy the
Excess Packet Loss/Latency within two (2) hours of determining the source of the
Excess Packet Loss/Latency. If the Excess Packet Loss/Latency is caused from
outside of the Exodus LAN or WAN, Exodus will notify Customer and will use
commercially reasonable efforts to notify the party(ies) responsible for the
source and cooperate with it(them) to resolve the problem as soon as possible.
(C) FAILURE TO DETERMINE SOURCE AND/OR RESOLVE PROBLEM. In the
event that Exodus is unable to determine the source of and remedy the Excess
Packet Loss/Latency within the time periods described above (where Exodus was
solely in control of the source), Exodus will credit Customer's account the
pro-rata connectivity charges for one (1) day of service for every two (2) hours
after the time periods described above that it takes Exodus to resolve the
problem, up to an aggregate maximum credit of connectivity charges for seven (7)
days of service in any one (1) month.
(iii) CUSTOMER MUST REQUEST CREDIT: To receive any of the credits described
in this section 5.2(a), Customer must notify Exodus within seven (7) business
days from the time Customer becomes eligible to receive a credit. Failure to
comply with this requirement will forfeit Customer's right to receive a credit.
(iv) REMEDIES SHALL NOT BE CUMULATIVE; MAXIMUM CREDIT: In the event that
Customer is entitled to multiple credits hereunder arising from the same event,
such credits shall not be cumulative and Customer shall be entitled to receive
only the maximum single credit available for such event. In no event will Exodus
be required to credit Customer in any one (1) calendar month connectivity
charges in excess of seven (7) days of service. A credit shall be applied only
to the month in which there was the incident that resulted in the credit.
Customer shall not be eligible to receive any credits for periods in which
Customer received any Internet Data Center Services free of charge.
(v) TERMINATION OPTION FOR CHRONIC PROBLEMS: If, in any single calendar month,
Customer would be able to receive credits totaling fifteen (15) or more days
(but for the limitation in paragraph (iv) above) resulting from three (3) or
more events during such calendar month or, if any single event entitling
customer to credits under paragraph 5.2(a)(i) exits for a period of eight (8)
consecutive hours, then, Customer may terminate this Agreement for cause and
without penalty by notifying Exodus within five (5) days following the end of
such calendar month. Such termination will be effective thirty (30) days after
receipt of such notice by Exodus.
THIS WARRANTY DOES NOT APPLY TO ANY INTERNET DATA CENTER SERVICES THAT EXPRESSLY
EXCLUDE THIS WARRANTY (AS DESCRIBED IN THE SPECIFICATION SHETS FOR SUCH
PRODUCTS). THIS SECTION 5.2(a) STATES CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR
ANY FAILURE BY EXODUS TO PROVIDE INTERNET DATA CENTER SERVICES.
(b) NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS WARRANTY SET OUT IN SUBSECTION
(a) ABOVE, THE INTERNET DATA CENTER SERVICES ARE PROVIDED ON AN "AS IS" BASIS,
AND CUSTOMER'S USE OF THE INTERNET DATA CENTER SERVICES IS AT ITS OWN RISK.
EXODUS DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND/OR
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE,
AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE.
EXODUS DOES NOT WARRANT THAT THE INTERNET DATA CENTER SERVICES WILL BE
UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE.
(c) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD
PARTIES. EXODUS DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM EXODUS'
INTERNET DATA CENTERS AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN
LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY
THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN
PRODUCE SITUATIONS IN WHICH EXODUS' CUSTOMERS' CONNECTIONS TO THE INTERNET (OR
PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH EXODUS WILL USE
COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY
AND AVOID SUCH EVENTS, EXODUS CANNOT GUARANTEE THAT THEY WILL NOT OCCUR.
ACCORDINGLY, EXODUS DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO
SUCH EVENTS.
6. LIMITATIONS OF LIABILITY.
6.1 PERSONAL INJURY. EACH REPRESENTATIVE AND ANY OTHER PERSONS VISITING THE
INTERNET DATA CENTERS DOES SO AT ITS OWN RISK AND EXODUS ASSUMES NO LIABILITY
WHATSOEVER FOR ANY HARM TO SUCH PERSONS RESULTING FROM ANY CAUSE OTHER THAN
EXODUS' NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN PERSONAL INJURY TO SUCH
PERSONS DURING SUCH A VISIT.
6.2 DAMAGE TO CUSTOMER EQUIPMENT OR BUSINESS. EXODUS ASSUMES NO LIABILITY FOR
ANY DAMAGE TO, OR LOSS RELATING TO, CUSTOMER'S BUSINESS RESULTING FROM ANY CAUSE
WHATSOEVER. CERTAIN CUSTOMER EQUIPMENT, INCLUDING BUT NOT LIMITED TO CUSTOMER
EQUIPMENT LOCATED ON CYBERRACKS, MAY BE DIRECTLY ACCESSABLE BY OTHER CUSTOMERS.
EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE TO, OR LOSS OF, ANY CUSTOMER
EQUIPMENT RESULTING FROM ANY CAUSE OTHER THAN EXODUS' NEGLIGENCE OR WILLFUL
MISCONDUCT. TO THE EXTENT EXODUS IS LIABLE FOR ANY DAMAGE TO, OR LOSS OF, THE
CUSTOMER EQUIPMENT FOR ANY REASON, SUCH LIABILITY WILL BE LIMITED SOLELY TO THE
THEN-CURRENT REPLACEMENTVALUE OF THE CUSTOMER EQUIPMENT.
6.3 EXCLUSIONS. EXCEPT AS SPECIFIED IN SECTIONS 6.1 AND 6.2, IN NO EVENT
WILL EXODUS BE LIABLE TO CUSTOMER, ANY REPRESENTATIVE, OR ANY THIRD PARTY FOR
ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, CUSTOMER EQUIPMENT,
CUSTOMER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS,
REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL, PUNITIVE,
INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF DATA, OR INTERRUPTION OR LOSS OF USE
OF SERVICE OR OF ANY CUSTOMER EQUIPMENT OR CUSTOMER'S BUSINESS, EVEN IF ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT
(INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE.
6.4 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Customer acknowledges
that Exodus has set its prices and entered into this Agreement in reliance upon
the limitations of liability and the disclaimers of warranties and damages set
forth herein, and that the same form an essential basis of the bargain between
the parties. The parties agree that the limitations and exclusions of liability
and disclaimers specified in this Agreement will survive and apply even if found
to have failed of their essential purpose.
7. INDEMNIFICATION.
7.1 EXODUS' INDEMNIFICATION OF CUSTOMER. Exodus will indemnify, defend and
hold Customer harmless from and against any and all costs, liabilities, losses,
and expenses (including, but not limited to, reasonable attorneys' fees)
(collectively, "LOSSES") resulting from any claim, suit, action, or proceeding
(each, an "ACTION") brought against Customer alleging (i) the infringement of
any third party registered U.S. copyright or issued U.S. patent resulting from
the provision of Internet Data Center Services pursuant to this Agreement (but
excluding any infringement contributorily caused by Customer's Business or
Customer Equipment) and (ii) personal injury to Customer's Representatives from
Exodus's negligence or willful misconduct.
7.2 CUSTOMER'S INDEMNIFICATION OF EXODUS. Customer will indemnify, defend and
hold Exodus, its affiliates harmless from and against any and all Losses
resulting from or arising out of any Action brought by or against Exodus, its
affiliates or customers alleging: (a) with respect to the Customer's Business:
(i) infringement or misappropriation of any intellectual property rights; (ii)
defamation, libel, slander, obscenity, pornography, or violation of the rights
of privacy or publicity; or (iii) spamming, or any other offensive, harassing or
illegal conduct or violation of the Rules and Regulations or (b) any damage or
destruction to the Customer Area, the Internet Data Centers or the equipment of
Exodus or any other customer caused by Customer or Representative(s) or
Customer's designees.
NON-STANDARD - JAMTV CORPORATION
EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (REV 6/98)
10/01/98
PAGE 2
<PAGE>
7.3 NOTICE. Each party will provide the other party prompt written notice
upon of the existence of any such event of which it becomes aware, and an
opportunity to participate in the defense thereof.
8. TERM AND TERMINATION.
8.1 TERM. This Agreement will be effective for a period of one (1) year from
the Installation Date, unless earlier terminated according to the provisions of
this Section 8. The Agreement will automatically renew for additional terms of
one (1) year each.
8.2 TERMINATION.
(a) FOR CONVENIENCE.
(i) BY CUSTOMER DURING FIRST THIRTY DAYS. Customer may terminate this
Agreement for convenience by providing written notice to Exodus at any time
during the thirty (30) day period beginning on the Installation Date.
(ii) BY EITHER PARTY. Either party may terminate this Agreement for
convenience at any time effective after the first (1st) anniversary of the
Installation Date by providing ninety (90) days' prior written notice to the
other party at any time thereafter.
(b) FOR CAUSE. Either party will have the right to terminate this Agreement
if: (i) the other party breaches any material term or condition of this
Agreement and fails to cure such breach within thirty (30) days after receipt of
written notice of the same, except in the case of failure to pay fees, which
must be cured within five (5) days after receipt of written notice from Exodus;
(ii) the other party becomes the subject of a voluntary petition in bankruptcy
or any voluntary proceeding relating to insolvency, receivership, liquidation,
or composition for the benefit of creditors; or (iii) the other party becomes
the subject of an involuntary petition in bankruptcy or any involuntary
proceeding relating to insolvency, receivership, liquidation, or composition for
the benefit of creditors, if such petition or proceeding is not dismissed within
sixty (60) days of filing.
8.3 NO LIABILITY FOR TERMINATION. Neither party will be liable to the other
for any termination or expiration of this Agreement in accordance with its
terms.
8.4 EFFECT OF TERMINATION. Upon the effective date of expiration or
termination of this Agreement: (a) Exodus will immediately cease providing the
Internet Data Center Services; (b) any and all payment obligations of Customer
under this Agreement will become due immediately; (c) within thirty (30) days
after such expiration or termination, each party will return all Confidential
Information of the other party in its possession at the time of expiration or
termination and will not make or retain any copies of such Confidential
Information except as required to comply with any applicable legal or accounting
record keeping requirement; and (d) Customer will remove from the Internet Data
Centers all Customer Equipment and any of its other property within the Internet
Data Centers within five (5) days of such expiration or termination and return
the Customer Area to Exodus in the same condition as it was on the Installation
Date, normal wear and tear excepted. If Customer does not remove such property
within such five-day period, Exodus will have the option to (i) move any and all
such property to secure storage and charge Customer for the cost of such removal
and storage, and/or (ii) liquidate the property in any reasonable manner.
8.5 CUSTOMER EQUIPMENT AS SECURITY. In the event that Customer fails to pay
Exodus all amounts owed Exodus under this Agreement when due, Customer Agrees
that upon written notice, Exodus may take possession of any Customer Equipment
and store it, at Customer's expense, until taken in full or partial satisfaction
of any lien or judgment, all without being liable to prosecution or for damages.
8.6 SURVIVAL. The following provisions will survive any expiration or
termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8 and 9.
9. MISCELLANEOUS PROVISIONS.
9.1 FORCE MAJEURE. Except for the obligation to pay money, neither party will
be liable for any failure or delay in its performance under this Agreement due
to any cause beyond its reasonable control, including act of war, acts of God,
earthquake, flood, embargo, riot, sabotage, labor shortage or dispute,
governmental act or failure of the Internet, provided that the delayed party:
(a) gives the other party prompt notice of such cause, and (b) uses its
reasonable commercial efforts to correct promptly such failure or delay in
performance.
9.2 NO LEASE. This Agreement is a services agreement and is not intended to
and will not constitute a lease of any real or personal property. Customer
acknowledges and agrees that (i) it has been granted only a license to occupy
the Customer Space and use the Internet Data Centers and any equipment provided
by Exodus in accordance with this Agreement, (ii) Customer has not been granted
any real property interest in the Customer Space or Internet Data Centers, and
(iii) Customer has no rights as a tenant or otherwise under any real property or
landlord/tenant laws, regulations, or ordinances. For good cause, including the
exercise of any rights under Section 8.5 above, Exodus may suspend the right of
any Representative or other person to visit the Internet Data Centers.
9.3 MARKETING. Customer agrees that Exodus may refer to Customer by trade
name and trademark, and may briefly describe Customer's Business, in Exodus'
marketing materials and web site. Customer hereby grants Exodus a license to use
any Customer trade names and trademarks solely in connection with the rights
granted to Exodus pursuant to this Section 9.3.
9.4 GOVERNMENT REGULATIONS. Customer will not export, re-export, transfer, or
make available, whether directly or indirectly, any regulated item or
information to anyone outside the U.S. in connection with this Agreement without
first complying with all export control laws and regulations which may be
imposed by the U.S. Government and any country or organization of nations within
whose jurisdiction Customer operates or does business.
9.5 NON-SOLICITATION. During the period beginning on the Installation Data
and ending on the first anniversary of the termination or expiration of this
Agreement in accordance with its terms, Customer agrees that it will not, and
will ensure that its affiliates do not, directly or indirectly, solicit or
attempt to solicit for employment any persons employed by Exodus during such
period.
9.6 GOVERNING LAW; DISPUTE RESOLUTION, SEVERABILITY; WAIVER. This Agreement
is made under and will be governed by and construed in accordance with the laws
of the State of California (except that body of law controlling conflicts of
law) and specifically excluding from application to this Agreement that law
known as the United Nations Convention on the International Sale of Goods. Any
dispute relating to the terms, interpretation or performance of this Agreement
(other than claims for preliminary injunctive relief or other pre-judgment
remedies) will be resolved at the request of either party through binding
arbitration. Arbitration will be conducted in California, under the rules and
procedures of theAmerican Arbitration Association ("=AAA"). The parties will
request that JAMS appoint a single arbitrator possessing knowledge of online
services agreements; however the arbitration will proceed even if such a person
is unavailable. In the event any provision of this Agreement is held by a
tribunal of competent jurisdiction to be contrary to the law, the remaining
provisions of this Agreement will remain in full force and effect. The waiver of
any breach or default of this Agreement will not constitute a waiver of any
subsequent breach or default, and will not act to amend or negate the rights of
the waiving party.
9.7 ASSIGNMENT; NOTICES. Customer may not assign its rights or delegate its
duties under this Agreement either in whole or in part without the prior written
consent of Exodus, except that Customer may assign this Agreement in whole as
part of a corporate reorganization, consolidation, merger, or sale of
substantially all of its assets. Any attempted assignment or delegation without
such consent will be void. Exodus may assign this Agreement in whole or part.
This Agreement will bind and inure to the benefit of each party's successors and
permitted assigns. Any notice or communication required or permitted to be given
hereunder may be delivered by hand, deposited with an overnight courier, sent by
confirmed facsimile, or mailed by registered or certified mail, return receipt
requested, postage prepaid, in each case to the address of the receiving party
indicated on the signature page hereof, or at such other address as may
hereafter be furnished in writing by either party hereto to the other. Such
notice will be deemed to have been given as of the date it is delivered, mailed
or sent, whichever is earlier.
9.8 RELATIONSHIP OF PARTIES. Exodus and Customer are independent contractors
and this Agreement will not establish any relationship of partnership, joint
venture, employment, franchise or agency between Exodus and Customer. Neither
Exodus nor Customer will have the power to bind the other or incur obligations
on the other's behalf without the other's prior written consent, except as
otherwise expressly provided herein.
9.9 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including all documents
incorporated herein by reference, constitutes the complete and exclusive
agreement between the parties with respect to the subject matter hereof, and
supersedes and replaces any and all prior or contemporaneous discussions,
negotiations, understandings and agreements, written and oral, regarding such
subject matter. This Agreement may be executed in two or more counterparts, each
of which will be deemed an original, but all of which together shall constitute
one and the same instrument.
Customer's and Exodus' authorized representatives have read the foregoing and
all documents incorporated therein and agree and accept such terms effective as
of the date first above written.
CUSTOMER EXODUS COMMUNICATIONS, INC.
Signature: Howard A. Tullman Signature: /s/ Mary Anne Wellman
_______________________ ___________________________
Print Name: Howard A. Tullman Print Name: Mary Anne Wellman
_______________________ ___________________________
Title: CEO Title: Corporate Counsel
__________________________ ________________________________
NON-STANDARD - JAMTV CORPORATION
EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (REV 6/98)
10/01/98
PAGE 3
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of
June 2, 1997 (the "Effective Date"), by and between JAMTV CORPORATION, a
Delaware corporation (the "Company"), and HOWARD A. TULLMAN (the "Executive").
RECITALS:
A. The Company desires to obtain the benefit of the Executive's
knowledge, skills and experience and assure itself of the ongoing right to
Executive's services subject to the terms and conditions set forth in this
Agreement beginning on the Effective Date; and
B. The Executive is willing and able to render services to the
Company, beginning on the Effective Date, on the terms and conditions set forth
in this Agreement.
AGREEMENTS:
In consideration of the mutual agreements, provisions and covenants
contained in this Agreement, the Company and Executive hereby agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions provided
in this Agreement, the Company hereby agrees to employ Executive and Executive
hereby accepts employment with the Company. Executive's title shall be Chief
Executive Officer of the Company and he shall possess such powers and perform
such duties as are normally incident to such office, as provided in the by-laws
of the Company and in accordance with the applicable corporate laws governing
the Company. Executive's initial duties shall be to direct and supervise on a
day-to-day basis those areas of the Company's business that correspond to
Executive's areas of expertise, which include the acquisition, development and
use of technology, investor relations, finance, legal, human resources,
management and operations, production and marketing, the development of
strategic technology related partnerships, and such other areas as may be
identified from time to time by the Board of Directors of the Company (the
"Board"). Executive shall report directly to the Board. Executive will perform
the duties of his employment hereunder diligently and faithfully and in
conformity with the directions of the Board, and shall at all times be subject
to and shall observe and carry out such reasonable rules, regulations, policies,
directions and restrictions as may be established from time to time by the
Company.
<PAGE>
2. TERM OF EMPLOYMENT. Unless terminated as provided in Section 5
hereof, the term of this Agreement shall be for a period of three years (the
"Employment Period"), commencing on the Effective Date and continuing through
and including the day immediately preceding the third anniversary of the
Effective Date (the "Expiration Date"). Before the Expiration Date, the Company
and Executive shall negotiate, in good faith, an extension, modification or
amendment of this Agreement, or a new employment agreement, which would govern
the employment of Executive by the Company after the Expiration Date; provided,
however that neither party shall be bound by the non-surviving terms of any
employment agreement governing the employment of Executive after the Expiration
Date unless such parties shall have entered into a binding, written agreement
governing such employment.
3. COMPENSATION AND BENEFITS.
(a) BASE SALARY. As compensation for the services to be rendered by
Executive hereunder, the Company shall pay to Executive a base salary of $90,000
per year (the "Base Salary"), subject to increase on the first and second
anniversaries of the Effective Date as determined by the Compensation Committee
of the Board. The Base Salary shall be payable in periodic installments (but in
no event less frequently than semi-monthly) in accordance with the standard
payroll practices of the Company in effect from time to time, less income tax
withholdings and other required employee deductions.
(b) BUSINESS EXPENSES. In accordance with the Company's policies
established from time to time, the Company will pay or reimburse Executive for
all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentation by
Executive of appropriate receipts and vouchers.
(c) DISCRETIONARY BONUS. For each fiscal year during the Employment
Period, the Company will set a target bonus for Executive of at least $25,000.
The amount of the bonus actually paid, if any, will be determined by the Board
(or the Compensation Committee of the Board, if one has been established) based
upon Executive's performance and the achievement of the Company's financial
objectives.
(d) STOCK OPTIONS. Executive may be granted an option or options to
purchase shares of the common stock of the Company ("Stock Option"), provided
that Executive shall be granted, as of the Effective Date, a Stock Option for
the purchase of __________ shares (the "Initial Option"), which shall vest and
become fully exercisable on December 31, 1997. The Initial Option and each
additional Stock Option granted to Executive (if any) shall be evidenced by a
Stock Option Agreement in the form attached hereto as EXHIBIT A, to be executed
by the Executive and the Company at the time of grant ("Stock Option
Agreement"). The applicable Stock Option Agreement shall set forth the date
that the Initial Option and any additional Stock Option (if any), as the case
may be, shall vest and become exercisable and shall set forth the exercise price
per share, which shall be equal to the per share fair market value of the common
stock of the Company determined as of the date of grant. All Stock
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Options granted to Executive shall be granted under the Company's 1997 Stock
Option Plan, and shall be subject to the terms and conditions of such plan
and the Stock Option Agreement.
(e) FRINGE BENEFITS. The Company shall make available to Executive,
throughout the Employment Period, such benefits and perquisites as are generally
provided by the Company to its executive employees. Without limiting the
foregoing, Executive shall be eligible to participate in the pension plan, group
life, health or accident insurance, or other such plan or policy which may
presently be in effect or which may hereafter be adopted by the Company for the
benefit of its executive Executives generally, in each case subject to the terms
and conditions of any such plan or policy.
(f) SEVERANCE PAY. In the event Executive's employment with the
Company is terminated by the Company, in consideration of the Executive's
covenants set forth in Section 7 hereof, and in consideration of his employment,
the Company shall pay to the Executive severance pay in an aggregate amount
equal to $45,000 (the "Severance Amount"), less income tax withholdings and
other required employee deductions. The Severance Amount shall be payable in
semi-monthly installments over a period of six months, subject to the terms of
Section 3(a).
4. VACATION. Throughout the Employment Period, Executive shall be
entitled to take, from time to time, on an annual basis, four weeks of vacation
with pay, at such times as shall be mutually convenient to Executive and the
Company.
5. TERMINATION.
(a) FOR CAUSE. At any time during the term of this Agreement, the
Company may terminate Executive's employment under this Agreement for Cause,
without any further liability hereunder except as noted in paragraph 3(f)
above. As used in this Agreement, "Cause" shall mean termination by action of
the Board because of any one or more of the following: (i) the Executive's
conviction of, or plea of nolo contendere to, a felony; (ii) the Executive's
breach of any legal duty of loyalty to the Company, misappropriation of the
Company's funds, or dishonest, fraudulent, illegal or unethical business
conduct; (iii) the failure of Executive to perform the duties provided in
Section 1, which failure to so perform shall continue after notice from the
Company; (iv) the Executive's breach of the obligations provided in Sections
6 and 7 of this Agreement; (v) the Executive's illegal use of controlled
substances; or (vi) any material breach of this Agreement by the Executive
(other than one identified above) which shall continue after notice from the
Company. Termination for Cause shall be effective immediately for those
events described in subparagraphs (i), (ii), (iv), and (v). Termination for
Cause shall be effective for the events in subparagraphs (iii) and (vi) 30
days after notice to Executive from the Company of the occurrence of such
events and Executive shall have failed to cure such events within such 30 day
period.
(b) DEATH OF EXECUTIVE. This Agreement shall terminate automatically
upon the death of Executive. Any Stock Option granted to Executive prior to his
death shall continue to be exercisable in accordance with the terms of the
Company's Stock Option Plan.
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(c) DISABILITY. This Agreement shall terminate upon a determination
by the Board based upon a written medical opinion that the Executive is unable
to perform the essential functions of his employment position, due to a
disability of Executive that cannot be reasonably accommodated by the Company.
(d) INSOLVENCY. Executive, at its option, may terminate this
Agreement if (i) the Company shall commence any proceeding in bankruptcy or for
relief of debtors seeking to have an order for relief entered with respect to it
or seeking to adjudicate it a bankrupt or insolvent; or (ii) there shall be
commenced against the Company any case, proceeding or other action of a nature
referred to in clause (i) above which (A) results in the entry of an order for
relief or any adjudication that it is bankrupt or insolvent or (B) remains
undismissed, undischarged, unstayed or unbounded for period of 90 days.
6. CONFIDENTIAL INFORMATION.
(a) CONFIDENTIAL INFORMATION DEFINED. "Confidential Information"
means any trade secret (as defined in 765 ILSC Section 1065/2(d)) of the Company
that contains, reflects or embodies the Company's business plans or the
Company's strategic, financial, technical, joint venture, or investor
information.
(b) DISCLOSURE AND USE. Executive shall not disclose or use at any
time, either during or after Executive's employment with the Company or any
other direct or indirect subsidiary of the Company (collectively referred to in
this paragraph as the "Company"), any Confidential Information, except that
Executive may disclose, subject to Section 7, Confidential Information solely to
the extent: (1) required for Executive to perform his employment duties with
the Company; (2) it has been disclosed to Executive by a third party who is not
subject to restriction on the disclosure of such information; (3) it has or
becomes generally available to the public other than as a result of a disclosure
by a party who is not subject to nondisclosure obligations with respect thereto;
(4) it must be disclosed as a result of a subpoena or other legal process, after
the Company has had the opportunity to request a suitable protective order for
such information; or (5) the Company has given Executive prior written
authorization to do so. Executive's obligations under this paragraph shall
survive the termination of this Agreement and Executive's employment with the
Company, and shall remain in effect and be enforceable against Executive for so
long as any Confidential Information retains economic value, whether actual or
potential, because it is not generally known to other persons who can obtain
economic value from its disclosure or use. Executive shall execute such
reasonable further agreements evidencing Executive's obligations to the Company
concerning nondisclosure of Confidential Information as the Company may require
from time to time.
(c) RETURN OF MATERIALS. Upon termination of his employment with the
Company, Executive shall promptly deliver to the Company all customer lists,
specifications, drawings, computer programs, listings, documentation, manuals,
letters, notes, note books, reports, and all
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other embodiments of Confidential Information (together with copies thereof)
in the possession or under the control of Executive.
7. RESTRICTIVE COVENANT.
(a) RESTRICTED ACTIVITIES. As conditions of his employment and in
consideration of his employment, Executive covenants and agrees as follows:
(i) subject to Section 7(c) below, beginning on the Effective
Date and continuing for 12 months after the termination of Executive's
employment with the Company (the "Restricted Period"), he will not, without the
prior written consent of the Board, directly or indirectly, as a stockholder
(except as a stockholder owning beneficially or of record less than 5% of the
outstanding shares of any class of publicly traded stock of any issuer), or as
an officer, director, employee, partner, joint venturer, proprietor or
otherwise, engage in, become interested in, consult with, lend to or borrow
from, advise or negotiate for or on behalf of, the "Restricted Business."
(ii) during the Restricted Period, he will not solicit (or
employ or cause to be employed other than by the Company) other employees of the
Company or any affiliate or subsidiary of the Company, directly or indirectly,
for the purpose of enticing them to leave their employment with the Company or
any affiliate or subsidiary of the Company;
(iii) during the Restricted Period, he will not attempt in any
manner to solicit any Restricted Business from any individual or entity who or
which is a client of the Company at any time within six months before the date
that Executive's employment by the Company terminates or to persuade any such
client to cease doing business with the Company or to reduce the amount of
business which such client has customarily done or contemplates doing with the
Company, whether or not the relationship between the Company and such client was
originally established in whole or in part through his efforts;
(iv) during the Restricted Period, he will make full and
complete disclosure of the existence of this Agreement and the content of this
Section 7 to all prospective employers with whom he may discuss possible
employment;
(v) he will refrain from any disparagement, direct or
indirect, through innuendo or otherwise, of the Company or any of its employees,
agents, officers, directors, shareholders or affiliates;
(vi) subject to Section 7(c) below, during his employment with
the Company, he will not, without the prior written consent in each case of the
Board, participate actively in any other business interests or investments which
would conflict with his responsibilities under this Agreement;
5
<PAGE>
(vii) during his employment with the Company, he will not,
without the prior written consent in each case of the Board: (a) exchange
goods, products or services of the Company in return for goods, products or
services of any individual or firm or (b) accept gifts or favors from any
outside organization or agency which, individually or collectively, may cause
undue influence in his selection of goods, products or services for the Company;
and
(viii) after the termination of his employment with the Company,
he will not secure, or attempt to secure, from any employee or former employee
of the Company or any affiliate or subsidiary of the Company, any information
relating to the Company or any affiliate or subsidiary of the Company or its
operations.
(b) RESTRICTED BUSINESS DEFINED. For the purposes of this Agreement,
"Restricted Business" means (a) the production, creation, compilation, support,
and programming of multimedia productions and content (including, without
limitation, live, streaming, and recorded audio, video, and graphics and news
and information from or about music, entertainment, artists, and performers) for
placement, broadcast, downloading, transmission, or distribution on or through
the Internet, World Wide Web, computer networks, CDs, CD-ROMs and DVDs, and
wireless interactive networks or devices, and (b) the distribution and sale by
the foregoing means of goods relating to the foregoing content (including,
without limitation, recorded music and video products, CDs, CD-ROMs, disks,
tapes, computer software, concert or theater merchandise, memorabilia, books,
and clothing).
(c) LIMITATIONS. Nothing contained in this Agreement shall prohibit
Executive from forming, investing or participating in any other entity or being
employed by any other entity so long as Executive and such other entity do not
compete with the Restricted Business of the Company as set forth in Section
7(a), and at no time shall Executive's employment hereunder be exclusive.
(d) REPRESENTATION AND WARRANTY. Executive represents and warrants
to the Company that, notwithstanding the operation of the covenants contained in
this Section 7, upon the termination of his employment hereunder, Executive will
be able to obtain employment for the purpose of earning a livelihood.
6
<PAGE>
8. SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render the same valid, or not
applicable to the given circumstances, or excised from this Agreement, as the
situation may require, and this Agreement shall be construed and enforced as if
such provision had been included herein as so modified in scope or application,
or had not been included herein, as the case may be. Should this Agreement, or
any one or more of its provisions hereof, be held to be invalid, illegal or
unenforceable within any governmental jurisdiction or subdivision thereof, the
Agreement or any such provision or provisions shall not as a consequence thereof
be deemed to be invalid, illegal or unenforceable in any other governmental
jurisdiction or subdivision thereof.
9. LEGAL REMEDIES. Executive hereby acknowledges that the
Company would suffer irreparable injury if the provisions of Sections 6 and 7
above, which shall survive the termination of the Agreement, were breached
and that the Company's remedies at law would be inadequate in the event of
such breach. Accordingly, Executive hereby agrees that any such breach or
threatened breach may, in addition to any and all other available remedies,
be preliminarily enjoined by the Company with bond or satisfactory security.
In the event of litigation under this Agreement, each of the Company and
Executive shall pay its own attorneys' fees and expenses, except that if
Executive is enjoined either preliminarily or permanently, after an
evidentiary hearing, then Executive shall pay the attorneys' fees and
expenses of the Company in connection with that evidentiary hearing and,
similarly, if such evidentiary hearing results in a court refusing a
permanent injunction, then the Company shall pay Executive's attorneys' fees
and expenses in connection with such hearing.
10. NON-ASSIGNABILITY. In light of the unique personal services to
be performed by Executive hereunder, it is acknowledged and agreed that any
purported or attempted assignment or transfer by Executive of this Agreement or
any of Executive's duties, responsibilities or obligations hereunder shall be
void. This Agreement shall not be assigned by the Company without the prior
written consent of Executive.
11. NOTICES. Any notice, request, demand or other communication
required or permitted under this Agreement shall be in writing and shall be
deemed to have been given when delivered personally or when mailed by certified
mail, return receipt requested, or by facsimile transmission with confirmation
of receipt thereof addressed as follows:
If to the Company:
JAMtv Corporation
640 N. LaSalle, Suite 560
Chicago, Illinois 60610
Facsimile: 312.642.0616
Attn: Chief Executive Officer
7
<PAGE>
Attn: President
If to Executive:
Howard A. Tullman
1118 W. Drummond
Chicago, Illinois 60614
or to such other address or addresses as may be specified from time to time by
notice; provided, however, that any notice of change of address shall not be
effective until its receipt by the party to be charged therewith.
12. GENERAL.
(a) AMENDMENTS. Neither this Agreement nor any of the terms or
conditions hereof may be waived, amended or modified except by means of a
written instrument duly executed by the parties hereto.
(b) CAPTIONS AND HEADINGS. The captions and paragraph headings used
in this Agreement are for convenience of reference only, and shall not affect
the construction or interpretation of this Agreement or any of the provisions
hereof.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all of
which together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. Except as otherwise set forth or referred to
in this Agreement, this Agreement constitutes the sole and entire agreement and
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them as to such subject matter.
(f) RELIANCE BY THIRD PARTIES. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns, and no other person or entity shall have any right to rely on this
Agreement or to claim or derive any benefit therefrom absent the express written
consent of the party to be charged with such reliance or benefit.
8
<PAGE>
(g) GOVERNING LAW; JURISDICTION. This Agreement shall be construed
in accordance with and governed in all respects by the laws of the State of
Illinois (without giving effect to the conflicts of laws provisions thereof).
The parties hereto agree that all claims, disputes, or controversies between
them arising out of, connected with, related to, or incidental to the
relationship established between them in connection with this Agreement, whether
arising at law or equity in contract, tort, equity, or otherwise, if pursued in
court shall be resolved only by state or federal courts located in Cook County,
Illinois, but each party hereto acknowledges that any appeals from those courts
may have to be heard by a court located outside of Cook County, Illinois. Each
party hereto waives in all disputes any objection that it may have to personal
jurisdiction or the venue of the court considering the dispute.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on and as of the date first set forth above.
JAMtv CORPORATION
By: /s/ Howard A. Tullman
-------------------------------
Title: CEO
----------------------------
/s/ Howard A. Tullman
--------------------------------
Howard A. Tullman
9
<PAGE>
EXHIBIT A
FORM OF STOCK OPTION AGREEMENT
[To be attached]
10
<PAGE>
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of April
1, 1998 (the "Effective Date"), by and between JAMtv Corporation, a Delaware
corporation (the "Company"), and Stuart B. Frankel (the "Executive").
RECITALS:
A. The Company desires to obtain the benefit of the Executive's
knowledge, skills and experience and assure itself of the ongoing right to
Executive's services subject to the terms and conditions set forth in this
Agreement beginning on the Effective Date; and
B. The Executive is willing and able to render services to the Company,
beginning on the Effective Date, on the terms and conditions set forth in this
Agreement.
AGREEMENTS:
In consideration of the mutual agreements, provisions and covenants
contained in this Agreement, the Company and Executive hereby agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions provided in
this Agreement, the Company hereby agrees to employ Executive and Executive
hereby accepts employment with the Company. Executive's title shall be Chief
Financial Officer of the Company and he shall possess such powers and perform
such duties as are normally incident to such office, as provided in the by-laws
of the Company and in accordance with the applicable corporate laws governing
the Company. Executive's initial duties shall be to direct and supervise the
financial and budgetary operations of the Company's business and to handle all
interactions with the Company's independent auditors as well as all reports,
filings and other submissions which may be. required in the event that the
Company becomes a public entity and such other areas as may be identified from
time to time by the Chief Executive Officer of the Company or the Board of
Directors of the Company (the "Board"). Executive shall report to the Chief
Executive Officer. Executive will perform the duties of his employment hereunder
diligently and faithfully and in conformity with the directions of the Board,
and shall at all times be subject to and shall observe and carry out such
reasonable rules, regulations, policies, directions and restrictions as may be
established from time to time by the Company.
2. TERM OF EMPLOYMENT. Unless terminated as provided in Section 6
hereof, the term of this Agreement shall be for a period of two years (the
"Employment Period"), commencing on the Effective Date and continuing through
and including the day immediately preceding the second anniversary of the
Effective Date (the "Expiration Date"). Before the Expiration Date, the Company
and Executive shall negotiate, in good faith, an extension, modification or
amendment of this Agreement, or a new employment agreement, which would govern
the employment of Executive by the Company after the Expiration Date; provided,
<PAGE>
however that neither party shall be bound by the non-surviving terms of any
employment agreement governing the employment of Executive after the Expiration
Date unless such parties shall have entered into a binding, written agreement
governing such employment.
3. COMPENSATION AND BENEFITS.
(a) BASE SALARY/RETENTION BONUS. As compensation for the services to
be rendered by Executive hereunder, the Company shall pay to Executive a base
salary of $100,000 per year (the "Base Salary"), subject to increase on the
first anniversary of the Effective Date as determined by the Compensation
Committee of the Board. The Base Salary shall be payable in periodic
installments (but in no event less frequently than semi-monthly) in accordance
with the standard payroll practices of the Company in effect from time to time,
less income tax withholdings and other required employee deductions. If the
Executive is still employed by the Company at the end of the first year of his
employment, he shall be paid a one-time Retention Bonus in the amount of $6500
if, and only if, as a result of leaving his prior place of employment, he does
not receive the full final installment payment of his 1997 bonus from that
employer.
(b) BUSINESS EXPENSES. In accordance with the Company's policies
established from time to time, the Company will pay or reimburse Executive for
all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentation by
Executive of appropriate receipts and vouchers. The Executive will also be
reimbursed for his documented and reasonable moving expenses incurred in his
move to Chicago up to the amount of $5000.
(c) BONUS. For each fiscal year during the Employment Period, the
Company will set a guaranteed minimum bonus for Executive of at least $25,000,
with the ability, upon the achievement of the objectives defined by the Board or
the Compensation Committee, to earn up to an aggregate annual bonus (including
the guaranteed portion) of $50,000. The amount of the bonus actually paid, if
any, will be determined by the Board (or the Compensation Committee of the
Board, if one has been established) based upon Executive's performance and the
achievement of the Company's financial objectives. The annual bonus (in its
entirety) for each year will be paid in the final month of each year.
(d) STOCK OPTIONS. Executive will be granted an option or options to
purchase shares of the common stock of the Company ("Stock Option"), as of the
Effective Date, for the purchase of 60,000 shares (the "Initial Option"), 30,000
shares of which shall vest and become fully exercisable on December 31, 1998
and 30,000 shares of which shall vest and become fully exercisable on December
31,1999. In the event of an Initial Public Offering of the Company's stock, the
vesting of these shares would not accelerate. The Initial Option and each
additional Stock Option granted to Executive (if any) shall be evidenced by a
Stock Option Agreement in the form attached hereto as EXHIBIT A, to be executed
by the Executive and the Company at the time of grant ("Stock Option
Agreement"). The applicable Stock Option Agreement shall set forth the date that
the Initial Option and any additional Stock Option (if any), as the case may be,
shall vest and become exercisable and shall set forth the exercise price per
share, which shall be equal to the per share fair market value of the common
stock of the Company determined as of
<PAGE>
the date of grant, which in the case of the Initial Option shall be $7.50 per
share. All Stock Options granted to Executive shall be granted under the
Company's 1997 Stock Option Plan, and shall be subject to the terms and
conditions of such plan and the Stock Option Agreement. In the event of
inconsistencies between the Stock Option Agreement and this agreement, the
provisions of this agreement will apply.
(e) FRINGE BENEFITS. The Company shall make available to Executive,
throughout the Employment Period, such benefits and perquisites as are generally
provided by the Company to its executive employees. Without limiting the
foregoing, Executive shall be eligible to participate in the pension plan, group
life, health or accident insurance, or other such plan or policy which may
presently be in effect or which may hereafter be adopted by the Company for the
benefit of its executive Executives generally, in each case subject to the terms
and conditions of any such plan or policy.
(f) SEVERANCE PAY/CHANGE OF CONTROl. In the event Executive's
employment with the Company is terminated by the Company, in consideration of
the Executive's covenants set forth in Section 7 hereof, and in consideration of
his employment, the Company shall pay to the Executive severance pay in an
aggregate amount equal to $50,000 (the "Severance Amount"), less' income tax
withholdings and other required employee deductions. The Severance Amount shall
be payable in semi-monthly installments over a period of six months, subject to
the terms of Section 3(a). In addition, the Executive shall be paid a lump sum
on the date of termination equal to the pro rata portion of any guaranteed
annual bonus earned as of the date of severance. Any Change of Control of the
Company may be treated by Executive, in his sole discretion and upon prompt
written notice delivered pursuant hereto to the Company, as a severance and all
of the foregoing provisions shall apply and, in addition, in such case, all
non-vested option shares of Executive shall become immediately vested and
exercisable as of the effective date of the severance. For purposes of this
letter, a Change in Control shall mean any of the following events:
(i) the acquisition by new stockholders (being any entity,
person or group of persons) acting in concert, of a beneficial
ownership interest in the Company, resulting in the total beneficial
interest of such entity, person or group of persons equaling or
exceeding 50% of the total outstanding common stock and warrants of the
Company. The change in control shall occur on the date the beneficial
ownership of the acquiring entity, person or group of persons equals or
exceeds 50% of the outstanding common stock and warrants of the
Company. or
(ii) a merger, consolidation, or reorganization having
substantially the same effect; or the sale of all or substantially all
the consolidated assets of the Company, in each case, with respect to
the entity, person or group of persons who were the respective.
beneficial owners of the outstanding common stock immediately prior to
such event do not, following such event, beneficially own, directly or
indirectly, more than 50% respectively, of the then outstanding voting
stock of the corporation resulting from such event or the corporation
purchasing or receiving assets pursuant to such event.
<PAGE>
4. VACATION. Throughout the Employment Period, Executive shall be
entitled to take, from time to time, on an annual basis, three weeks of vacation
with pay, at such times as shall be mutually convenient to Executive and the
Company.
5. TERMINATION.
(a) FOR CAUSE. At any time during the term of this Agreement, the
Company may terminate Executive's employment under this Agreement for Cause,
without any further liability hereunder except as noted in paragraph 3(f) above.
As used in this Agreement, "Cause" shall mean termination by action of the Board
because of any one or more of the following: (i) the Executive's conviction of,
or plea of nolo contendere to, a felony; (ii) the Executive's breach of any
legal duty of loyalty to the Company, misappropriation of the Company's funds,
or dishonest, fraudulent, illegal or unethical business conduct; (iii) after
January 1, 1999, the failure of Executive to perform the duties provided in
Section 1, which failure to so perform shall continue after notice from the
Company; (iv) the Executive's breach of the obligations provided in Sections 6
and 7 of this Agreement; (v) the Executive's illegal use of controlled
substances; or (vi) any material breach of this Agreement by the Executive
(other than one identified above) which shall continue after notice from-the
Company. Termination for Cause shall be effective immediately for those events
described in subparagraphs (i), (ii), (iv), and (v). Termination for Cause shall
be effective for the events in subparagraphs (iii) and (vi) 30 days after notice
subparagraphs (iii) and (vi) 30 days after notice to Executive from the Company
of the occurrence of such events and Executive shall have failed to cure such
events within such 30-day period.
(b) DEATH OF EXECUTIVE. This Agreement shall terminate automatically
upon the death of Executive. Any Stock Option granted to Executive prior to his
death shall continue to be exercisable in accordance with the terms of the
Company's Stock Option Plan.
(c) DISABILITY. This Agreement shall terminate upon a determination by
the Board based upon a written medical opinion that the Executive is unable to
perform the essential functions of his employment position, due to a disability
of Executive that cannot be reasonably accommodated by the Company.
6. CONFIDENTIAL INFORMATION.
(a) CONFIDENTIAL INFORMATION DEFINED. "Confidential Information" means
any trade secret (as defined in 765 ILSC Section 1065/2(d)) of the Company that
contains, reflects or embodies the Company's business plans or the Company's
strategic, financial, technical, joint venture, or investor information.
(b) DISCLOSURE AND USE. Executive shall not disclose or use at any
time, either during or after Executive's employment with the Company or any
other direct or indirect subsidiary of the Company (collectively referred to in
this paragraph as the "Company"), any Confidential Information, except that
Executive may disclose, subject to Section 7, Confidential Information solely to
the extent: (1) required for Executive to perform his employment duties with the
<PAGE>
Company; (2) it has been disclosed to Executive by a third party who is not
subject to restriction on the disclosure of such information; (3) it has or
becomes generally available to the public other than as a result of a disclosure
by a party who is not subject to nondisclosure obligations with respect thereto;
(4) it must be disclosed as a result of a subpoena or other legal process, after
the Company has had the opportunity to request a suitable protective order for
such information; or (5) the Company has given Executive prior written
authorization to do so. Executive's obligations under this paragraph shall
survive the termination of this Agreement and Executive's employment with the
Company, and shall remain in effect and be enforceable against Executive for so
long as any Confidential Information retains economic value, whether actual or
potential, because it is not generally known to other persons who can obtain
economic value from its disclosure or use. Executive shall execute such
reasonable further agreements evidencing Executive's obligations to the Company
concerning nondisclosure of Confidential Information as the Company may require
from time to time.
(c) RETURN OF MATERIALS. Upon termination of his employment with the
Company, Executive shall promptly deliver to the Company all customer lists,
specifications, drawings, computer programs, listings, documentation, manuals,
letters, notes, note books, reports, and all other embodiments of Confidential
Information (together with copies thereof) in the possession or under the
control of Executive.
7. RESTRICTIVE COVENANT.
(a) RESTRICTED ACTIVITIES. As conditions of his employment and in
consideration of his employment, Executive covenants and agrees as follows:
(i) subject to Section 7(c) below, beginning on the Effective
Date and continuing for 12 months after the termination of Executive's
employment with the Company (the "Restricted Period"), he will not,
without the prior written consent of the Board, directly or
indirectly, as a stockholder (except as a stockholder owning
beneficially or of record less than 5% of the outstanding shares of
any class of publicly traded stock of any issuer), or as an officer,
director, employee, partner, joint venturer, proprietor or otherwise,
engage in, become interested in, consult with, lend to or borrow from,
advise or negotiate for or on behalf of, the "Restricted Business."
(ii) during the Restricted Period, he will not solicit (or
employ or cause to be employed other than by the Company) other
employees of the Company or any affiliate or subsidiary of the
Company, directly or indirectly, for the purpose of enticing them to
leave their employment with the Company or any affiliate or subsidiary
of the Company;
(iii) during the Restricted Period, he will not attempt in any
manner to solicit any Restricted Business from any individual or entity
who or which is a client of the Company at any time within six months
before the date that Executive's employment by the Company terminates
or to persuade any such * client to cease doing business with the
Company or to reduce the amount of business which such client has
customarily done or contemplates doing with the Company, whether or not
the relationship between the
<PAGE>
Company and such client was originally established in whole or in part
through his efforts;
(iv) during the Restricted Period, he will make full and
complete disclosure of the existence of this Agreement and the content
of this Section 7 to all prospective employers with whom he may discuss
possible employment;
(v) he will refrain from any disparagement, direct or
indirect, through innuendo or otherwise, of the Company or any of its
employees, agents, officers, directors, shareholders or affiliates;
(vi) subject to Section 7(c) below, during his employment with
the Company, he will not, without the prior written consent in each
case of the Board, participate actively in any other business interests
or investments which would conflict with his responsibilities under
this Agreement;
(vii) during his employment with the Company, he will not,
without the prior written consent in each case of the Board: (a)
exchange goods, products or services of the Company in return for
goods, products or services of any individual or firm or (b) accept
gifts or favors from any outside organization or agency which,
individually or collectively, may cause undue influence in his
selection of goods, products or services for the Company; and
(viii) after the termination of his employment with the
Company, he will not secure, or attempt to secure, from any employee or
former employee of the Company or any affiliate or subsidiary of the
Company, any information relating to the Company or any affiliate or
subsidiary of the Company or its operations.
(b) Restricted Business Defined. For the purposes of -this Agreement,
"Restricted Business" means (a) the production, creation, compilation, support,
and programming of multimedia productions and content (including, without
limitation, live, streaming, and recorded audio, video, and graphics and news
and information from or about music, entertainment, artists, and performers) for
placement" broadcast, downloading, transmission, or distribution on or through
the Internet, World Wide Web, computer networks, CDs, CD-ROMs and DVDs, and
wireless interactive networks or devices, and (b) the distribution and sale by
the foregoing means of goods relating to the foregoing content (including,
without limitation, recorded music and video products, CDs, CD-ROMs, disks,
tapes, computer software, concert or theater merchandise, memorabilia, books,
and clothing).
(c) Representation and Warranty. Executive represents and warrants to
the Company that, notwithstanding the operation of the covenants contained in
this Section 7, upon the termination of his employment hereunder, Executive will
be able to obtain employment for the purpose of earning a livelihood.
<PAGE>
8. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render the same valid, or not applicable to the given
circumstances, or excised from this Agreement, as the situation may require, and
this Agreement shall be construed and enforced as if such provision had been
included herein as so modified in scope or application, or had not been included
herein, as the case may be. Should this Agreement, or any one or more of its
provisions hereof, be held to be invalid, illegal or unenforceable within any
governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal or unenforceable in any other governmental jurisdiction or
subdivision thereof.
9. LEGAL REMEDIES. Executive hereby acknowledges that the Company
would suffer irreparable injury if the provisions of Sections 6 and 7 above,
which shall survive the termination of the Agreement, were breached and that the
Company's remedies at law would be inadequate in the event of such breach.
Accordingly, Executive hereby agrees that any such breach or threatened breach
may, in addition to any and all other available remedies, be preliminarily
enjoined by the Company with- bond or satisfactory security. In the event of
litigation under this Agreement, each of the Company and Executive shall pay its
own attorneys' fees and expenses, except that if Executive is enjoined either
preliminarily or permanently, after an evidentiary hearing, then Executive shall
pay the attorneys' fees and expenses of the Company in connection with that
evidentiary hearing and, similarly, if such evidentiary hearing results in a
court refusing a permanent injunction, then the Company shall pay Executive's
attorneys' fees and expenses in connection with such hearing.
10. NON-ASSIGNABILITY. In light of the unique personal services to be
performed by Executive hereunder, it is acknowledged and agreed that any
purported or attempted assignment or transfer by Executive of this Agreement or
any of Executive's duties, responsibilities or obligations hereunder shall be
void. This Agreement shall not be assigned by the Company without the prior
written consent of Executive.
11. NOTICES. Any notice, request, demand or other communication
required or permitted under this Agreement shall be in writing and shall be
deemed to have been given when delivered personally or when mailed by certified
mail, return receipt requested, or by facsimile transmission with confirmation
of receipt thereof addressed as follows:
If to the Company:
JAMtv Corporation
640 N. LaSalle, Suite 560
Chicago, Illinois 60610
Facsimile: 312.642.0616
Attn: Chief Executive Officer
<PAGE>
If to Executive:
Stuart B. Frankel
or to such other address or addresses as may be specified from time to time by
notice; provided, however, that any notice of change of address shall not be
effective until its receipt by the party to be charged therewith.
12. GENERAL.
(a) AMENDMENTS. Neither this Agreement nor any of the terms or
conditions hereof may be waived, amended or modified except by means of a
written instrument duly executed by the parties hereto.
(b) CAPTIONS AND HEADINGS. The captions and paragraph headings used in
this Agreement are for convenience of reference only, and shall not affect the
construction or interpretation of this Agreement or any of the provisions hereof
(c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all of
which together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. Except as otherwise set forth or referred to in
this Agreement, this Agreement constitutes the sole and entire agreement and
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them as to such subject matter.
(f) RELIANCE BY THIRD PARTIES. This Agreement is intended for the sole
and exclusive benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns, and no other person or entity shall have any right to rely on this
Agreement or to claim or derive any benefit therefrom absent the express written
consent of the party to be charged with such reliance or benefit.
(g) GOVERNING LAW, JURISDICTION. This Agreement shall be construed in
accordance with and governed in all respects by the laws of the State of
Illinois (without giving effect to the conflicts of laws provisions thereof).
The parties hereto agree that all claims, disputes, or controversies between
them arising out of, connected with, related to, or incidental to the
relationship established between them in connection with this Agreement, whether
arising at law or equity in contract, tort, equity, or otherwise, if pursued in
court shall be resolved only by state or federal courts located in Cook County,
<PAGE>
Illinois, but each party hereto acknowledges that any appeals from those courts
may have to be heard by a court located outside of Cook County, Illinois. Each
party hereto waives in all disputes any objection that it may have to personal
jurisdiction or the venue of the court considering the dispute.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on and as of the date first set forth above.
JAMtv CORPORATION
By: /s/ Howard A. Tullman
----------------------------------------
Title: CEO
-------------------------------------
Stuart B. Frankel
/s/ Stuart B. Frankel
- --------------------------------------------
<PAGE>
EXHIBIT A
FORM OF STOCK OPTION AGREEMENT
[To be attached]
<PAGE>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT
WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
LINKING, CONTENT LICENSING AND ADVERTISING AGREEMENT
THIS LINKING, CONTENT LICENSING AND ADVERTISING AGREEMENT ("Agreement") is made
this 8th day of April, 1998 ("Effective Date"), by and among JAMtv Corporation,
a Delaware corporation with its principal offices at 640 North LaSalle Street,
Suite 560, Chicago, Illinois 60610 ("Jam"), Straight Arrow Publishers, a New
York partnership with its principal offices at 1290 Avenue of Americas, 2nd
Floor, New York, New York 10104 ("Straight Arrow"), and CDnow, Inc., a
Pennsylvania corporation, with its principal offices at Jenkins Court, Suite
300, 610 Old York Road, Jenkintown, Pennsylvania 19046 ("CDnow"); each a "party"
and collectively the "parties."
CDnow sells a variety of entertainment products through a retail vending site on
the Internet's World Wide Web at the Universal Resource Locator ("URL") of:
www.cdnow.com (the "CDnow Site").
Straight Arrow owns and operates Rolling Stone magazine and owns certain content
related thereto and the name, trademark and brand "Rolling Stone" (hereinafter
collectively known as "RS").
Jam and Straight Arrow have entered into a legally binding agreement to form a
joint venture arrangement for the Rolling Stone Network ("RSN") whereby Jam will
operate RSN-branded Sites ("RSN Sites" is defined in Section 1 below), and
Straight Arrow is providing the Straight Arrow Content to Jam for its exclusive
use with the RSN Sites.
CDnow, Jam and Straight Arrow wish to enter into this Agreement whereby CDnow
will be the exclusive Music Seller with a license to use, copy and display the
Content and advertise and have links on the RSN Sites. Additionally, CDnow will
purchase online advertising on the RSN Sites, radio air time from the radio
airtime available through Jam and advertising space in RS print publications.
NOW THEREFORE, in consideration of the mutual promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound, the parties hereby agree
as follows:
1. DEFINITIONS Capitalized terms not otherwise defined in this Agreement
will have the following meanings:
(a) "Above-the-Fold" means situated within the portion of a page that
is designed to be visible on a standard computer screen with a resolution of 640
pixels by 480 pixels without requiring the user to scroll horizontally or
vertically through the page.
(b) "Agreement" is defined in the first paragraph of the preamble to
this Agreement.
(c) "AOL" and "AOL Agreement" are defined in Section 2(b)(ii)(A) of
this Agreement.
(d) "AOL Content" is defined in Section 2(e) of this Agreement.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(e) "Carry-Through Bar" means a bar, which, when clicked, links an RSN
user back to the RSN Site from the Co-branded Pages.
(f) "CDnow is defined in the first paragraph of the preamble to this
Agreement.
(g) "CDnow Link" means any form of link that contains a CDnow designed
and/or approved proprietary feature, is located on a page on an RSN Site and
takes an RSN user to a Co-branded Page. CDnow will provide screen shot mockups
of the Co-branded Pages as set forth in Exhibit C to this Agreement.
(h) "CDnow Site" is defined in the second paragraph of the preamble to
this Agreement.
(i) "Co-branded Page" means a page residing on CDnow's servers that a
visitor from RSN's Site will link to, which displays certain proprietary
features of both RSN and CDnow, and where such visitor can purchase CDnow
products. A Co-branded Page can only be viewed by a visitor who links to it
directly from RSN's Site or through a stored URL (e.g. bookmark or similar
technological storage mechanism).
(j) "Competitive Marketing" is any advertising, promotion,
sponsorship, link or displayed message (not provided or sponsored by CDnow)
that (i) promotes a Music Seller (other than CDnow), (ii) promotes the sale
of pre-recorded music by a Music Seller other than CDnow, or (iii) in the
case of a link, transfers to a page on a Site that promotes the sale of
pre-recorded music by a Music Seller other than CDnow or to a Music Seller
(other than CDnow) that sells pre-recorded music or enables a person to
purchase pre-recorded music. With regard to the RSN Sites, Competitive
Marketing does not include label or artist advertising and promotions,
provided such advertising or promotions and any links included with such
advertising and promotions placed on the RSN Sites do not contain Competitive
Marketing.
(k) "Confidential Information" is defined in Section 15(a) of this
Agreement.
(l) "Content" means, collectively, the Straight Arrow Content (as
defined in Section 1(aa) below) and the Jam Content (as defined in Section 1(p)
below).
(m) "Content Indices" is defined in Section 2(c)(i) of this Agreement.
(n) "Effective Date" is defined in the first paragraph of the preamble
to this Agreement.
(o) "Entity" means any natural person, partnership, corporation, or
division, subsidiary or business unit thereof, retail site, Internet site, World
Wide Web site or other form of business organization.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(p) "Exclusive AOL Content" means, as of the Effective Date, the
following content provided to AOL under the AOL Agreement: (i) "Interactive
Cover Story" consisting of a supplemental story or supplemental content (e.g., a
brief synopsis, additional content or pictures, or sound or video clips related
to the cover story) to RS's current cover story; (ii) certain elements of the
Rolling Stone Photo Gallery;" (iii) certain elements of the "Rewind" section'
and (iv) the "Read Me Now" section, featuring a welcome screen, letters to RS,
sections allowing members to write letters to RS and to participate or vote in
RS polls, contests and online programs, previews of forthcoming features in the
RS area within the AOL proprietary online service and other special features
such as offerings, contests and quizzes.
(q) "Finder's Fee Advance" is defined in Section 6(c)(i) of this
Agreement.
(r) "Jam" is defined in the first paragraph of the preamble to this
Agreement.
(s) "Jam Content" means all existing and future digitized and
non-digitized articles, reviews, digital or transcribed interviews, video and
audio libraries, photographs, books and any other content which Jam has
created, published or produced, or which Jam has access to through a
licensing arrangement with any other Entity, provided Jam has the right to
license or sublicense the foregoing.
(t) "Launch Event" is defined in Article 5 of this Agreement.
(u) "Marks" means a party's names, brand names, logos, trademarks,
tradenames, servicemarks and other proprietary indicia
(v) "Music Seller" means any Entity, which sells pre-recorded music or
enables a person to purchase pre-recorded music online through the Internet, the
World Wide Web or any other open or proprietary online service.
(w) "New Customer" is defined in Section 6(c)(i) of this Agreement.
(x) In this Agreement, "party" and "parties" are defined in the first
paragraph of the preamble.
(y) "RS" is defined in the third paragraph of the preamble to this
Agreement.
(z) "RSN" is defined in the fourth paragraph of the preamble to this
Agreement.
(aa) "RSN Sites" means collectively, all Jam Sites, all RSN Sites and
all Sites operated by Jam for Straight Arrow.
(ab) "Site" means a site on the Internet, the World Wide Web or on any
open or proprietary online service.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(ac) "Straight Arrow" is defined in the first paragraph of the preamble
to this Agreement.
(ad) "Straight Arrow Content" means the content specified in Exhibit B
- - "Rolling Stone Content" to this Agreement
(ae) "Straight Arrow/Jam Exclusive License Agreement" is defined in
Section 2(d) of this Agreement.
(af) "Term" is defined in Article 12 of this Agreement.
(ag) "URL" is defined in the second paragraph of the preamble to this
Agreement.
2. CONTENT.
(a) LICENSE.
(i) Subject to the terms of this Agreement, JAM hereby grants
to CDnow during the Term a worldwide license to access, use, copy, modify
and reformat for display purposes and display the Content solely on
CDnow's Site or its servers. By way of example, and not limitation,
permitted uses includes digitizing non-digitized content.
(ii) CDnow will: (A) use no more than 500 words from each
Content article, review or the like without the prior consent of Jam; (B)
provide a textual link-back to the RSN Sites as part of such usage,
except that if 250 or fewer words from such Content article, review or
the like are used CDnow shall not be required to provide such link-back;
and (C) not distribute the Content to any third party, except as
permitted under an agreement mutually acceptable to the parties.
(iii) For Content requested by CDnow where Jam or Straight Arrow
do not have the requisite rights to provide CDnow with such Content for
its use pursuant to this Agreement, Jam and Straight Arrow will use their
respective best efforts to assist CDnow in obtaining such rights,
provided CDnow shall bear all costs or expenses in connection therewith.
(b) EXCLUSIVITY AND LIMITATIONS ON EXCLUSIVITY.
(i) EXCLUSIVITY. During the Term and except as set forth in
Section 2(b)(ii) below, Jam and Straight Arrow represent and warrant that
CDnow will be the exclusive Music Seller anywhere in the world that is
permitted to access, use, copy, modify and reformat for display purposes
and display the Content on any Site.
(ii) LIMITATIONS ON EXCLUSIVITY.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(A) THE AMERICA ONLINE AGREEMENT. Straight Arrow has
entered into an agreement with America Online, Inc. ("AOL"),
dated as of January 1, 1997 (the "AOL Agreement"), whereby AOL
has been granted a license to use certain Straight Arrow
Content. Pursuant to the AOL Agreement and any renewals,
extensions or re-negotiations thereof, AOL may place
Competitive Marketing on the same page as or in conjunction
with the Straight Arrow Content, provided such Competitive
Marketing remains within the AOL proprietary online service.
Straight Arrow reserves the right to enter into a new agreement
with AOL for AOL to place Straight Arrow Content on the AOL
Site (which is accessible by the general public); provided, as
part of such new agreement, neither Jam nor Straight Arrow
shall grant AOL the right to make the Straight Arrow Content
accessible on the same page as or in conjunction with
Competitive Marketing to any user on the Internet, the World
Wide Web or any other online service; provided, however, AOL
may place a button or link that contains a de minimis amount of
Straight Arrow Content on the same page as or in conjunction
with Competitive Marketing and which may point to the Rolling
Stone area on the AOL proprietary online service or to a RSN
Site. Subject to Straight Arrow's compliance with the terms of
this Agreement and provided Straight Arrow's performance under
the AOL Agreement and any renewals, extensions or new
agreements with AOL conform to the statements in this Section
2(b)(ii)(A), Straight Arrow shall not be in breach of this
Agreement.
(B) THE MICROSOFT NETWORK AGREEMENT. Straight Arrow
has entered into an agreement with Microsoft Corporation
("Microsoft"), dated as of May 1997 (the "Microsoft Agreement"),
whereby Microsoft has been granted a license to use certain
Straight Arrow Content in the channels feature of Microsoft
Internet Explorer, version 4.x. The Microsoft Agreement does not
grant Microsoft a right to place Competitive Marketing on the same
page as or in conjunction with the Straight Arrow Content, nor is
Microsoft granted a right to place or allow any third party to
place Competitive Marketing on any RSN Site. Subject to Straight
Arrow's compliance with the terms of this Agreement and provided
Straight Arrow's performance under the Microsoft Agreement
conforms to the statements in this Section 2(b)(ii)(B), Straight
Arrow shall not be in breach of this Agreement.
(C) THE POINTCAST AGREEMENT. Straight Arrow has
entered into an agreement with Pointcast Incorporated
("Pointcast"), dated as of June 1997 (the "Pointcast Agreement"),
whereby Pointcast has been granted a license to use certain
Straight Arrow Content solely for display purposes on certain of
its channels and networks on a periodic basis. The Pointcast
Agreement does not grant Pointcast a right to place Competitive
Marketing on any RSN Site. Subject to Straight Arrow's compliance
with the terms of this Agreement and provided Straight Arrow's
performance under the Pointcast Agreement conforms to the
statements in this Section 2(b)(ii)(C), Straight Arrow shall not
be in breach of this Agreement.
(c) ACCESS TO AND DELIVERY OF CONTENT.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(i) CONTENT INDICES. Within forty-eight hours of the
Effective Date and continuing throughout the Term, Jam will make
available to CDnow, and upon CDnow's request, reasonably provide access
to CDnow, any and all indices in any form of the Content (the "Content
Indices"). During the Term, as updated new Content Indices become
available, Jam will immediately provide access to such updated or new
Content Indices to CDnow.
(ii) CONTENT DELIVERY. Within three (3) business days of each
receipt of a request from CDnow, Jam will deliver to CDnow the Content
requested. If the Content is available in digitized form, Jam will
deliver it in such form to CDnow in a manner mutually agreeable to the
parties. If the Content is not available in digitized form, then Jam
will deliver it in the best form in which it is available, and, at
CDnow's discretion, (A) promptly (but in no event more than three (3)
business days after receipt of a request) digitize the requested Content,
which digitized Content shall be deemed to also be part of the Content,
in a form mutually agreeable to the parties; or (B) CDnow may have a
third party digitize the Content for CDnow, at no expense to Jam, and
CDnow will provide a copy of all such digitized material to Jam, at no
cost. CDnow and Jam agree to reasonably cooperate in fulfilling CDnow's
requests for Content.
(iii) ACCESS TO THE JAM AND STRAIGHT ARROW LIBRARIES. At
CDnow's request at any time and from time to time, Jam will make
available a librarian knowledgeable in the Content and the structure of
the Jam and Straight Arrow Content libraries in the possession of
Straight Arrow or Jam (as the case may be), and such librarian will
assist CDnow in accessing, digitizing and delivering the Content. CDnow
will pay a reasonable hourly rate for such librarian's time devoted to
assisting CDnow, which rate CDnow and Jam will mutually agree upon based
on good faith and diligent negotiations.
(d) OTHER REPRESENTATIONS AND WARRANTIES OF JAM. Jam represents and
warrants that as of the Effective Date and continuing throughout the Term: (i)
the Content available to CDnow under this Agreement is all of the Content owned
or licensed by Jam from Straight Arrow; (ii) except for the exclusivity
limitations set forth in Section 2(b)(ii) above, Jam has an exclusive, worldwide
license with Straight Arrow for use of all of the Straight Arrow Content in
connection with the RSN Sites, which is stated as such in the exclusive license
agreement entered in by and between Jam and Straight Arrow, dated as of
[___________] (the "Straight Arrow/Jam Exclusive License Agreement"), and
Straight Arrow has expressly consented to Jam sub-licensing the Straight Arrow
Content to CDnow so that Jam can fulfill its obligations under this Agreement,
and CDnow can access and use the Content as set forth in this Agreement; (iii)
the Straight Arrow Content has not been altered, redacted or modified in any
manner from the original substance provided to Jam from Straight Arrow; (iv)
except as set forth in Section 3(a)(ii)(B) below, Jam will not operate any Sites
anywhere in the world (other than the RSN Sites) independently of or in
conjunction with Straight Arrow that contains the Content in whole or in part
and any Competitive Marketing; and (v) Jam shall license and deliver to CDnow
the AOL Content, subject to and consistent with the terms and conditions of this
Agreement.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
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(e) OTHER REPRESENTATIONS AND WARRANTIES OF STRAIGHT ARROW. Straight
Arrow represents and warrants that as of the Effective Date and continuing
throughout the Term: (i) the Straight Arrow Content licensed to Jam under the
Straight Arrow/Jam Exclusive License Agreement is all of the Straight Arrow
Content owned or licensed by Straight Arrow; (ii) except for the exclusivity
limitations set forth in Section 2(b)(ii) above, Jam has an exclusive, worldwide
license with Straight Arrow for use of all of the Straight Arrow Content in
connection with the RSN Sites, which is stated as such in the Straight Arrow/Jam
Exclusive License Agreement, and Straight Arrow has expressly consented to Jam
sub-licensing the Straight Arrow Content to CDnow so that Jam can fulfill its
obligations under this Agreement, and CDnow can access and use the Straight
Arrow Content as set forth in this Agreement; (iii) except for the exclusivity
limitations set forth in Section 2(b)(ii) above, Straight Arrow has not licensed
the Straight Arrow Content, in whole or in part, to any third party for use
online or on any Site; (iv) during the Term, Straight Arrow will not operate,
independently of or in conjunction with Jam, any Sites (other than the RSN
Sites) that contain the Content in whole or in part and any Competitive
Marketing; and (v) any and all Content (other than the Exclusive AOL Content)
made available or delivered to AOL or any third party under or pursuant to the
AOL Agreement ("AOL Content"), shall also be licensed and delivered to Jam
pursuant to the Straight Arrow/Jam Exclusive License Agreement, and Jam is
permitted to license and deliver to CDnow the AOL Content subject to and
consistent with the terms of this Agreement.
(f) REPRESENTATIONS AND WARRANTIES OF CDNOW. CDnow acknowledges that
the Straight Arrow Content is the valuable intellectual property of Straight
Arrow and the Jam Content is the valuable intellectual property of Jam, and
CDnow agrees that it shall not use or modify any of the Content, except as
otherwise permitted under this Agreement or as otherwise permitted by Jam or
Straight Arrow in their reasonable business judgment or, if applicable, by
Straight Arrow in its discretion as set forth in Section 8 of Exhibit B to this
Agreement.
3. RSN SITES.
(a) EXCLUSIVITY AND LIMITATIONS ON EXCLUSIVITY.
(i) EXCLUSIVITY. Except as set forth in Section3(a)(ii)
below, during the Term:
(1) Jam represents and warrants that CDnow will be the
exclusive Music Seller throughout the world that can sell recorded
music through, and place advertising, promotions, buttons, banners
or other forms of links for the sale of recorded music on, the RSN
Sites.
(2) Jam will use its best efforts to encourage labels
and artists advertising and promoting on the RSN Sites to include
CDnow Links in any content, advertising or promotions they place
on the RSN Sites or their own Sites.
(3) If Jam, Straight Arrow or a third party wishes to
sell one or more recorded music products on the RSN Sites that are
not offered by CDnow, Jam shall give
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CDnow a right of first refusal to offer such products. If CDnow,
within twenty (20) days of being provided such offer by Jam,
determines not to offer such products, then Jam may permit such
third party to offer such products for sale on the RSN Sites;
provided that if and when CDnow offers such products, Jam shall
terminate such third party's right to offer such products for sale
on the RSN Sites as soon as practicably feasible, and, thereafter,
CDnow shall be the exclusive Music Seller with the right to offer
such products on the RSN Sites.
(ii) LIMITATIONS ON EXCLUSIVITY.
(A) This terms of Section 3(a) shall not apply to: (1)
Jam when it is involved in any manner (including, without
limitation, sponsoring, promoting, broadcasting or producing) in
any activities other than online services, including, without
limitation, television or radio broadcasts, pay per view concerts
or live performances, provided any online sales of recorded music
by Jam or through the RSN Sites associated with such events is
through CDnow, and any advertising or promotion by Jam on the RSN
Sites of the sale of recorded music associated with such events
shall point solely to a Co-branded Page; (2) Straight Arrow when
it is involved in any manner (including, without limitation,
sponsoring, promoting, broadcasting or producing) in any
activities other than online services, including, without
limitation, television or radio broadcasts, pay per view concerts
or live performances, provided any online sales of recorded music
through the RSN Sites associated with such events is through
CDnow, and any advertising or promotion by Straight Arrow or
through the RSN Sites of the sale of recorded music associated
with such events shall point solely to a Co-branded Page; (3) Jam
when it conducts the sale, advertising, promotion or distribution
of its or RSN's connected or enhanced CDs, provided any online
sale of recorded music associated with such connected or enhanced
CDs is solely through CDnow, and any advertising or promotion by
JAM of recorded music associated with such events shall point
solely to a Co-branded Page; or (4) Jam or Straight Arrow when
they (collectively or individually) digitally deliver individual
songs, albums or compilations performed by artists or bands that
are captured or recorded by Jam, Straight Arrow or RSN at or in
connection with its Webcasts, Virtual Venue, or Virtual Tour
activities; provided, when CDnow has the capability to make such
digital delivery, any online sales of the same shall be solely
through CDnow, and any advertising or promotion by Jam or Straight
Arrow of recorded music associated with such events shall point
solely to a Co-branded Page.
(B) CDnow acknowledges that in the event Jam acquires
or merges with another Entity (excluding a natural person) that
has a pre-existing relationship with a Music Seller other than
CDnow, the fulfillment by Jam of any agreement with such other
Music Seller shall not be deemed a breach of this Agreement;
provided, Jam shall not (1) renew or extend the term of such
agreement, without first giving CDnow a bona fide right of first
refusal and first negotiation to become the music store on the
acquired or merged Site; (2) enter into any new agreements with
such Music Sellers other than
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CDnow that allows such Music Sellers access to the Content or to
place Competitive Marketing on the RSN Sites or (3) broaden the
scope of such agreements to contain the Content or Competitive
Marketing.
(b) DELIVERY AND PLACEMENT OF CDNOW LINKS. During the Term, Jam
shall place the CDnow Links on the RSN Sites in accordance with the requirements
set forth in this Section 3(b).
(i) Jam shall place the CDnow Links on the pages on the RSN
Sites, and all existing and future equivalents, extensions or
replacements of such pages on the RSN Sites, in accordance with the
specifications set forth in Exhibit C to this Agreement. Unless
otherwise specified in this Section 3(b), during the Term, the CDnow
Links shall be permanent and non-rotating.
(ii) On Jam's Sites, Jam shall place (A) a graphical CDnow Link
Above-the-Fold in the navigation bar (the navigation bar appears at all
time on all pages on the Jam Sites), (B) a CDnow logo below the left
NAVIGATION BAR in a manner that is at least as good or better than RSN or
any other third party links that are of a similar nature (C) contextually
placed graphical CDnow Links on the Virtual Venue Main Page, Virtual
Venue Event Pages, Featured Artist and Artist Pages, Artist Discography
Pages, Artist Album Pages and any other appropriate areas of the Site (D)
a CDnow branded search box below-the-fold on all Virtual Venue Pages in a
manner that is at least as good or better than Pollstar and Ticketmaster
or any other third party links that are of a similar nature and (E) a
CDnow logo at the bottom of all Featured Artist and Artist Pages in a
manner that is at least as good or better than Pollstar and Ticketmaster
or any other third party links that are of a similar nature. On Jam's
Sites, Jam shall guarantee 5% of monthly inventory and 20% of the unsold
monthly inventory will be dedicated to CDnow banners, which will rotate
throughout the Jam Sites.
(iii) On the RSN Sites, Jam shall place (A) a graphical CDnow
Link Above-the-Fold in the navigation bar (the navigation bar appears at
all time on all pages on the RSN Sites), (B) a CDnow branded promotion
box to rotate a guaranteed 5% of the time on the RSN home page and all
other pages next to the standard large banner, (C) a CDnow branded
promotional box, contextually placed below-the-fold on the Article Pages,
(D) a graphical CDnow Link contextually placed Above-the-Fold on Search
Results pages, Recordings Pages, Album Review Rages (top level, upper
right), Recent Releases Pages, Artist Find Results Pages, On the Road
Pages and any other appropriate pages, and future similar pages (E) a
contextually placed CDnow Branded Link on the side navigation box of the
Album Review Pages, Artist Pages and Artist Discography Pages and future
similar pages and (F) a graphically branded CDnow search box on the
Artist Search Page. On the RSN Sites, Jam shall (1) integrate a CDnow
buy option into the "information bar" on every Live Page and future
similar pages, and (2) guarantee 5% of monthly inventory and 20% of the
unsold monthly inventory will be dedicated to CDnow banners rotating
throughout the RSN Sites.
(iv) Jam agrees that CDnow may vary the elements of the CDnow
Links no less than twice per month, upon five (5) business days notice.
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(v) Prior to implementing any modifications to the CDnow Links
not requested by CDnow, Jam will obtain the written consent of CDnow,
which consent shall not be unreasonably withheld.
(c) MINIMUM CDNOW LINK GUARANTEES. During the Term, Jam and RSN will
deliver to users of the RSN Sites a minimum of 150,000,000 CDnow Links on pages
on the RSN Sites in accordance with the following schedule: (i) the first twelve
months beginning on the date the CDnow Links are fully implemented and
operational on the RSN Sites -- 40,000,000 CDnow Links; (ii) the twelve months
following the first twelve months -- 50,000,000 CDnow Links; and (iii) the
twelve months following the second twelve months -- 60,000,000 CDnow Links.
(d) CONTINUED DEVELOPMENT OF OTHER CDNOW LINK PLACEMENT OPPORTUNITIES.
The parties agree to work together during the Term in good faith to identify and
implement appropriate placement of the CDnow Links throughout the RSN Sites,
including all necessary testing of the performance of such links.
4. BUSINESS DEVELOPMENT OPPORTUNITIES.
(a) Throughout the Term, the parties will mutually work together in
good faith to identify, create, develop and implement marketing and public
relations opportunities for additional sales, advertising and promotion of CDnow
on the RSN Sites and other Jam and Straight Arrow Sites and media properties,
sale of RSN merchandise and co-branding of traffic flows between the Co-branded
Pages, the CDnow Site and the RSN Sites.
(b) Throughout the Term, the parties will mutually work together in
good faith to identify, create, develop and implement opportunities for CDnow to
distribute the Content to CDnow business partners. CDnow will not distribute
the Content except as permitted under agreement mutually acceptable to the
parties.
(c) Throughout the Term, Jam and Straight Arrow will, in good faith
and where feasible, offer CDnow, and CDnow will, in good faith and where
feasible offer Jam and Straight Arrow, the opportunity and right of first
refusal to participate in other business relationships (similar to the business
relationships envisioned under this Agreement) Jam, Straight Arrow or CDnow (as
the case may be) have entered into or are considering entering into, and, upon
receipt of such offer by, and expression of interest from, a party, the parties
agree to negotiate diligently and in good faith to develop a definitive
agreement concerning each such opportunity.
5. LAUNCH EVENT. During the Term, the parties will mutually plan and
conduct a major launch event for the debut of the Rolling Stone Network (the
"Launch Event") for which the parties will mutually agree on cost sharing for
the event. CDnow may, at its option, pay its share of the agreed upon costs of
the Launch Event and other events to be co-sponsored by the parties from the
print advertising commitment (as set forth in Section 6(b)(ii) of this
Agreement).
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6. PAYMENTS. During the Term and in consideration of Jam and Straight Arrow
fulfilling their respective obligations under this Agreement, CDnow will make
the payments to Jam and Straight Arrow (as appropriate) as set forth in Sections
6(a) through (c) below:
(a) CONTENT LICENSE FEES. CDnow agrees to pay Jam *** CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION*** Payment will be made in
the following manner: *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS
INFORMATION*** and, thereafter, *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THIS INFORMATION*** the CDnow Links are continuously fully implemented
and operational on the RSN Sites.
(b) PRINT, BROADCAST AND WEBSITE ADVERTISING, PROMOTION AND LINKING
FEES. CDnow agrees to purchase a total of $4,250,000 from (A) Jam in RSN Site
advertising, promotions and links, (B) print advertising from Straight Arrow,
(C) broadcast advertising from Jam and (D) promotions in media properties
controlled (currently and in the future) by Straight Arrow and/or Jam or its
radio affiliates, during the Term and as follows:
(i) CDnow will *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THIS INFORMATION***
(ii) CDnow will *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THIS INFORMATION***
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*** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
payment.
(iii) Straight Arrow *** CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR THIS INFORMATION***
(c) NEW CUSTOMER FINDER'S FEE.
(i) CDnow agrees to *** CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR THIS INFORMATION***
(ii) If, upon termination of this Agreement, *** CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(d) PAYMENT SUMMARY. The following summarizes the payments terms set
forth in Sections 6(a) through (c) above:
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*** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
Broadcast advertising placement commission: $300,000
7. AUDIT RIGHTS; REPORTING
(a) AUDIT RIGHTS; UNDER/OVER PAYMENTS. Each party shall maintain
complete and accurate records in accordance with U.S. Generally Accepted
Accounting Principles (GAAP) for all transactions which are the subject of this
Agreement for not less than (3) years after the last payment is due under this
Agreement. A "big six" independent accounting firm retained by a party (the
auditing party) shall have access to such records of the other party (the
audited party), upon reasonable notice, for the purposes of audit during normal
business hours, for so long as such records are required to be maintained. If
such accounting firm determines that any additional payment is due the auditing
party by the audited party and such payment is not the subject of a good faith
dispute between the parties, then the audited party shall promptly make payment
of such amount plus interest at a rate of six percent (6%) per annum to the
auditing party. If a party overpays the other party, the party that has made
such overpayment shall be entitled to a credit against the next payment due to
the other party in the amount of the overpayment, unless such overpayment is the
subject of a good faith dispute between the parties or if no further payments
are due under this Agreement, in which case, the party that has received the
overpayment will promptly refund to the other party the amount of the
overpayment.
(b) REPORTING.
(i) Within thirty (30) days after the end of each calendar
month during the Term, CDnow shall provide Jam with a report listing the
number of New Customers and the Finder's Fees due to Jam. Such report is
to be used by Jam solely to track whether CDnow is fulfilling its
obligations under this Agreement.
(ii) On the first business day of each week during the Term,
Jam will provide CDnow with a weekly report of CDnow Links delivered to
users of RSN's Site during the immediately preceding week in a form and
via media mutually agreeable to the parties.
(iii) During the Term, each of Jam and Straight Arrow will
provide CDnow with monthly reports of total print and broadcast
advertising and other promotions delivered by each party in a form and
via a method mutually acceptable to CDnow and Jam or Straight Arrow (as
the case may be). Such reports are to be used by CDnow solely to track
whether Jam and Straight Arrow are fulfilling their obligations under
this Agreement.
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8. FRAMING AND RETURN LINKS. During the Term and thereafter, Jam shall
not frame in any manner the CDnow Site or any Co-branded Pages or pages from
the CDnow Site. When an RSN user clicks on a button, banner or any other
form of link to a Co-branded Page, such user shall be transferred directly to
the Co-branded Page without such framing. CDnow shall place a Carry-Through
Bar on the Co-branded Pages that will provide a user that has linked to a
Co-branded Page from a RSN Site with an opportunity to return to the RSN
Site. CDnow and Jam shall mutually agree upon the overall design of the
Carry-Through Bar within the specifications provided by CDnow in the
Carry-Through Bar Specifications, attached hereto as Exhibit A to this
Agreement.
9. FULFILLMENT. During the Term and thereafter, CDnow shall have the sole
right and responsibility for processing all orders through every aspect of a
transaction, including receiving, filling, shipping and handling, collecting
payment, tracking and transaction security. All orders for CDnow's products
shall be placed by customers directly with CDnow and shall be subject to
acceptance by CDnow. All orders accepted shall be subject to the terms and
conditions of CDnow's then current terms and conditions of sale. Such terms
may be changed at any time, without notice to Jam, RSN or its customers.
CDnow shall have no obligation to ship any orders unless payment in full is
received in advance. Prices for the products shall be set solely by CDnow.
CDnow reserves the right to change its prices at any time, without notice to
Jam, RSN or its customers.
10. STAFFING. During the Term, each party agrees to provide staffing
sufficient for such party to meet its obligations under this Agreement in a
timely manner. Further, each party shall appoint a relationship manager who
shall have responsibility for managing the day-to-day activities of the party
under this Agreement.
11. LICENSE; OWNERSHIP.
(a) LICENSE TO THE "ROLLING STONE" BRAND NAME AND STRAIGHT ARROW
MARKS. Straight Arrow hereby grants to CDnow, during the Term, a limited,
worldwide, non-transferable license to use the "Rolling Stone" brand name and
other Straight Arrow Marks (as authorized by Straight Arrow from time to time)
as reasonably necessary for CDnow to exercise its rights, promote and sell its
products and fulfill its obligations under this Agreement. CDnow shall be the
exclusive Music Seller licensed to use the Rolling Stone brand name in
connection with online sales, except for sales by third parties licensed to sell
music compilations under the Rolling Stone brand name and except as otherwise
licensed to AOL under the AOL Agreement. Straight Arrow shall have the right to
approve all initial uses of the "Rolling Stone" brand name, which approval shall
not be unreasonably withheld or delayed.
(b) LICENSE BETWEEN JAM AND CDNOW FOR USE OF MARKS. CDnow hereby
grants to Jam, during the Term, a limited, non-exclusive, non-transferable
license to use CDnow's Marks (as authorized by CDnow from time to time)
solely as reasonably necessary for Jam to perform its obligations under this
Agreement. Jam hereby grants to CDnow, during the Term, a limited,
non-exclusive, non-transferable license to use Jam's Marks (as authorized by
Jam from time to time) solely as reasonably necessary for CDnow to perform
its obligations under this Agreement. Each of CDnow and Jam shall have the
right to
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approve all initial uses of its Marks by the other party, which approval
shall not be unreasonably withheld or delayed.
(c) Each party owns and shall retain all right, title and interest in
its Marks and other intellectual property. No party shall copy, distribute,
reproduce or use the other party's Marks or other intellectual property, except
as expressly permitted under this Agreement.
(d) No party shall at any time contest, impair or disparage in any
manner, or assist another party or any third party in contesting, impairing or
disparaging in any manner, either directly or indirectly, another party's (the
owning party's) Marks or its ownership rights in its Marks. Any and all
goodwill arising from the use by a party of another party's Marks shall inure
solely to the benefit of the owning party, and each party hereby expressly
acknowledges the other party's superior rights therein.
12. TERM AND TERMINATION.
(a) TERM AND RENEWAL.
(i) TERM. The term of this Agreement shall commence upon the
Effective Date and shall continue for three (3) years thereafter (the
"Term") unless previously terminated as set forth below. The Term shall
include any renewal terms (as discussed in Section 12(a)(ii) below).
(ii) RENEWALS; RIGHT-OF-FIRST-NEGOTIATION.
(A) If CDnow desires to renew this Agreement, then
CDnow shall notify Jam and Straight Arrow of its intention to
renew not less than seventy-five (75) days prior to the expiration
of the Term, and, beginning not less than sixty (60) days prior to
the expiration of the Term, Jam and Straight Arrow agree to
diligently and in good faith negotiate with CDnow to determine
reasonable terms and conditions for renewal of this Agreement and
extension of the Term prior to the end of the Term. If the
parties are not able to conclude such negotiations within thirty
(30) days of their start, then Jam or Straight Arrow shall be free
to initiate negotiations with any third party.
(B) Except as set forth in Section 12(a)(ii )(A)
above, Straight Arrow and Jam shall not negotiate with any third
party while the Agreement is in effect and while any such
negotiations are in progress.
(C) If the Straight Arrow/Jam Exclusive License
Agreement is terminated at any time during the Term or while CDnow
is negotiating a renewal of the Term, then CDnow shall have the
right of first negotiation to use the Straight Arrow Content
(similar to the license set forth in Article 2 above) directly
with Straight Arrow, and Straight Arrow will diligently and in
good faith negotiate such license for a reasonable period of time.
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(b) TERMINATION FOR CAUSE.
(i) If a party becomes insolvent, files a petition in
bankruptcy, makes an assignment for the benefit of its creditors
or dissolves or ceases to do business, any of the other parties
may terminate the party's rights and obligations under this
Agreement (except for the obligations applicable to the party
specified in Section 12(e) below). The occurrence of a party
becoming insolvent, filing a petition in bankruptcy, making an
assignment for the benefit of creditors or otherwise being no
longer able to fully perform its obligations under this Agreement
and thereby terminating or having terminated its rights and
obligations under this Agreement will not cause this Agreement to
be terminated with respect to the remaining parties.
Notwithstanding the foregoing, such termination shall not relieve
the terminated party from liability for the performance of its
obligations prior to such termination, and termination by a party
shall be in addition to all other rights and remedies the
terminating parties may have available to them under this
Agreement or at law or in equity.
(ii) If a party materially breaches any of the terms of this
Agreement, any other party may terminate the breaching party's
rights and obligations under this Agreement (except for the
obligations applicable to the party specified in Section 12(e)
below) thirty (30) days after written notice to the party of
such party's breach of such terms, which breach is not remedied
within such 30-day period to the reasonable satisfaction of the
non-breaching parties. Notwithstanding the foregoing, such
termination shall not relieve the terminated party in breach
from liability for the performance of its obligations prior to
such termination, and termination by a party shall be in
addition to all other rights and remedies the terminating
parties may have available to them under this Agreement or at
law or in equity.
(c) TERMINATION FOR BREACH OF EXCLUSIVITY. CDnow may terminate this
Agreement immediately upon providing written notice of termination to Jam and
Straight Arrow in the event that Jam or Straight Arrow breaches any of the
exclusivity provisions or their respective representations and warranties set
forth in this Agreement.
(d) TERMINATION AS A RESULT OF TERMINATION OF THE STRAIGHT ARROW/JAM
EXCLUSIVE LICENSE AGREEMENT. If the Straight Arrow/Jam Exclusive License
Agreement is terminated or modified (such that Jam cannot fulfill its
obligations to CDnow under this Agreement) at any time during the Term, then
CDnow shall have the right to immediately terminate this Agreement, receive a
pro rata refund of all outstanding, unearned advance payments made in advance to
Jam, and the provisions of Section 12(a)(ii)(C) shall apply.
(e) EFFECTS OF TERMINATION. Upon the termination or expiration of
this Agreement, each party will immediately cease any and all existing, and not
make any future, use of the other party's name, brand names, Marks and other
proprietary indicia, and CDnow shall cease all use of the Content, and each
party shall certify the same (as applicable) in writing to the other party.
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(f) SURVIVAL. Paragraphs 1, 7(a), 11(c), 11(d), 14 (for any actions
that arose during the term of the Agreement), 15 and 16 shall survive
termination of this Agreement.
13. GENERAL REPRESENTATIONS.
(a) Each party represents and warrants that it has, and will retain
during the Term, all necessary rights, title and authority to enter into and
fulfill its obligations under this Agreement, to grant the other party the
rights and licenses herein granted and to perform all of its obligations under
this Agreement.
(b) Each party represents and warrants that as of the Effective Date
and continuing throughout the Term (i) there are no restrictions, agreements or
understandings whatsoever to which the representing party is a party that would
prevent or make unlawful its execution of this Agreement or its engagement
hereunder; and (ii) that its execution of this Agreement and its engagement
hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which it is a party or by which it is bound.
(c) CDnow represents and warrants that to the best of its knowledge
any content provided by CDnow and displayed on CDnow's Site during the Term does
not constitute defamation or invasion of the right of privacy or publicity, or
infringement of the copyrights, Marks or other intellectual property rights, of
any third party. This representation and warranty shall specifically not apply
to content provided by visitors to CDnow's Site such as visitors who use chat
rooms, bulletin boards, or other forums, which allow visitors to display
material that is not within the control of CDnow.
(d) Jam represents and warrants that to the best of its knowledge any
Content provided by Jam to CDnow during the Term under this Agreement does not
constitute defamation or invasion of the right of privacy or publicity, or
infringement of the copyrights, Marks or other intellectual property rights, of
any third party.
14. INDEMNIFICATION.
(a) CDNOW INDEMNIFICATION. CDnow shall indemnify, defend and hold
harmless each of Jam and Straight Arrow and their respective affiliates,
directors, officers, employees and agents, against any and all claims, actions,
liabilities, losses, and expenses (including reasonable attorneys' fees) brought
by a third party relating to or arising out of any claim that any content
provided by CDnow and displayed on the Co-branded Pages or the RSN Sites during
the Term constitutes a defamation or invasion of the right of privacy or
publicity, or infringement of the Marks, copyrights, or other intellectual
property rights, of any third party. This indemnity shall specifically not
apply to content provided by visitors to CDnow's Site who use CDnow's chat
rooms, bulletin boards, or other forums which allow visitors to display material
that is not within the control of CDnow.
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(b) JAM INDEMNIFICATION. Jam shall indemnify, defend and hold
harmless CDnow and its respective affiliates, directors, officers, employees and
agents, against any and all claims, actions, liabilities, losses, and expenses
(including reasonable attorneys' fees) brought by a third party relating to or
arising out of any claim that any content provided by Jam that is displayed on
the Co-branded Pages, CDnow's Site or the RSN Sites during the Term constitutes
a defamation or invasion of the right of privacy or publicity, or infringement
of the copyrights, Marks or other intellectual property rights, of any third
party.
(c) DUTIES OF THE INDEMNIFYING PARTY. The indemnified party shall
promptly provide the indemnifying party with written notice of any claim, which
the indemnified party believes falls within the scope of this Article 14;
provided, however, that, except to the extent the indemnifying party is actually
prejudiced by the indemnified party's failure to provide such prompt notice,
such failure to provide prompt notice hereunder shall not limit the indemnified
party's rights under this Article 14. The indemnifying party shall have the
right to control the defense and, if applicable settlement of such claim;
provided that in defending or settling such claim the indemnifying party shall
not prejudice the rights of or disclose the Confidential Information of the
indemnified party, without the prior written consent of the indemnified party.
The indemnified party may, at its own expense, assist in the defense of any such
claim if it so chooses, provided that the indemnifying party shall control such
defense and all negotiations relative to the settlement of any such claim.
15. CONFIDENTIALITY; PUBLIC RELATIONS.
(a) PROTECTION OF CONFIDENTIAL INFORMATION. Each party agrees that
the Confidential Information of the other parties will be held in confidence to
the same extent and the same manner as each party protects its own Confidential
Information, but each party agrees that in no event will less than reasonable
care be used. Each party shall, however, be permitted to disclose relevant
aspects of such Confidential Information to its officers, employees and
consultants on a need-to-know basis for the purpose of such party's performance
of its obligations under this Agreement, provided such persons agree to protect
the other parties' Confidential Information to the same extent as required under
this Agreement. Each party agrees to use all reasonable steps to ensure that
the other parties' Confidential Information received under this Agreement is not
disclosed in violation of this Section 15(a). For purposes of this Agreement,
"Confidential Information" means the terms of this Agreement, except as
otherwise specifically provided in this Agreement; each parties' trade secrets,
financial information, processes, formulas, specifications, programs,
instructions, source code, technical know-how, methods and procedures for
operation, benchmark test results, information about employees, customers,
marketing strategies, services, business or technical plans and proposals, in
any form; and any other information relating to either party that is not
generally known to the public at large.
(b) EXCLUSIONS FROM CONFIDENTIAL INFORMATION. Confidential
Information shall not include information that (i) is or becomes generally known
or available to the public at large through no negligent act or omission of
either party; (ii) can be demonstrated to have been available lawfully to either
party prior to the disclosure or had thereafter been furnished to either party
without restrictions to disclosure or use; or (iii) can be demonstrated to be
independently developed by the recipient of Confidential
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Information without use of such Confidential Information and such independent
development is proven on the basis of either party's records related to such
development.
(c) REGULATORY DISCLOSURES. Each party agrees that it shall not be
deemed a breach of this Agreement for any other party to disclose the terms and
conditions of this Agreement in any required regulatory filing with the
Securities & Exchange Commission, a national stock exchange or the NASDAQ, which
the other party, in good faith, determines is required, provided the other party
seeks confidential treatment of the material financial terms and conditions of
this Agreement.
(d) PUBLICITY. No party will make any announcements or statements to
the public or create any written materials concerning the relationship between
them without the prior written consent of the other parties, which consent is
not to be unreasonably withheld or delayed. The parties agree to issue a joint
press release within five (5) business days of the Effective Date in a form and
containing language reasonably acceptable to both parties.
16. MISCELLANEOUS.
(a) INDULGENCES, ETC. Neither the failure nor any delay on the part
of any party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence or as a waiver of any other right, remedy,
power or privilege.
(b) CONTROLLING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania, other
than conflicting choice-of-law provisions.
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(c) NOTICES. All notices, requests, demands, and other communications
required or permitted under this Agreement and the transactions contemplated
herein shall be in writing and shall be deemed to have been duly given, made and
received when delivered against receipt when sent by United States certified
mail, return receipt requested, postage prepaid, or reputable overnight courier,
addressed as set forth below:
(i) If to CDnow:
CDnow, Inc.
Jenkins Court, Suite 300
610 Old York Road
Jenkintown, PA 19046
Attn: General Counsel
(ii) If to JAMtv: (iii) If to Straight Arrow:
JAMtv Corporation Straight Arrow Publishers
640 North LaSalle Street, Suite 560 1290 Avenue of the Americas
Chicago, Illinois 60610 2nd Floor
Attn: Howard Tullman New York, New York 10104
Attn: John Lagana
In addition, notice by mail shall be by air mail if posted outside
of the continental United States. Any party may change the address to which
communications or copies are to be sent by giving notice of such change of
address in the manner set forth herein.
(d) PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(e) ENTIRE AGREEMENT The terms and conditions of this Agreement and
any and all Exhibits attached hereto represent the entire understanding between
the parties with respect to the subject matter hereof, and supersede all prior
and contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written. The express terms hereof control and
supersede any course of performance and/or usage of trade inconsistent with any
of the terms hereof. This Agreement may not be modified or amended other than
by an agreement in writing signed by both parties.
(f) PARAGRAPH HEADINGS. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
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(g) TELEFAXES CONSTITUTE VALID DOCUMENTS. This Agreement and
subsequent modifications may be transmitted by telecopy facsimile machine and
such facsimile copy shall be deemed an original if all pages thereof are
initialed and the Agreement or modifications are signed by the duly authorized
representative of the parties. Such facsimiles shall constitute valid, binding
documents and shall be regarded as such upon receipt. The original of the
document sent by telefax shall be promptly sent within seventy-two (72) hours by
overnight courier to the receiving party so that accurate files may be
maintained. Failure to send timely any original document shall not affect the
validity or binding nature of such document.
(h) FORCE MAJEURE. No party shall be held to be in breach of this
Agreement by reason of any failure or delay in its performance hereunder if
such failure is due to causes beyond its reasonable control, including but
not limited to, acts of the other party, acts of God, delays in
transportation, inability beyond its reasonable control to obtain necessary
labor or materials, or events such as fires, floods, earthquakes, storms,
war, act of public enemy, civil commotions and the like or by any law, rule,
regulation, order or other action by any public authority. To the extent
failure to perform is caused by such an event, such party shall be excused
from performance hereunder so long as such event continues to prevent such
performance, and provided the non-performing party takes all reasonable steps
to resume full performance.
(i) INDEPENDENT CONTRACTORS. Each party shall act as an independent
contractor and shall have no authority to obligate or bind the other parties in
any respect. No employee of a party shall represent himself or herself to be an
employee of any other party.
(j) COMPLIANCE WITH LAWS. Each party shall comply with all federal,
state and local laws, licensing regulations and rulings of governmental bodies
having jurisdiction over its business. Nothing in this Agreement shall be
construed to require either party to perform any act in violation of any laws,
regulations or rulings.
(k) DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS
AGREEMENT, CDNOW'S SITE, THE RSN SITES AND THE CO-BRANDED PAGES ARE PROVIDED ON
AN "AS IS" BASIS WITHOUT WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF TITLE OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OTHER THAN THOSE WARRANTIES
WHICH ARE IMPLIED BY OR INCAPABLE OF EXCLUSION, RESTRICTION OR MODIFICATION
UNDER THE LAWS APPLICABLE TO THIS AGREEMENT.
(l) LIMITATIONS OF LIABILITY.
(i) IN NO EVENT SHALL ANY PARTY HERETO BE LIABLE FOR ANY
INDIRECT, SPECIAL, EXEMPLARY, CONSEQUENTIAL OR INCIDENTAL DAMAGES, OF ANY
NATURE UNDER THIS AGREEMENT WHETHER SUCH DAMAGES ARE ALLEGED IN TORT,
CONTRACT OR INDEMNITY, EVEN IF THE PARTY IS INFORMED
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OF THE POSSIBILITY OF SUCH DAMAGES, UNLESS SUCH DAMAGES ARE DUE TO SUCH
PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(ii) AS BETWEEN CDNOW AND JAM, CDNOW AGREES THAT JAM SHALL NOT
BE LIABLE TO CDNOW FOR CLAIMS ARISING SOLELY AS A RESULT OF A BREACH BY
STRAIGHT ARROW OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS
HEREUNDER. AS BETWEEN CDNOW AND STRAIGHT ARROW, STRAIGHT ARROW SHALL NOT
BE LIABLE TO CDNOW FOR CLAIMS ARISING SOLELY AS A RESULT OF A BREACH BY
JAM OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER.
(m) BINDING NATURE OF AGREEMENT. This Agreement shall be binding upon
the parties hereto and their respective heirs, executors, successors and
assigns. Neither party may, without the prior written consent of the other
party, assign or transfer this Agreement or any obligation incurred hereunder.
Any attempt to do so in contravention of this Section 16(m) shall be void and of
no force and effect.
(n) TIMELY PERFORMANCE. Each party acknowledges that in the
performance of this Agreement, time shall be considered of the essence.
[SIGNATURES ON NEXT PAGE.]
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IN WITNESS WHEREOF, the parties' duly authorized representatives have executed
this Agreement as of the day and year first above written.
CDNOW, INC. STRAIGHT ARROW PUBLISHERS
(A NEW YORK PARTNERSHIP)
By:____________________________ By: _______________________________
Name:__________________________ Name: _____________________________
(print or type) (print or type)
Date:__________________________ Date: _____________________________
JAMTV CORPORATION
By:____________________________
Name:__________________________
(print or type)
Date:___________________________
23
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
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EXHIBIT A
CARRY-THROUGH BAR SPECIFICATIONS AS OF 4/15/97
SIZE
Total Carry-through Bar Size: 468(w) x 25(h) pixels as of April 1, 1997 all
Carry-through Bar sizes must be 468(w) x 25(h) to comply with the Internet
Advertising Bureau's (IAB) banner standards.
Live area for Partner Logo: 360(w) x 24(h) pixels
COLOR
Bar is black at all times.
Only partner logos/icons can be as many colors as desired with a black
background "Return to..." copy is mandatory and must be set up as white
Helvetica Neue Black 10pt type, centered and 5 pixels in from the left-hand side
of the first black bar
We recommend all copy to be white
To pick up a template go to http://cdnow.com/cobrand_template
FORMAT
Must be saved in a GIF file format
PLACEMENT
Carry-through bar is placed on the top and bottom of each CDnow page. Only those
people who visit CDnow from your site will see the Carry-through bar
URL/ADDRESS
Partners have the option of 1 to 3 links on their Carry-through bar-- The URLs
will be provided by the partner
If more than one link is desired, the bar must consist of multiple gif images
that reference previous Carry-through bar specifications. When using multiple
gif images keep two pixels between each bar. No image maps are permitted. Please
see the following page for more examples of possible banner solutions.
SOURCE CODE
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
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CDnow will provide the partner with a from equals (from=) tag. This tag allows
us to identify customers coming from the Partners site to CDnow.
TIMING
CDnow requires a minimum of five business days from when we receive the
Carry-through bar to implement it on our site.
CARRY-THROUGH BAR SAMPLES
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EXHIBIT B - ROLLING STONE CONTENT
The Rolling Stone Content shall include the following sections, parts,
elements and portions of Rolling Stone magazine, to the extent that Straight
Arrow possesses or acquires the necessary proprietary rights therein sufficient
for use on the RSN Sites. Straight Arrow will use commercially reasonable
efforts to obtain supplemental materials relating to the Rolling Stone Content,
such as outtakes, photos or descriptive materials, provided that Straight Arrow
will bear no additional costs therefor, other than as set forth in the
Agreement.
(1) The contents, including photos, created for and contained in the Random
Notes section of Rolling Stone Online or any successor to such section
containing similar types of content, to the extent that the Random Notes Section
or any such successor continues to appear in ROLLING STONE magazine.
(2) Magazine covers from Rolling Stone magazine.
(3) MusicNet recorded interviews (insofar as such interviews are in Wenner
Media's possession).
(4) Excerpts or selections from the cover stories of Rolling Stone magazine.
(5) Exclusive feature stories prepared on a regular basis solely for the
Rolling Stone Online staff, in conjunction with the magazine staff, including
multimedia components.
(6) Information contained in the Grapevine and The Industry sections of
ROLLING STONE magazine, and any successors to such sections containing similar
types of content, to the extent that such sections or successors continue to
appear therein, along with new materials developed by the parties relating to
gossip columns and similar commentaries.
(7) The contents of and information contained in concert reviews, record
reviews, artists' questions and answers, artists' picks, college reports, and
any charts, polls (such as readers' and critics' polls) or compilations
contained in Rolling Stone Online along with exclusive record reviews and charts
prepared and developed for ROLLING STONE magazine.
(8) Available photography, audio assets, video assets, art, interviews,
reviews, transcripts, digital material, images, illustrations, animations,
books, and any other content (including, without limitation, all historical,
current and future interviews, record reviews, photographs, illustrations,
animations, interview tapes, feature articles, obituaries, sidebars, live
reviews, photo captions and unique editorial content from special or
anniversary issues, charts and lists that were written by Straight Arrow
editorial staff and work-for-hire (freelancers) and/or licensed writers where
Straight Arrow has the rights to such material), which Straight Arrow has
created, published or produced, or which Straight Arrow has access to through
a licensing arrangement with any other Entity , in the possession and control
of Straight Arrow, Wenner Media and/or ROLLING STONE magazine, which may be
used to create new and/or supplementary or re-purposed audio/visual and
multimedia material for the Rolling Stone Network, all to be provided in
Straight Arrow's discretion.
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WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
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EXHIBIT C - MOCKUPS GUIDELINES FOR PLACEMENT OF CDNOW LINKS ON THE RSN SITES
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FIRST AMENDMENT TO THE LINKING, CONTENT LICENSING
AND ADVERTISING AGREEMENT
This Amendment (the "FIRST AMENDMENT") to the Linking, Content Licensing and
Advertising Agreement (the "AGREEMENT") by and among JAMtv Corporation, Straight
Arrow Publishers and CDnow, Inc., dated as of April 8, 1998, is entered into
effective as of June 30, 1999 (the "First Amendment Effective Date") by and
between Tunes.com Inc., a Delaware corporation (fka JAMtv Corporation)
("TUNES"), Straight Arrow Publishers, a New York partnership ("STRAIGHT ARROW")
and CDnow Online, Inc., a Pennsylvania corporation and the successor-in-interest
to CDnow, Inc. ("CDNOW").
RECITAL
The parties entered into the Agreement and wish to amend the Agreement as set
forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties hereby agree as follows:
1. AMENDMENTS TO DEFINITIONS.
a. Section 1(l) of the Agreement setting forth the definition of
"Content" is hereby deleted in its entirety.
b. Section 1(s) of the Agreement setting forth the definition of "JAM
Content" is hereby deleted in its entirety.
c. Section 1(aa) of the Agreement setting forth the definition of
"RSN Sites" is hereby deleted in its entirety and replaced with the following:
(aa) "RSN" Sites means the ROLLINGSTONE.COM Site, or any RSN-
branded successor to such Site.
d. The Agreement shall be and hereby is amended so that each
reference to the defined term "Content" shall be deemed a reference to the
defined term "Straight Arrow Content."
e. The Agreement shall be and hereby is amended so that each
reference to the defined term "JAM" shall be deemed a reference to the term
"Tunes" as defined in the preamble to this Amendment.
2. AMENDMENTS TO SECTION 2 OF THE AGREEMENT (CONTENT).
a. Section 2(a)(i) of the Agreement is hereby deleted in its entirety
and replaced with the following:
(i) Subject to the terms of this Agreement, Tunes
hereby grants to CDnow during the Term a NONEXCLUSIVE worldwide
license to access, use, copy, modify and
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reformat for display purposes and display the Straight Arrow
Content solely on CDnow's Site. By way of example, and not
limitation, permitted uses includes digitizing non-digitized
content.
b. Section 2(b) of the Agreement is hereby deleted in its entirety as
of the First Amendment Effective Date.
3. AMENDMENTS TO SECTION 3 (RSN SITES) OF THE AGREEMENT.
a. Section 3(b)(ii) of the Agreement is hereby deleted in its
entirety. To avoid confusion, the parties agree that links generated at the
"JAM Sites" prior to the First Amendment Effective Date shall be counted against
the delivery requirements set forth in Section 3(c).
b. The last sentence of Section 3(b)(iii) is hereby deleted in its
entirety and replaced with the following:
On the RSN Sites, Tunes shall integrate a CDnow buy option into
the "information bar" on every Live Page and future similar pages.
4. AMENDMENTS TO SECTION 6 OF THE AGREEMENT (PAYMENTS).
a. Section 6(a) of the Agreement is hereby deleted in its entirety
and replaced with the following:
(a) CONTENT LICENSE FEES. CDnow agrees to ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
b. The parties agree that *** CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR THIS INFORMATION*** In addition, Section 6(b) of the
Agreement is hereby deleted in its entirety and
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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT
WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
replaced with the following:
(b) PRINT AND WEB SITE ADVERTISING, PROMOTION AND LINKING
FEES.
(i) Commencing with the First Amendment Effective
Date, CDnow will *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THIS INFORMATION***
(ii) In addition to the fee set forth in Section
6(b)(i) above, *** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THIS INFORMATION***
***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
As used herein, ***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
THIS INFORMATION***
The payments, if any, to be made under this Section 6(b)(ii) shall
be paid within 30 days following ***CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED FOR THIS INFORMATION***
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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT
WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
(iii) During the Term, CDnow agrees ***CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
c. The parties agree that ***CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR THIS INFORMATION*** following:
(i) Commencing with the First Amendment Effective
Date, ***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
THIS INFORMATION***
d. Section 6(d) of the Agreement is hereby deleted in its entirety.
5. AMENDMENTS TO SECTION 12 OF THE AGREEMENT.
a. Section 12(i) of the Agreement is hereby deleted in its entirety
replaced with the following:
(i) TERM. The term of this Agreement shall commence
upon the Effective Date and shall continue until March 31, 2001
(the "Term") unless previously terminated
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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT
WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
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as set forth below. The Term shall include any renewal terms
(as discussed in Section 12(a)(ii) below).
6. NEW SECTION 17. A new Section 17 is hereby added to the Agreement as
follows:
17. ***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS
INFORMATION***
7. NEW SECTION 18. A new Section 18 is hereby added to the Agreement as
follows:
18. OUTSTANDING INVOICE. There is ***CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED FOR THIS INFORMATION***
8. EFFECT OF AMENDMENT. The terms of the Agreement, as amended hereby,
remain in full force and effect. Subject to the terms and conditions of the
Agreement, this First Amendment shall terminate upon termination of the
Agreement.
9. MISCELLANEOUS. The parties acknowledge and agree that this First
Amendment is an integral part of the Agreement. Notwithstanding any provision
of the Agreement to the contrary, in the even of any conflict between this First
Amendment and the Agreement, the terms and conditions of this First Amendment
shall control. This First Amendment may be executed in counterparts, each of
which shall be deemed an original.
[Signature Page Follows]
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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT
WHEREBY THE TEXT TO BE KEPT CONFIDENTIAL IS MARK BY EITHER *** OR ***
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS INFORMATION***
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
on the day first written above.
CDNOW ONLINE, INC. TUNES.COM INC.
By:_________________________________ By:________________________________
Name:_______________________________ Name:______________________________
Title:______________________________ Title:_____________________________
Date:_______________________________ Date:______________________________
1005 Virginia Drive 640 N. LaSalle Street
Fort Washington, Pennsylvania 19034 Suite 560
215-619-9900 (voice) Chicago, Illinois 60610
215-619-9521 (fax) 312-642-7560 (voice)
312-654-1099 (fax)
STRAIGHT ARROW PUBLISHERS
(a New York Partnership)
By:________________________________
Name:______________________________
Title:_____________________________
Date:______________________________
1290 Avenue of the Americas
2nd Floor
New York, New York 10104
__________________ (voice)
__________________ (fax)
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<PAGE>
640 NORTH LA SALLE STREET
OFFICE LEASE
THIS LEASE (hereinafter referred to as "Lease"), made this _____ day of
June, 1999,
W I T N E S S E T H:
MAC Management Co., Inc., as exclusive agent for 640 LaSalle LLC, an
Illinois limited liability company ("Lessor"), hereby leases unto Tunes.com
Inc., a Delaware Corporation ("Lessee"), and the Lessee hereby accepts the
Premises ("Premises") known as Suite 557, consisting of approximately 4,183
rentable square feet (as outlined in Attachment "A-1" attached hereto and made a
part of this Lease) at:
640 NORTH LA SALLE STREET, CHICAGO, ILLINOIS
("Building") for a term ("Term") commencing on August 1, 1999, (sometimes
hereinafter referred to as the "Commencement Date"), and ending May 31, 2002,
unless sooner terminated as provided herein, to be occupied and used by the
Lessee for general office space. Occupancy shall be available on the
Commencement Date.
IN CONSIDERATION THEREOF, the Parties covenant and agree:
1. BASE RENT.
Lessee shall pay to Lessor at the office of Lessor or at such other
place as Lessor may designate, the annual Base Rent (hereinafter referred to as
"Base Rent") as follows:
<TABLE>
<CAPTION>
Annual Base Rent Monthly Base Rent
Commencement Date -
<S> <C> <C>
07/31/00 $66,924.00 $5,577.00
08/01/00 - 07/31/01 $68,940.00 $5,745.00
08/01/01 - 05/31/02 $71,004.00 $5,917.00
</TABLE>
which shall be paid and due in equal monthly installments, each in
advance on the first day of each and every calendar month during the Term and at
the then current rate for fractions of a month if the Term shall be commence or
terminate on any day other than the last day of a month. The Base Rent,
Adjusted Rent (as hereinafter defined), Estimated Rent (as
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hereinafter defined) and other sums and charges payable by Lessee under this
Lease are hereinafter referred to as "rent". Lessee recognizes that late
payment of any rent or other sum due under this Lease will result in
administrative expense to Lessor, the extent of which additional expense is
extremely difficult and economically impractical to ascertain. Lessee
therefore agrees that if rent or any other sum is not paid within five (5)
days after the date due and payable pursuant to this Lease, such amount shall
bear interest at the Designated Rate, as thereinafter defined from said fifth
day until paid. In addition, if said amount remains unpaid for more than five
(5) days after said amount is due, Lessee shall pay Lessor in addition to
interest as aforesaid a late fee equal to the greater of: (a) Fifty Dollars
($50.00), or (b) a sum equal to five percent (5%) per month of the unpaid
rent or other payment. The amount of the late charge to be paid by Lessee
shall be reassessed and added to Lessee=s obligation for each successive
monthly period until paid. The provisions for payment of interest and for
payment of a late fee in no way relieve Lessee of the obligation to pay rent
or other payments on or before the date on which they are due, nor do they in
any way affect Lessor=s remedies hereunder in the event said rent or other
payment is unpaid after any applicable notice or cure period. The Designated
Rate shall be the rate of interest announced from time to time by Bank of
America -Illinois as its Reference Rate, which may not be the lowest or best
rate charged by said bank.
2. SERVICE. The Lessor shall provide:
(a) Janitor Service in and about the Premises, Saturdays, Sundays and
holidays excepted. The Lessee shall not provide any janitor service without the
Lessor's written consent. If the Lessor's consent be given, such janitor
service shall be subject to Lessor's supervision but at the Lessee's sole
responsibility. The Lessee shall not provide any janitor service in the
Premises except through a janitor contractor or employees who are and shall
continuously be in each and every instance satisfactory to the Lessor.
(b) Heat and Air Conditioning daily from 8:00 a.m. to 6:00 p.m.,
Saturday 8:00 a.m. to 1:00 p.m., Sundays and holidays excepted, whenever heat
or air conditioning shall, in the Lessor's reasonable judgment, be required
for the comfortable occupation and use of the Premises.
(c) Water from City of Chicago mains for drinking, lavatory and
toilet purposes, drawn through fixtures installed by the Lessor or by the Lessee
with the Lessor's written consent. The Lessee shall pay, at rates fixed by the
Lessor, for water used for air conditioning, refrigerating or any purpose other
than drinking, lavatory and toilet purposes and dishwashing.
(d) Passenger Elevator Service in common with other tenants daily
from 8:00 a.m. to 6:00 p.m. (Saturdays to 1:00 p.m.) Sundays and holidays
excepted and Freight Elevator Service in common with other tenants daily from
8:00 a.m. to 5:00 p.m. Saturdays, Sundays and holidays excepted. At all other
times at least one elevator shall be available for Lessee's use.
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(e) Electricity 24 hours per day, each day of the Term, Lessee shall
be entitled to an allowance (the "Allowance") for electrical use up to $11.50
($1.00 per each rentable square foot in the Premises divided by 365 rounded up
to the nearest half dollar) for each day of the Term. Lessee shall not be
obligated to pay for electrical use at the rates (including taxes and other
charges) which Lessor is charges by the utility company furnishing the
electricity to the Premises, at the rates (including taxes and other charges),
which lessor is charged by the utility company furnishing the electricity
exceeds the Allowance, Lessee agrees to pay such excess to Lessor within thirty
(30) days of Lessor's invoice therefor, as additional rent due hereunder.
Lessor shall maintain but Lessee shall bear the cost of maintaining
the lighting fixtures and replacement of all parts, including lamps and
ballasts.
(f) Lessor reserves the right to discontinue furnishing electricity
and require Lessee to procure electricity at Lessee's expense by arrangement
with Commonwealth Edison Company or another approved local utility provided,
however, commencing with the date when Lessee receives such direct service, the
fixed annual Base Rent payable under the Lease shall be reduced by $4,183.00 per
annum.
The Lessor does not warrant that any of the services above mentioned
will be free from interruptions caused by war, insurrection, civil commotion,
riots, acts of God or the enemy or Government action, repairs, renewals,
improvements, alterations, strikes, lockouts, picketing, whether legal or
illegal, accidents, inability of Lessor to obtain fuel or supplies, or any other
cause or causes beyond the reasonable control of the Lessor. Any such
interruption of service shall never be deemed an eviction or disturbance of the
Lessee's use and possession of the Premises or any part thereof, or render the
Lessor liable to the Lessee for damages, or relieve the Lessee from performance
of the Lessee's obligations under this Lease. Notwithstanding the foregoing, in
the event of any interruption of service which is not beyond the reasonable
control of Lessor, (i) the Lessor will act diligently to restore any required
service which is interrupted; and, (ii) if an interruption of services renders
the Premises untenantable (i.e., unusable by the Lessee for the intended
purpose) for more than five (5) consecutive business days, the Base Rent
beginning on the sixth day will abate until the Premises are restored to
tenantable condition.
3. LESSOR'S TITLE. The Lessor's title is and always shall be
paramount to the title of the Lessee, and nothing herein contained shall
empower the Lessee to do any act which can, shall or may encumber the title
of the Lessor.
4. CERTAIN RIGHTS RESERVED TO THE LESSOR. The Lessor reserves the
following rights: (a) to change the name or street address of the Building
without notice or liability of the Lessor to the Lessee; (b) to install and
maintain a sign or signs on the exterior of the Building; (c) to have access for
the Lessor and the other tenants of the Building to any mail chutes located on
the Premises according to the rules of the United States Post Office; (d) to
designate all sources for furnishing sign painting and lettering on any exterior
surfaces of the Premises or those within the Premises, which can be seen from
outside the Premises or the
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Building, ice, drinking water, towels and toilet supplies used on the
Premises; (e) during the last 180 days of the Term or any part thereof, if
during or prior to that time the Lessee vacates the Premises, to decorate,
remodel, repair, alter or otherwise prepare the Premises for reoccupancy; (f)
to constantly have pass keys to the Premises; (g) to grant to anyone the
exclusive right to conduct any particular business or undertaking in the
Building; provided no such grant shall prohibit Lessee from using the
Premises for general office space; (h) to exhibit the Premises to others and
to display "For Rent" signs on the exterior or interior of the Premises
during the last 180 days of the Term; (i) to take any and all measures,
including inspections, repairs, alterations, additions and improvements to
the Premises or to the Building, as may be necessary or desirable for the
safety, protection or preservation of the Premises or the Building or the
Lessor's interests, or as Lessor may deem necessary in the operation of the
Building, Lessor shall at all times when proceeding hereunder, use its best
efforts not to unreasonably interfere with Lessee's business operations.
The Lessor may enter upon the Premises after oral or written notice to
Lessee, except in case of emergency in which no notice shall be required, and
may exercise any or all of the foregoing rights hereby reserved without being
deemed guilty of an eviction or disturbance of the Lessee's use or possession of
the Premises or any part thereof or render the Lessor liable to the Lessee for
damages, or relieve the Lessee from performance of the Lessee's obligations
under this Lease.
5. DEFAULT UNDER OTHER LEASE. If the term of any lease, other than
this Lease, made by the Lessee for any premises in the Building shall be
terminated or terminable after the making of this Lease because of any default
by the Lessee under such other lease, such fact shall empower the Lessor, at the
Lessor's sole option, to terminate this Lease by notice to the Lessee.
6. WAIVER OF CLAIMS. To the fullest extent permitted by law, the Lessee
releases the Lessor and the Lessor's agents, beneficiaries, and servants from,
and waives all claims for, damage to person or property sustained by the Lessee
or any occupant of the Building or Premises resulting from the Building or
Premises or any part of either or any equipment or appurtenance becoming out of
repair, or resulting from any accident in or about the Building, or resulting
directly or indirectly from any act or neglect of any lessee or occupant of the
Building or of any other person, other than by reason of Lessor's negligence or
intentional misconduct. This Paragraph 6 shall apply especially, but not
exclusively, to the flooding of basements or other subsurface areas, and to
damage caused by refrigerators, sprinkling devices, air conditioning apparatus,
water, snow, frost, steam, excessive heat or cold, falling plaster, broken
glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or
plumbing fixtures, and shall apply equally whether any such damage results from
the act or neglect of other tenants, occupants or servants in the Building or of
any other person, and whether such damage be caused or result from any thing or
circumstance above mentioned or referred to, or any other thing or circumstance
whether of a like nature or of a wholly different nature. If any such damage,
whether to the demised Premises or to the Building or any part thereof, or
whether to the Lessor
4
<PAGE>
or to other tenants in the Building, result from any act or neglect of the
Lessee, the Lessor may, at the Lessor's option, repair such damage and the
Lessee shall, upon demand by the Lessor, reimburse the Lessor forthwith for
the total cost of such repairs. The Lessee shall not be liable for any
damages caused by its act or neglect if the Lessor or a tenant has recovered
the full amount of the damages from insurance and the insurance company has
waived in writing its right of subrogation against the Lessee as rent
hereunder. Lessee's failure to pay any such reimbursement upon demand shall
entitle Lessor to interest at the Default Rate from the date of demand until
paid. All property belonging to the Lessee or any occupant of the Premises
that is in the Building or the Premises shall be there at the risk of the
Lessee or other person only, and the Lessor shall not be liable for damage
thereto or theft or misappropriation thereof.
Lessor and the Lessor's agents, beneficiaries and servants shall not
be liable in damages to the Lessee for any direct or consequential injury
sustained by any person or property of Lessee, or that of Lessee's employees,
beneficiaries, agents or invitees, occasioned in whole or in part by war,
insurrection, civil commotion, riots, acts of God or the enemy or Government
action, repairs, renewals, improvements, alterations, strikes, lockouts,
picketing, whether legal or illegal, accidents, inability of Lessor to obtain
fuel or supplies, planned or intentional action by any person resulting in fire,
explosion or panic, or any other cause or causes beyond the reasonable control
of the Lessor.
7. HOLDING OVER. If the Lessee retains possession of the Premises or any
part thereof after the expiration of the Term by lapse of time or otherwise, the
Lessee shall pay the Lessor rent at double the rate of rent specified in
Paragraph 1 for the time the Lessee thus remains in possession, and in addition
thereto, shall pay the Lessor all damages sustained by reason of the Lessee's
retention of possession. If the Lessee remains in possession of the Premises,
or any part thereof, after the expiration of the Term by lapse of time or
otherwise, such holding over shall, at the election of the Lessor expressed in a
written notice to the Lessee and not otherwise, constitute a renewal of this
Lease for one year. The provisions of this Paragraph do not waive the Lessor's
rights of reentry or any other right hereunder.
8. ASSIGNMENT AND SUBLETTING. The Lessee shall not, without Lessor's
written consent, which consent may not be unreasonably withheld: (a) assign or
convey this Lease or any interest under it; (b) allow any transfer hereof or any
lien upon the Lessee's interest herein or in the Premises by operation of law;
(c) sublet the Premises or any part thereof; or (d) permit the use or occupancy
of the Premises or any part thereof by any one other than the Lessee. The
transfer, assignment or hypothecation of any stock or interest in Lessee in
excess of fifty (50%) percent in the aggregate shall be deemed an assignment
within the meaning and provisions of this Paragraph 8, requiring Lessor's
consent.
9. CONDITION OF PREMISES.
(a) CONDITION OF IMPROVEMENTS. Anything in this Lease to the
contrary notwithstanding, it is understood and agreed between the Lessor and
Lessee that the Premises
5
<PAGE>
covered by this Lease are being delivered by Lessor to Lessee in "AS IS"
condition. The Lessee's taking possession of the Premises shall be conclusive
evidence as against the Lessee that the Premises were in satisfactory
condition when the Lessee took possession. No promise of the Lessor to
alter, remodel or improve the Premises or the Building and no representation
respecting the condition of the Premises or the Building have been made by
the Lessor to the Lessee, unless the same is contained herein, or made a part
hereof. This Lease does not grant any rights to light or air over property,
except over public streets kept open by public authority.
The Lessee shall remove the Lessee's furniture, machinery, safe or
safes, trade fixtures and other items of personal property of every kind and
description from the Premises prior to the end of the Term, however ended. If
not so removed, the Lessor may request their removal, and if the Lessee does not
remove them, the Lessor may do so and the Lessee shall pay the cost of such
removal to the Lessor upon demand. If the Lessor does not request their
removal, all such items shall be conclusively presumed to have been conveyed by
the Lessee to the Lessor under this Lease as a bill of sale without further
payment or credit by the Lessor to the Lessee.
(b) Lessee shall promptly notify Lessor in writing of all
assignments, liens, encumbrances, granting of chattel mortgages, or creation of
security interests, all as same relate to Lessee's sign and trade fixtures or
other personal property in the Premises, effected during the quarter. Any
consent by Lessor to such security interest shall be held to apply only to the
specific transaction thereby authorized and to any subsequent transaction. Any
violation of the terms of this Subparagraph by Lessee shall be without force and
effect and shall not be binding upon the Lessor. In no event shall Lessee
assign, lien, encumber, grant a chattel mortgage or create a security interest
in leasehold improvements which have been incorporated into the Premises,
including, but not limited to, affixed lighting fixtures, heating, ventilating
and air conditioning equipment.
10. ALTERATIONS. The Lessee shall not make any alterations in or
additions to the Premises without the Lessor's advance written consent in each
and every instance, not to be unreasonably withheld. All alterations or
additions shall be made pursuant to the following conditions:
(a) Before commencement of any work or delivery of any materials onto
the Premises or into the Building, the Lessee shall furnish the Lessor with
plans and specifications, names and addresses of contractors, copies of
contracts, necessary permits and indemnification in form and amount satisfactory
to Lessor and waivers of lien against any and all claims, costs, damages,
liabilities and expenses which may arise in connection with the alterations or
additions, together with certificates of insurance from all contractors
performing labor or furnishing materials insuring the Lessor against any and all
liabilities which may arise out of or be connected in any way with said
additions or alterations. In addition, Lessee shall provide an "All Physical
Loss" Builders Risk insurance policy with respect to all alterations and
additions in an amount equal to l00% of the replacement cost of the alterations
and additions. Lessor shall be named an insured as its interest may appear.
Whether the Lessee furnishes the Lessor the
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foregoing or not, the Lessee hereby agrees to defend, indemnify and hold the
Lessor harmless from any and all liabilities of every kind and description
which may arise out of or be connected in any way with said alterations or
additions.
(b) Alterations and additions shall comply with all insurance
requirements and with all ordinances and regulations of the City of Chicago or
any department or agency thereof and with the requirements and statutes and
regulations of the State of Illinois or of any department or agency thereof, and
shall be installed in a good, workmanlike manner and only new, high-grade
materials shall be used. Lessee shall permit the Lessor to supervise
construction operations in connection with alterations or additions if the
Lessor requests to do so.
(c) The Lessee shall pay all the costs of such alterations and
additions plus a reasonable amount to Lessor for Lessor's overhead with respect
to supervision necessary to satisfy Lessor that no damage will result to the
Building. Such charge shall not, however, relieve Lessee of any responsibility
or liability for any such damage. Lessee shall also pay the cost of decorating
the Premises occasioned by such alterations and additions. Each payment upon
said costs shall be only upon receipt of all such contractor's and
subcontractor's sworn statements, full or partial waivers of lien, certificates
and other documentation, if any, as Lessor or any title insurance company shall
request in order to fully protect the building and the Premises against all
possible claims in the nature of mechanic's liens arising out of the performance
of said work and to enable said title insurance company to insure the title to
the Premises and the building against such claims. Without limitation of the
foregoing, upon completing any alterations or additions, the Lessee shall
furnish the Lessor with contractors' affidavits and full and final waivers of
lien and receipted bills covering all labor and materials expended and used,
together with all such of the other documentation described above as Lessor
shall require.
(c) All alterations, additions, hardware, non-trade fixtures and all
improvements, temporary or permanent, in or upon the Premises, including all
affixed lighting fixtures, heating, ventilating and air conditioning equipment,
and all pipes, ducts, conduits, wiring, paneling, partitions, railing, galleries
and the like, whether placed there by the Lessee or by the Lessor, shall, unless
the Lessor requests their removal, become the Lessor's property and shall remain
upon the Premises at the termination of this Lease by lapse of time or otherwise
without compensation or allowance or credit to the Lessee. If, upon the
Lessor's request, the Lessee does not remove said additions, hardware, non-trade
fixtures and improvements, the Lessor may remove the same and the Lessee shall
pay the cost of such removal to the Lessor upon demand. In any event, Lessee
shall repair or pay on demand all costs of repair of, any damage to the Premises
or the Building done during the course of such removal.
11. USE OF PREMISES. (a) The Lessee shall occupy and use the Premises
during the Term for the business purposes set forth on page l hereof and none
other. (b) The Lessee shall not, without prior written consent of the Lessor,
exhibit, sell or offer for sale on the Premises or in the Building any article
or thing except those articles and things essentially connected with the stated
use of the Premises without the advance written consent of the Lessor.
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(c) The Lessee will not make or permit to be made any use of the Premises
which, directly or indirectly is forbidden by public law, ordinance or
governmental regulation or which may be dangerous to life, limb or property,
or which may invalidate or increase the premium cost of any policy of
insurance carried on the Building or covering its operation. (d) the Lessee
shall not display, inscribe, print, paint, maintain or affix on any place in
or about the Building any sign, notice, legend, direction, figure or
advertisement, except on or next to the doors of the Premises and on the
Directory Boards, and then only such name or names and matter, and in such
color, size, style, place and material, as shall first have been approved by
the Lessor in writing. (e) The Lessee shall not advertise the business,
profession, or activities of the Lessee conducted in the Building in any
manner which violates the letter or spirit of any code of ethics adopted by
any recognized association or organization pertaining to such business,
profession or activities, and shall not use the name of the Building for any
purpose other than that of business address of the Lessee, and shall never
use any picture or likeness of the Building in any circulars, notices,
advertisements or correspondence without the Lessor's express consent in
writing. (f) The Lessee shall not obstruct, or use for storage, or for any
purpose other than ingress and egress, the sidewalks, entrances, passages,
courts, corridors, vestibules, halls, elevators and stairways of the
Building. (g) No vehicle and no dog or other animal or bird hall be brought
or permitted to be in the Building or any part thereof. (h) The Lessee shall
not make or permit any noise or odor that is objectionable to other occupants
of the Building to emanate from the Premises and shall not create or maintain
a nuisance thereon, and shall not disturb, solicit or canvass any occupant of
the Building, and shall not do any act tending to injure the reputation of
the Building. (i) The Lessee shall not install any piano in the Building, or
any antennae, aerial wires or other equipment inside or outside the Building,
without, in each and every instance, prior approval in writing by the Lessor.
The use thereof, if permitted shall be subject to control by the Lessor to
the end that others shall not be disturbed or annoyed. (j) The Lessee shall
not place or permit to be placed any article of any kind on the window ledges
or on the exterior walls, and shall not throw or permit to be thrown or
dropped any article from any window of the Building. (k) The Lessee shall
not undertake to regulate any thermostat, and shall not waste water by tying,
wedging or otherwise fastening open any faucet. (l) No additional locks or
similar devices shall be attached to any door or window. No keys for any
door other than those provided by the Lessor shall be made. If more than two
keys for one lock are desired by the Lessee, the Lessor may provide the same
upon payment by the Lessee. Upon termination of this Lease or of the
Lessee's possession the Lessee shall surrender all keys of the Premises and
shall make known to the Lessor the explanation of all combination locks on
safes, cabinets and vaults. (m) The Lessee shall be responsible for the
locking of doors and the closing of transoms and windows in and to the
Premises. (n) If the Lessee desires telegraphic, telephonic, burglar alarm
or signal service, the Lessor will, upon request, direct where and how
connections and all wiring for such services shall be introduced and run.
Without such directions, no boring, cutting or installation of ires or cables
is permitted. (o) If the Lessee desires and the Lessor permits blinds,
shades, awnings, or other form of inside or outside window covering, or
window ventilators or similar devices, they shall be furnished, installed and
maintained at the expense of the Lessee and must be of such shape, color,
material and make as approved by the Lessor. (p) All persons entering or
leaving the Building between the hours of 6 p.m. and 8 a.m., Monday through
Friday, or at any time on
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Saturdays, Sundays or holidays, may be required to identify themselves to a
watchman by registration or otherwise and to establish their rights to enter
or leave the Building. The Lessor may exclude or expel any peddler,
solicitor or beggar at any time. (q) The Lessee shall not overload any
floor. The Lessor may direct the routing and location of safes and other
heavy articles. Safes, furniture and all large articles shall be brought
through the Building and into the Premises at such times and in such manner
as the Lessor shall direct and at the Lessee's sole risk and responsibility.
The Lessee shall list all furniture, equipment and similar articles to be
removed from the Building, and the list must be approved at the Office of the
Building or by a designated person before Building employees will permit any
article to be removed. (r) Unless the Lessor gives advance written consent
in each and every instance, the Lessee shall not install or operate any steam
or internal combustion engine, boiler, machinery, refrigerating or heating
device or air conditioning apparatus in or about the Premises, or carry on
any mechanical business therein, or use the Premises for housing
accommodations or lodging or sleeping purposes, or do any cooking therein, or
use any illumination other than electric light, or use or permit to be
brought into the Building or Premises any inflammable oils or fluids such as
gasoline, kerosene, naphtha and benzine, or any explosives or other articles
deemed extra hazardous to life, limb or property. (s) The Lesse shall not
place or allow anything to be against or near the glass of partitions or
doors of the Premises which may diminish the light in, or be unsightly from,
halls or corridors. (t) The Lessee shall not install in the Premises any
equipment which uses a substantial amount of electricity without the advance
written consent of the Lessor. The Lessee shall ascertain from the Lessor
the maximum amount of electrical current which can safely be used in the
demised Premises, taking into account the capacity of the electric wiring in
the Building and the Premises and the needs of other tenants in the Building
and shall not use more than such safe capacity. The Lessor's consent to the
installation of electric equipment shall not relieve the Lessee from the
obligation not to use more electricity than such safe capacity. (u) The
Lessee shall not lay linoleum or other similar floor covering so that such
floor covering shall come in direct contact with the floor of the Premises,
and if linoleum or other similar floor covering is used, an interliner of
builder's deadening felt shall first be affixed to the floor by paste or
other material soluble in water. The use of cement or other similar material
is prohibited. (v) In addition to all other liabilities for breach of any
covenant of this Paragraph 11, the Lessee shall pay to the Lessor all damages
caused by such breach and shall also pay to the Lessor an amount equal to any
increase in insurance premium or premiums caused by such breach. The
violation of any covenant of this Paragraph 11 may be restrained by
injunction.
12. REPAIRS. Subject to the provisions of Paragraph 13, the Lessee shall,
at the Lessee's own expense, keep the Premises in good order, condition and
repair during the Term, including the replacement of all broken glass with glass
of the same size and quality, with signs thereon, under the supervision and with
the approval of the Lessor. If the Lessee does not make repairs promptly and
adequately, the Lessor may, but need not, make repairs, and the Lessee shall pay
promptly the cost thereof. At any time or times, the Lessor, either voluntarily
or pursuant to governmental requirement, may, at the Lessor's own expense, make
repairs, alterations or improvements in or to the Building or any part thereof,
including the Premises, and, during operations, may close entrances, doors,
corridors, elevators or other facilities, all
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without any liability to the Lessee by reason of interference, inconvenience
or annoyance. The Lessor and its beneficiaries shall not be liable to the
Lessee for any expense, injury, loss or damage resulting from work done in or
upon, or the use of, any adjacent or nearby building, land, street or alley.
The Lessee shall pay the Lessor for overtime and for any other expense
incurred in event repairs, alterations, decorating or other work in the
Premises are not made during ordinary business hours at the Lessee's request.
Lessor, at Lessor's own expense, shall maintain in good order,
condition and repair during the Term, the roof, foundation and structural
components of the Building other than the Premises, such that the same shall be
at all times in a clean and sanitary condition, in full compliance with all
applicable laws, and in a condition at lease as good as that maintained at other
comparable office buildings within the City of Chicago. Lessor may include
within the Operating Expenses, Lessor's expenses incurred in complying with this
paragraph.
13. UNTENANTABILITY. If the Premises or the Building are made
untenantable by fire or other casualty, the Lessor may elect to terminate this
Lease as of the date of the fire or casualty by notice to the Lessee within
sixty (60) days after that date. In the event that the Lessor does not
terminate this Lease, the Lessor shall repair, restore or rehabilitate the
Building or the Premises at the Lessor's expense within one hundred twenty (120)
days after the Lessor is enabled to take possession of the Premises and
undertake reconstruction or repairs, in which latter event the Lease shall not
terminate but rent shall be abated on a per diem basis while the Premises are
untenantable. If the Lessor elects so to repair, restore or rehabilitate the
Building or the Premises and does not substantially complete the work within the
one hundred twenty (120) day period, either party can terminate this Lease as of
the date of the fire or casualty by notice to the other party not later than one
hundred thirty (130) days after the Lessor is enabled to take possession of the
Premises and undertake reconstruction or repairs. In the event of termination
of the Lease pursuant to this Paragraph 13, rent shall be apportioned on a per
diem basis and be paid to the date of the fire or casualty.
14. EMINENT DOMAIN. If the Building, or any portion thereof which
includes a substantial part of the Premises, or which prevents the operation of
the Building, shall be taken or condemned by any competent authority for any
public use or purpose, the Term of this Lease shall end upon, and not before,
the date when the possession of the part so taken shall be required for such use
or purpose, and without apportionment of the condemnation award. The Lessee
shall have no right to share in such award. Current rent shall be apportioned
as of the date of such termination. If any condemnation proceeding shall be
instituted in which it is sought to take or damage any part of the Building, or
the land under it, or if the grade of any street or alley adjacent to the
Building is changed by any competent authority and such change of grade makes it
necessary or desirable to remodel the Building to conform to the changed grade,
the Lessor shall have the right to cancel this Lease upon not less than ninety
days' notice prior to the date of cancellation designated in the notice. No
money or other consideration shall be payable by the Lessor to the Lessee for
the right of cancellation and the Lessee shall have no
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right to share in the condemnation award or in the judgment for damages
caused by the change of grade.
15. LESSOR'S REMEDIES. All rights and remedies of the Lessor herein
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law.
(a) If any voluntary or involuntary petition or similar pleading
under any section or sections of any bankruptcy act shall be filed by or against
the Lessee, or any voluntary or involuntary proceeding in any court or tribunal
shall be instituted to declare the Lessee insolvent or unable to pay the
Lessee's debts, and in the case of an involuntary petition or proceeding, the
petition or proceeding is not dismissed within thirty days from the date it is
filed, the Lessor may elect, but is not required, and with or without notice of
such election, and with or without entry or other action by the Lessor, to
forthwith terminate this Lease, and, notwithstanding any other provision of this
Lease, the Lessor shall forthwith upon such termination be entitled to recover
damages in an amount equal to the then present value of the rent specified in
Paragraph 1 of this Lease for the residue of the stated Term hereof, less the
fair rental value of the Premises for the residue of the stated Term.
(b) If the Lessee defaults in the payment of rent, and the Lessee
does not cure the default within five (5) days after written demand for payment
of such rent, or if the Lessee defaults in the prompt and full performance of
any other provision of this Lease, and the Lessee does not cure the default
within twenty days (forthwith if the default involves a hazardous condition)
after written demand by the Lessor that the default be cured unless the default
involves a hazardous condition, which shall be cured forthwith upon the Lessor's
demand, or if the leasehold interest of the Lessee be levied upon under
execution or be attached by process of law, or if the Lessee makes an assignment
for the benefit of creditors, or if a receiver be appointed for any property of
the Lessee, or if the Lessee abandons the Premises, then and in any such event
the Lessor may, if the Lessor so elects but not otherwise, and with or without
notice of such election and with or without any demand whatsoever, either
forthwith terminate this Lease and the Lessee's right to possession of the
Premises or, without terminating this Lease, forthwith terminate the Lessee's
right to possession of the Premises.
(c) Upon any termination of this Lease, whether by lapse of time or
otherwise, or upon termination of the Lessee's right to possession without
termination of the Lease, the Lessee shall surrender possession and vacate the
Premises immediately, and deliver possession thereof to the Lessor, and hereby
grants to the Lessor and its beneficiaries full and free license to enter into
and upon the Premises in such event with or without process of law and to
repossess the Lessor of the Premises as of the Lessor's former estate and to
expel or remove the Lessee and any others who may be occupying or within the
Premises and to remove any and all property therefrom, using such force as may
be necessary, without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer and without relinquishing the Lessor's rights to rent
or any other right given to the Lessor hereunder or by operation of law.
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(d) If the Lessee abandons the Premises or otherwise entitles the
Lessor so to elect, and the Lessor elects to terminate the Lessee's right to
possession only, without terminating the Lease, the Lessor may, at the
Lessor's option enter into the Premises, remove the Lessee's signs and other
evidences of tenancy, and take and hold possession thereof as in this
Paragraph 15 provided, without such entry and possession terminating the
Lease or releasing the Lessee, in whole or in part, from the Lessee's
obligation to pay the rent hereunder for the full Term, and in any such case
the Lessee shall pay to the Lessor, the rent and other financial obligations
hereunder as they come due. Upon and after entry into possession without
termination of the Lease, the Lessor may, but need not, relet the Premises or
any part thereof for the account of the Lessee to any person, firm or
corporation other than the Lessee for such rent, for such time and upon such
terms as the Lessor in the Lessor's sole discretion shall determine, and the
Lessor shall not be required to accept any tenant offered by the Lessee or to
observe any instructions given by the Lessee about such reletting. In any
such case, the Lessor may make repairs, alterations and additions in or to
the Premises, and redecorate the same to the extent deemed by the Lessor
necessary or desirable, and the Lessee shall, upon demand, pay the cost
thereof, together with the Lessor's expenses of the reletting. If the
consideration collected by the Lessor upon any such reletting for the
Lessee's account is not sufficient to pay monthly the full amount of the rent
reserved in this Lease, together with the costs of repairs, alterations,
additions, redecorating and the Lessor's expenses, the Lessee shall pay to
the Lessor the amount of each monthly deficiency upon demand; and if the
consideration so collected from any such reletting is more than sufficient to
pay the full amount of the rent reserved herein, together with the costs and
expenses of the Lessor, the Lessor, at the end of the stated Term of the
Lease, shall account for the surplus to the Lessee.
(e) Deleted in its entirety.
(f) Any and all property which may be removed from the Premises by
the Lessor pursuant to the authority of the Lease or of law, to which the
Lessee is or may be entitled, may be handled, removed or stored by the Lessor
at the risk, cost and expense of the Lessee, and the Lessor and its
beneficiaries shall in no event be responsible for the value, preservation or
safekeeping thereof. The Lessee shall pay to the Lessor, upon demand, any and
all expenses incurred in such removal and all storage charges against such
property so long as the same shall be in the Lessor's possession or under the
Lessor's control. Any such property of the Lessee not removed from the
Premises or retaken from storage by the Lessee within thirty days after the
end of the Term, however terminated, shall be presumed to have been conveyed
by the Lessee to the Lessor under this Lease as a bill of sale without
further payment or credit by the Lessor to the Lessee.
(g) The Lessee shall pay upon demand all the Lessor's costs,
reasonable charges and expenses, including the fees of counsel, agents and
others retained by the Lessor, incurred in enforcing the Lessee's obligations
hereunder or incurred by the Lessor in any litigation, negotiation or
transaction in which the Lessee causes the Lessor, without the Lessor's
fault, to become involved or concerned.
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16. SUBORDINATION OF LEASE. Without the necessity of any additional
document being executed by Lessee for the purpose of effecting a subordination,
this Lease shall be subject and subordinate at all times to ground or
underlying leases and to the lien of any mortgages or deeds of trust now
(provided Lessee is furnished a Non Disturbance Agreement in a commercially
reasonable form) or hereafter placed on, against or affecting the Building,
Lessor's Site (which shall mean the land on which the Building is situated
and, where appropriate, the sidewalks and landscaping from the boundaries of
the land to the surrounding streets), Lessor's interest or estate therein, or
in any ground or underlying lease; provided, however, that if the mortgagee,
trustee, or holder of any such mortgage or deed of trust elects to have
Lessee's interest in this Lease be superior to any such instrument, then by
notice to Lessee this Lease shall be deemed superior, whether this Lease was
executed before or after said instrument. Notwithstanding the foregoing,
Lessee covenants and agrees to execute and deliver upon demand such further
instruments evidencing such subordination or superiority of this Lease as may
be required by Lessor.
17. NOTICES.
(a) Except as otherwise expressed herein, all notices
provided for herein shall be in writing. In every instance where it shall be
necessary or desirable for either party hereto to serve any notice or demand
upon the other party hereto, it shall be sufficient (i) to deliver or cause
to be delivered to the party on whom such notice or demand is to be served or
its duly authorized agent a written or printed copy thereof, or (ii) to send
a copy thereof by United States certified or registered mail, postage
prepaid, addressed to the party on whom such notice or demand is to be
served, in which event the notice or demand shall be deemed to have been
served at the time the notice or demand is postmarked, or (iii) send a copy
thereof by recognized overnight courier service, next business day delivery,
in which event the notice or demand shall be deemed to have been served on
the next business day.
(b) In every instance where notice or demand is served by mail or
overnight courier as aforesaid, it shall be sufficient to send such notice or
demand, as above provided, to Lessor at:
Michael Cahan
MAC Management Co., Inc.
640 North LaSalle
Chicago, IL 60610
with a copy to :
Michael Miselman, Esquire
D'Ancona & Pflaum
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111 East Wacker Drive
Suite 2800
Chicago, IL 60601
and to Lessee at:
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Attn: Stuart Frankel
or to such other address or addresses as either party may select upon notice
to the other party as herein provided.
18. MISCELLANEOUS.
(a) No receipt of money by the Lessor from the Lessee after the
termination of this Lease or after the service of any notice or after the
commencement of any suit, or after final judgment for possession of the
Premises shall renew, reinstate, continue or extend the Term of this Lease or
affect any such notice, demand or suit.
(b) No waiver of any default of the Lessee hereunder shall be
implied from any omission by the Lessor to take any action on account of such
default if such default persists or be repeated, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. The invalidity or
unenforceability of any provision hereof shall not affect or impair any other
provision.
(c) No person, firm or corporation, or the heirs, legal
representatives, successors and assigns, respectively, thereof, executing
this Lease on behalf of Lessor as agent, trustee or in any other
representative capacity shall ever be deemed or held individually liable
hereunder for any reason or cause whatsoever.
(d) The words "Lessor" and "Lessee" wherever used in this Lease
shall be construed to mean Lessors or Lessees in all cases where there is
more than one lessor or lessee, and the necessary grammatical changes
required to make the provisions hereof apply either to corporations or
individuals, men or women, shall in all cases be assumed as though in each
case fully expressed. Lessee agrees to furnish promptly upon demand a
corporate resolution, proof of due authorization by partners, or appropriate
documentation evidencing the due authorization of Lessee to enter into this
Lease. The term "rentable square feet" shall mean the rentable area of the
Premises or the Building as calculated by Lessor on the basis of the plans
and specifications (which were available for inspection by Lessee at the time
the Lease was executed) of the
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Building and including a proportionate share of any common areas. Lessee
hereby consents and agrees that the calculation of rentable square feet on
Page 1 hereof shall be controlling.
(e) Intentionally omitted.
(f) Provisions inserted herein or affixed hereto shall not be
valid unless appearing in the duplicate original hereof held by the Lessor.
In event of variation or discrepancy, the Lessor's duplicate shall control.
(g) Each provision hereof shall extend to and shall, as the case
may require, bind and inure to the benefit of the Lessor and the Lessee and
their respective heirs, legal representatives and successors, and assigns in
the event this Lease has been assigned with the express, written consent of
the Lessor as herein provided.
(h) The headings of Paragraphs are for convenience only and do not
limit or construe the contents of the Paragraphs.
(i) Submission of this instrument for examination does not
constitute a reservation of or option for the Premises. The instrument
becomes effective as a Lease upon execution and delivery by both Lessor and
Lessee.
(j) Except as otherwise expressly provided for herein, all amounts
(other than rent) owed by the Lessee to the Lessor hereunder shall be paid
within ten (l0) days from the date the Lessor renders statements of account
therefor and shall bear interest at the Default Rate from and after such
tenth day until paid.
(k) All riders attached to this Lease and signed by the Lessor and
the Lessee are hereby made a part of this Lease as though inserted at length
herein.
(l) If the Lessee shall occupy the Premises prior to the beginning
of the Term with the Lessor's consent, all the provisions of this Lease
shall be in full force and effect as soon as the Lessee occupies the
Premises. Rent for any period prior to the beginning of the Term shall be
fixed by agreement between the Lessor and the Lessee.
(m) This Lease is the entire understanding of the parties and the
terms and provisions of this Lease shall only be modified or amended in
writing.
(n) All sums due hereunder and accruing prior to the expiration of
the Term, whether by lapse of time or otherwise, shall be due notwithstanding
such expiration.
19. RENT ADJUSTMENT.
(a) The rent adjustment reserved herein by this Paragraph is based
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upon the Operating Expenses, as hereinafter defined, for the calendar year
1998, hereinafter referred to as the "Base Year". Should there be an increase
or decrease in said Operating Expenses for any calendar year during the term
of this Lease or any extension of the Term of this Lease, after the Base
Year, the amount of such increase or decrease shall be ascertained and the
rent reserved herein shall be adjusted, hereinafter referred to as "Adjusted
Rent", as follows: The rent for each calendar year or fraction thereof after
the Base Year shall be increased or decreased by 1.882% of said increase or
decrease in said Operating Expenses for the calendar year immediately ended
provided, however, that in the event of a decrease the reduction in the
Adjusted Rent may never result in a rent lower than the stipulated Base Rent
set forth in this Lease.
(b) In the event of an Operating Expense increase Lessee shall pay
Adjusted Rent to Lessor within ten (10) days of Lessor's written notice to
Lessee. Lessee's obligation for its payments hereunder shall survive the
Term of this Lease.
(c) In the event of an Operating Expense decrease Lessee shall be
given a credit towards Adjusted Rent within thirty (30) days of written
notice from Lessor to Lessee.
(d) Lessee shall also pay Lessor estimated rent (hereinafter
referred to as "Estimated Rent") in equal monthly installments each in
advance on the first day of each and every month during the Term in an amount
equal to one twelfth (1/12th) of Lessor's estimate of the increase in
Operating Expenses for the then current calendar year over the Base Year
based on Lessee's proportionate share as set forth in subparagraph (a) above
provided, however, that all Estimated Rent paid by Lessee in each calendar
year shall be applied as a credit against the Adjusted Rent to be paid by
Lessee to Lessor in accordance with subparagraph (a) above as calculated at
the end of each calendar year.
(e) "Operating Expenses" as used herein include, but not by way of
limitation, ad valorem real property taxes paid, as well as special taxes,
without limitation, special assessments, and any tax or excise levied by the
State of Illinois or the City of Chicago or any political subdivision
thereof, either on rents or other income from the Building and other portions
of Lessor's Site, excluding net income taxes required to be paid by Lessor to
the State of Illinois or the City of Chicago. Operating Expenses shall also
include, but not by way of limitation, all other expenses incurred by Lessor
in the maintenance and operation of the Building and other portions of
Lessor's Site, calculated in accordance with generally accepted accounting
principles, except as specifically modified herein, excluding the following:
(i) pro rata Operating Expenses and Taxes for owner
occupied space;
(ii) costs recovered by Lessor directly from Lessee and
other tenants of the Building and other portions of
Lessor's Site;
(iii) real estate brokers' leasing commissions or compensation;
16
<PAGE>
(iv) costs of improvements and replacements that are
capitalized in accordance with generally accepted
accounting principles;
(v) consulting fees associated with capital improvements;
and
(vi) depreciation, interest and principal payments on
mortgages, and other debt costs, if any, except that
depreciation of any capital improvements made after
expiration of the Base Year which are intended to
reduce Operating Expenses or which are required under
any governmental laws, regulations, or ordinances which
were not applicable to the Building or Lessor's site as
of the date hereof, shall not be excluded from
Operating Expenses.
20. ADDITIONAL RENT.
(a) "Consumer Price Index" shall mean the Consumer Price Index of
Urban Wage Earners and Clerical Workers - as revised from time to time - all
items, City of Chicago, issued by the Bureau of Labor Statistics, United
States Department of Labor, 1967 equals 100. In the event of a change in the
base index year or other index change, the adjustment factor issued by the
United States Department of Labor or other appropriate agency shall be
applied to the Consumer Price Index for purposes of this paragraph. If the
Consumer Price Index shall become unavailable to the public because
publication is discontinued, or otherwise, Lessor will substitute therefor a
comparable index based upon changes in the cost of living or purchasing power
of the consumer dollar published by any other governmental agency or, if no
such index shall then be available, a comparable index published by a major
bank or other financial institution or by a university or a recognized
financial publication.
(b) Effective as of each January 1 ("Adjustment Date") during the
Term, commencing January 1, 2000, the annual Base Rent for each year, shall
be increased by multiplying the Base Rent times twenty (20%) percent of the
percentage increase, if any, in the Consumer Price Index for the immediately
preceding calendar year over the Price Index for the calendar year 1998
("Base Year"). The Consumer Price Index for any year shall be determined by
adding the Consumer Price Index published for each month of the year and
dividing the total by twelve. In no event shall the Base Rent for any Lease
year be less than those amounts provided in Paragraph 1 hereof, unless Lessor
has exercised its right under Paragraph 2(f) of this Lease regarding the
discontinuance of furnishing electricity to the Premises.
(c) Lessor shall notify Lessee in writing as to the amount due
Lessor as a result of any change in the Consumer Price Index and Lessor shall
provide to the Lessee the Consumer Price Index for the Base Year and such
subsequent calendar year. Lessee shall remit its payment for the adjustment
to rent attributed by the Consumer Price Index within ten (10) days of the
above referred written notice from Lessor to Lessee.
17
<PAGE>
(d) Lessee shall also pay Lessor estimated rent (hereinafter
referred to as "Estimated Rent") in equal monthly installments each in
advance on the first day of each and every month during the Term in an amount
equal to one twelfth (l/l2th) of Lessor's estimate of the increase in
Consumer Price Index for the then current calendar year over the Base Year
computed as set forth in subparagraph (b) of this Paragraph 20, above
provided, however, that all Estimated Rent paid by Lessee in each calendar
year shall be applied as a credit against the Additional Rent to be paid by
Lessee to Lessor in accordance with subparagraph (b) above as calculated at
the end of each calendar year. At the expiration of Lessee's Term, Lessor
shall notify Lessee in writing of the actual Additional Rent due from Lessee
for the period, the Consumer Price Index for said period, and the Consumer
Price Index for the Base Year. All estimated Consumer Price Index rent
adjustment payments made by Lessee under this subparagraph (d) for the
period, shall be applied as a credit against the actual Additional Rent due
Lessor. Lessee's payment, if any, shall be due within ten (l0) days of said
notification from Lessor to Lessee. Lessee's obligation for said payment
shall survive the Term of this Lease.
(e) In the event of a Lease expiration on a day other than the
last day of the calendar year, rent adjustment for any Consumer Price Index
increase will be prorated for that portion of the Lease year extending beyond
the first day of the calendar year in which the Lease expires.
21. INTENTIONALLY DELETED.
22. SECURITY DEPOSIT. Lessee has this day deposited with the Lessor,
the sum of Five thousand nine hundred seventeen dollars ($5,917.00) as
security for the full and faithful performance by the Lessee of all the
terms, covenants and conditions upon the Lessee's part to be performed, which
said sum shall be returned to the Lessee within ninety (90) days after the
time fixed as the expiration of the Term herein. In the event of default by
the Lessee in respect of any of the terms, covenants, conditions or
provisions of said Lease, the Lessor may use, apply or retain all or any part
of the said security deposit in payment of any expense incurred by Lessor in
curing any default by Lessee, or (b) of damages suffered by Lessor by reason
of Lessee's default. Where applicable, vouchers and/or paid receipts will be
submitted to the Lessee within ninety (90) days, however Lessor's failure to
submit said documents within said time period shall not relieve Lessee's
liability for the above referred defaults under this Lease. The Lessor may
return the security or unused portion to the original Lessee, regardless of
any assignments of the within Lease in the absence of evidence satisfactory
to the Lessor of an assignment of the right to receive such security or any
part or balance thereof.
23. AFTER HOUR HVAC. During the Term of the Lease, the Lessee shall
have the right to purchase after hour heating, ventilation and air
conditioning at the rate of Forty Five ($45.00) Dollars per hour during the
first year of the Term and thereafter at its prevailing rates for such
services. Lessee must notify Lessor during the business hours and at least
two (2) hours
18
<PAGE>
in advance of its requirement for after hour HVAC. Lessee shall pay for such
services within ten (10) days after receipt of invoice from Lessor.
24. EFFECT OF WAIVER. The failure of Lessor to insist in any one or
more instances upon the strict performance of any of the terms, covenants,
conditions and agreements of this Lease, or to exercise any option herein
conferred, shall not be considered as Waiving or relinquishing for the future
any such terms, covenants or conditions, agreements or options, but the same
shall continue and remain in full force and effect; and the receipt of any
rent or any part thereof, whether the rent be that specifically reserved or
that which may become payable under any of the covenants herein contained,
and whether the same be received from Lessee or from any one claiming under
or through it or otherwise shall not be deemed to operate as a waiver of the
rights of Lessor to enforce the payment of rent or charges of any kind
previously due or which may thereafter become due, or the right to terminate
this Lease and to recover possession of the Premises by summary proceedings
or otherwise, as Lessor may deem proper, or to exercise any of the rights or
remedies reserved to Lessor hereunder or which Lessor may have at law, in
equity or otherwise.
25. CONSTRUCTION OF LEASE. Should any of the provisions of this Lease
require judicial interpretation, it is agreed that the court interpreting or
construing the same shall not apply a presumption that the terms of any such
provision shall be more strictly construed against one party by reason of the
rule of construction that a document is to be construed most strictly against
the party who itself or through its agent prepared the same, it being agreed
that the agents of all parties have participated in the preparation of this
Lease.
26. TENANT'S INSURANCE.
(a) Lessee, at Lessee's expense, agrees to maintain in force
during the Term:
(i) Comprehensive General Liability Insurance on an occurrence
basis with minimum limits of liability in an amount of
$500,000 for bodily injury, personal injury or death to
any one person and $100,000 with respect to damage to
property, including water and sprinkler damage; and
(ii) Fire Insurance with extended coverage and vandalism and
malicious mischief endorsements, in an amount adequate to
cover the full replacement value of all leasehold
improvements paid for by Lessee and wall and floor coverings
in the Premises.
(b) The policy referred to in Paragraph 26(a)(i) shall name
Lessor, its beneficiaries, and its respective agents and employees as
additional insureds and shall not provide for deductible amounts. The policy
referred to in Paragraph 26(a)(ii) shall not provide for deductible amounts
in excess of $5,000. Each policy referred to in Paragraph 26 shall be
19
<PAGE>
issued by one or more responsible insurance companies reasonably satisfactory
to Lessor and shall contain the following provisions and endorsements:
(i) that such insurance may not be canceled or amended without
thirty (30) days prior written notice to Lessor;
(ii) an express waiver of any right of subrogation by the
insurance company against Lessor and its agents and
employees; and
(iii) that the policy shall not be invalidated should the insured
waive in writing prior to a loss any or all rights of
recovery against any other party for losses covered by such
policies.
(c) Lessee shall deliver to Lessor certificates of insurance of
all insurance policies and renewals thereof to be maintained by Lessee
hereunder, not less than ten (10) days prior to the expiration date of each
policy. Provided that the insurance policies of Lessee will not be
invalidated nor will the right of the insured to collect the proceeds payable
under such policies be adversely affected by the waiver contained in the
following portion of this sentence, Lessee herein expressly waives all rights
of recovery which it might otherwise have against Lessor and its agents and
employees, for loss or damage to person, property or business to the extent
that such loss or damage is covered by valid and collectible insurance
policies. Lessee shall use its best efforts to obtain from its insurer the
right to waive claims as set forth in the preceding sentence without thereby
invalidating its insurance or affecting its right to proceeds payable
thereunder.
(d) Any insurance policy maintained by Lessor shall contain if
available an express waiver of any right of subrogation by the insurance
company against Lessee and its agents or employees.
27. REAL ESTATE BROKERS. Lessee represents that Lessee has not dealt
with any real estate broker, sales person or finder in connection with this
Lease, and no such person initiated or participated in the negotiation of
this Lease or showed the Premises to Lessee. Lessee hereby agrees to
indemnify and hold harmless Lessor from and against any and all liabilities
and claims for commissions and fees arising out of a breach of the foregoing
representation. Lessor shall be responsible for the payment of a commission
to the broker specified in this Paragraph 27, based upon the leasing
commission policy of Lessor applicable to the Building and in effect as of
the date of this Lease.
28. GOVERNING LAW. This Lease and the terms and provisions hereof
shall be construed in accordance with the Laws of the State of Illinois.
20
<PAGE>
29. SIGNAGE. Lessee shall obtain Lessor's written consent, which shall
not be unreasonably withheld, prior to placing any signage on or next to the
entrance door to the Premises.
30. SALE BY LESSOR. In the event of a sale or conveyance by Lessor of
the Building and Lessor's site, the same shall operate to release Lessor from
any future liability upon any of the covenants or conditions, expressed or
implied, herein contained in favor of Lessee, and in such event Lessee agrees
to look solely to the responsibility of the successor in interest of Lessor
in and to this Lease. Except as set forth in this Paragraph, this Lease
shall not be affected by any such sale, and Lessee agrees to attorn to the
purchaser or assignee. If any security has been given by Lessee to secure
the faithful performance of any of the covenants of this Lease, Lessor may
transfer or deliver said security, as such, to Lessor's successor in interest
and thereupon Lessor shall be discharged from any further liability with
regard to said security, provided that any successor shall not be liable for
such security unless such successor receives the same.
31. ESTOPPEL CERTIFICATE. Within ten (l0) days following any written
request which Lessor may make from time to time, Lessee shall execute and
deliver to Lessor or any prospective Lessor or mortgagee or prospective
mortgagee a sworn statement certifying: (a) the date of commencement of this
Lease; (b) the fact that this Lease is unmodified and in full force and
effect (or, if there have been modifications hereto, that this Lease is in
full force and effect, as modified, and stating the date and nature of such
modifications), (c) the date to which the rent and other sums payable under
this Lease have been paid, (d) the fact that there are no current defaults
under this Lease by either Lessor or Lessee, except as specified in Lessee's
statement, and (e) such other matters requested by Lessor. Lessor and Lessee
intend that any statement delivered pursuant to this Paragraph may be relied
upon by any mortgagee, beneficiary or purchaser and Lessee shall be liable
for all loss, cost or expense resulting from the failure of any sale or
funding of any loan caused by any material misstatement contained in such
estoppel certificate. Lessee hereby irrevocably appoints Lessor, or if
Lessor is a trust, Lessor's beneficiary or agent, as attorney-in-fact, for
the Lessee with full power and authority to execute and deliver the same
after such ten (l0) day period and such certificate as signed by Lessor,
Lessor's beneficiary or agent, as the case may be, shall be fully binding on
Lessee, if Lessee fails to deliver a contrary certificate within five (5)
days after receipt by Lessee of a copy of the certificate executed by Lessor,
Lessor's beneficiary or agent, as the case may be, on behalf of Lessee. This
Paragraph shall also be binding on any subtenant of Lessee.
32. UNAVOIDABLE DELAYS. The provisions of this Paragraph shall be
applicable if there shall occur, in and after the Rent Commencement Date, any
strikes, lockouts for labor disputes, inability to obtain labor or materials
or reasonable substitutes therefor or acts of God, governmental restrictions,
regulations or controls, enemy or hostile government action, civil commotion,
fire or other casualty or other conditions similar or dissimilar to those
enumerated in this Paragraph beyond the reasonable control of the party
obligated to perform. If Lessor or Lessee shall, as a result of any of the
above mentioned events, fail punctually to
21
<PAGE>
perform any obligation on its part to be performed under this Lease, then
such failure shall be excused and not be a breach of this Lease by the party
in question, but only to the extent and for the time occasioned by such
event. Notwithstanding anything to the contrary herein contained, however,
the provisions of this Paragraph shall not be applicable to Lessee's
obligation to pay, when due and payable, the Base Rent, Adjusted Rent,
Estimated Rent, or any other rent or sums or charges; and in addition, lack
of funds or inability to procure financing shall not be deemed to be an event
beyond the reasonable control of Lessee in the event of any unavoidable
delays as in this Paragraph provided. As a condition precedent to Lessee
claiming or relying upon such delay, Lessee shall give notice in writing of
such event to Lessor within ten (l0) days after the occurrence of the same.
33. TAXES. Lessee shall pay before delinquency all taxes, assessments,
license fees and public charges levied, assessed or imposed upon its business
operation, as well as upon its leasehold interest, trade fixtures,
furnishings, equipment, leasehold improvements, alterations, changes and
additions made by Lessee, merchandise and personal property of any kind
owned, installed or used by Lessee in, on or upon the Premises. In the event
any such items of property are assessed together with property of Lessor for
purposes of ad valorem real estate taxes, then, and in such event, such
assessment shall be equitably divided. Lessor shall determine the basis of
dividing any such assessments and such determination shall, if not arbitrary
or capricious, be binding upon both Lessor and Lessee. Lessee shall
reimburse Lessor upon demand for any such tax based on property of Lessee and
such amount shall be deducted in determining Operating Expenses hereunder.
Lessee, and not Lessor, shall pay when due and payable, any sales or use tax,
or other excise, tax or assessment, if any, now or hereafter levied or
assessed upon or against Lessee's or Lessor's interest in this Lease. If at
any time during the Term a tax, imposition, assessment or excise on rents or
other tax, however described, is levied or assessed against Lessor's interest
in this Lease or the rents hereunder, as a substitute in whole or in part for
any real property taxes as hereinbefore described, then Lessee hereby agrees
to pay Lessor, as additional rent hereunder, the amount of such tax,
imposition, assessment or excise on rents to the extent of such substitution.
Should the appropriate taxing authority require that any such tax, excise
and/or assessment be collected by Lessor for or on behalf of such taxing
authority, then such tax, excise and/or assessment shall be paid by Lessee to
Lessor monthly as additional rent in accordance with the terms of any notice
from Lessor to Lessee to such effect.
34. EXCULPATION OF LESSOR. Notwithstanding anything contained herein
to the contrary, the covenants contained in this Lease to be performed by
Lessor shall not be binding personally, but instead said covenants are made
for the purpose of binding only the fee simple or leasehold estate which
Lessor owns in the demised Premises. The Lessee shall look solely to the
equity of the Lessor in the property for the satisfaction of the remedies of
the Lessee in the event of a breach by the Lessor.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereunder have caused this Lease to be
executed under their seals, on the date first above written.
LESSOR:
ATTEST: MAC Management Co., Inc. as exclusive agent for
640 LaSalle LLC, an Illinois limited liability
company
By: BY
------------------------- -------------------------
Its Secretary Its President
ATTEST: LESSEE:
Tunes.com Inc., a Delaware Corporation
BY: BY:
------------------------- -------------------------
Its Secretary Its President
23
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, ________________________ , a Notary Public in and for said County in
the State aforesaid, do hereby certify that ____________________________, an
officer of the corporation, personally known to me to be the same person
whose name is subscribed to the foregoing instrument, appeared before me this
day in person and acknowledged that he signed and delivered the said
instrument as his own free and voluntary act.
Given under my hand and notarial seal this ________ day of
____________________________, 199__.
- ---------------------------------------
Notary Public
My commission expires:
-------------------------
24
<PAGE>
INDEX
<TABLE>
<CAPTION>
PARAGRAPH PAGE
- --------- ----
<S> <C>
1. BASE RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. LESSOR'S TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. CERTAIN RIGHTS RESERVED TO THE LESSOR . . . . . . . . . . . . . . 3
5. DEFAULT UNDER OTHER LEASE . . . . . . . . . . . . . . . . . . . 4
6. WAIVER OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . 4
7. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . 5
9. CONDITION OF PREMISES . . . . . . . . . . . . . . . . . . . . . . 5
10. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
13. UNTENANTABILITY . . . . . . . . . . . . . . . . . . . . . . . . 9
14. EMINENT DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . 10
15. LESSOR'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 10
16. SUBORDINATION OF LEASE. . . . . . . . . . . . . . . . . . . . . 12
17. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
18. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
19. RENT ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . 15
20. ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . 16
21. INTENTIONALLY DELETED . . . . . . . . . . . . . . . . . . . . . 17
22. SECURITY DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . 17
23. AFTER HOUR HVAC . . . . . . . . . . . . . . . . . . . . . . . . 18
24. EFFECT OF WAIVER. . . . . . . . . . . . . . . . . . . . . . . . 18
25. CONSTRUCTION OF LEASE . . . . . . . . . . . . . . . . . . . . . 18
26. TENANT'S INSURANCE. . . . . . . . . . . . . . . . . . . . . . . 18
27. REAL ESTATE BROKERS . . . . . . . . . . . . . . . . . . . . . . 19
28. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . 20
29. SIGNAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
30. SALE BY LESSOR. . . . . . . . . . . . . . . . . . . . . . . . . 20
31. ESTOPPEL CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . 20
32. UNAVOIDABLE DELAYS. . . . . . . . . . . . . . . . . . . . . . . 20
33. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
34. EXCULPATION OF LESSOR . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
LEASE AGREEMENT
BY AND BETWEEN
MAC Management Co., Inc. as
Exclusive Agent for
640 LaSalle LLC, an Illinois
limited liability company
and
Tunes.com Inc., a Delaware Corporation, as Lessee
To Premises Commonly Known As
SUITE 557
640 N. LA SALLE STREET
CHICAGO, ILLINOIS 60610
<PAGE>
EXHIBIT 10.11
TUNES.COM INC.
DIRECTORSHIP AGREEMENT
This Agreement is made as of __________ __,1999, by and between
Tunes.com Inc., a Delaware corporation (the "Corporation"), and the
individual whose name and signature appears on the last page hereof under the
heading "Director," a director of the Corporation (the "Director").
WHEREAS, it is essential to the Corporation that it attract and retain
as directors the most capable persons available and persons who have
significant experience in business, corporate and financial matters; and
WHEREAS, the Corporation has identified the Director as a person
possessing the background and abilities desired by the Corporation and
desires the Director to serve as a member of the Corporation's Board of
Directors; and
WHEREAS, the substantial increase in corporate litigation may, from time
to time, subject directors to burdensome litigation, the risks of which
frequently far outweigh the advantages of serving in such capacity; and
WHEREAS, the costs and availability of directors' and officers'
liability insurance have fluctuated widely over time, and such insurance
contains express and implied limitations on coverage and may involve
protracted claims procedures that prevent the timely payment of losses; and
WHEREAS, the Corporation and the Director recognize that serving as a
director of a corporation at times calls for subjective evaluations and
judgments upon which reasonable men may differ and that, in that context, it
is anticipated and expected that directors of corporations will and do from
time to time commit actual or alleged errors or omissions in the good faith
exercise of their duties and responsibilities; and
WHEREAS, it is now and has always been the express policy of the
Corporation to indemnify its directors to the fullest extent permitted by
law; and
WHEREAS, the Corporation and the Director desire to articulate clearly
in contractual form, their respective rights and obligations with regard to
the Director's service on behalf of the Corporation and with regard to claims
for loss, liability, expense or damage which, directly or indirectly, may
arise out of or relate to such service,
NOW, THEREFORE, the Corporation and the Director agree as follows:
<PAGE>
1. AGREEMENT TO SERVE
The Director shall serve as a director of the Corporation for as long as
the Director is duly elected or appointed or until said Director tenders a
resignation in writing.
2. DEFINITIONS
As used in this Agreement:
(a) The term "Proceeding" includes, without limitation, any
threatened, pending or completed action, suit or proceeding, whether brought
in the right of the Corporation or otherwise and whether of a civil,
criminal, administrative or investigative nature, in which the Director may
be or may have been involved as a party, witness or otherwise, by reason of
the fact that the Director is or was a director of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, whether or not serving in such capacity at the time any
liability or expense is incurred for which exculpation, indemnification or
reimbursement can be provided under this Agreement.
(b) The term "Expenses" includes, without limitation thereto, expenses
of investigations, judicial or administrative proceedings or appeals,
attorney, accountant and other professional fees and disbursements and any
expenses of establishing a right to indemnification under Section 11 of this
Agreement, but shall not include amounts paid in settlement by the Director
or the amount of judgments or fines against the Director.
(c) References to "other enterprise" include, without limitation,
employee benefit plans; references to "fines" include, without limitation,
any excise tax assessed with respect to any employee benefit plan; references
to "serving at the request of the Corporation" include, without limitation,
any service as a director, officer, employee or agent which imposes duties
on, or involves services by, such director, officer, employee or agent with
respect to an employee benefit plan, its participants, or its beneficiaries;
and a person who acted in good faith and in a manner reasonably believed to
be in the interest of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the Corporation" as
referred to in this Agreement.
3. LIMITATION OF LIABILITY
(a) To the fullest extent permitted by law, the Director shall have no
monetary liability of any kind or nature with respect to the Director's
conduct in serving the Corporation or any of its subsidiaries, their
respective stockholders or any other enterprise at the request of the
Corporation, except that this Section 3(a) shall not affect liability of the
Director for:
(i) any breach of the Director's duty of loyalty to the Corporation, such
subsidiaries, stockholders or enterprises;
2
<PAGE>
(ii) any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
(iii) any transaction from which the Director derived an improper personal
benefit; or
(iv) any unlawful payment of dividends, stock repurchases or redemptions.
(b) Without limiting the generality of (a) above and to the fullest
extent permitted by law, the Director shall have no personal liability to the
Corporation or any of its subsidiaries, their respective stockholders or any
other person claiming derivatively through the Corporation [or the Corporation],
regardless of the theory or principle under which such liability may be
asserted, for:
(i) punitive, exemplary or consequential damages;
(ii) treble or other damages computed based upon any multiple of damages
actually and directly proved to have been sustained;
(iii) fees of attorneys, accountants, expert witnesses or professional
consultants; or
(iv) civil fines or penalties of any kind or nature whatsoever.
4. INDEMNITY IN THIRD PARTY PROCEEDINGS
The Corporation shall indemnify the Director in accordance with the
provisions of this Section 4, if the Director is made a party to any Proceeding
(other than a Proceeding by or in the right of the Corporation to procure a
judgment in its favor), against all Expenses, judgments, fines and amounts paid
in settlement, actually and reasonably incurred by the Director in connection
with such Proceeding if the conduct of the Director was in good faith and the
Director reasonably believed that the Director's conduct was in, or not opposed
to, the best interests of the corporation, and, in the case of a criminal
proceeding, the Director, in addition, had no reasonable cause to believe that
the Director's conduct was unlawful. However, the Director shall not be
entitled to indemnification under this Section 4 in connection with any
Proceeding charging improper personal benefit to the Director in which the
Director was adjudged liable on the basis that personal benefit was improperly
received by the Director unless and only to the extent that the court conducting
such Proceeding or any other court of competent jurisdiction determines, upon
application, that despite the adjudication of liability, the Director is fairly
and reasonably entitled to indemnification in view of all the relevant
circumstances.
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5. INDEMNITY IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION
The Corporation shall indemnify the Director in accordance with the
provisions of this Section 5, if the Director is made a party to any Proceeding
by or in the right of the Corporation to procure a judgment in its favor,
against all Expenses actually and reasonably incurred by the Director in
connection with such Proceeding if the conduct of the Director was in good faith
and the Director reasonably believed that the Director's conduct was in the best
interests of the Corporation, or at least, not opposed to its best interests.
However, the Director shall not be entitled to indemnification under this
Section 5 in connection with any issue, claim or matter in a Proceeding to the
extent that the Director has been adjudged liable to the Corporation with
respect to such issue, claim or matter unless and only to the extent that the
court conducting such Proceeding or any other court of competent jurisdiction
determines upon application, that, despite the adjudication of liability, the
Director is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY
Notwithstanding any other provisions of this Agreement, to the extent that
the Director has been successful, on the merits or otherwise, in defense of any
Proceeding or in defense of any claim, issue or matter therein, the Corporation
shall indemnify the Director against all Expenses incurred in connection
therewith.
7. EXCLUSIONS
Notwithstanding any provision in this Agreement, the Corporation shall not
be obligated under this Agreement to make any indemnification in connection with
any claim made against the Director:
(a) to the extent to which any payment has been made to or on behalf of
the Director with respect to such claim under any insurance policy;
(b) if a court having jurisdiction in the matter finally determines that
such indemnification is not lawful under any applicable statute or public policy
(and, in this respect, both the Corporation and the Director have been advised
that in the opinion of the Securities and Exchange Commission indemnification
for liabilities arising under the Securities Act of 1933 is against public
policy and is, therefore, unenforceable and that claims for such indemnification
should be submitted to appropriate courts for adjudication unless, in the
opinion of counsel, the matter has been settled by controlling precedent);
(c) in connection with any Proceeding (or part of any Proceeding)
initiated by the Director, or any Proceeding by the Director against the
Corporation or its directors, officers, employees or other persons entitled to
be indemnified by the Corporation, unless (i) the Corporation is expressly
required by law to make the indemnification, (ii) the Proceeding was authorized
by the Board of Directors of the Corporation, or (iii) the Director initiated
the
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<PAGE>
Proceeding pursuant to Section 11 of this Agreement and the Director is
successful in whole or in part in the Proceeding;
(d) in connection with any proceeding by or on behalf of the Corporation
to recover short-swing profits pursuant to Section 16(b) of the Securities and
Exchange Act of 1934.
8. ADVANCES OF EXPENSES
The Corporation shall pay the Expenses incurred by the Director in any
Proceeding in advance of the final disposition of the Proceeding at the written
request of the Director, if the Director: furnishes the Corporation a written
undertaking to repay the advance to the extent that it is ultimately determined
that the Director is not entitled to be indemnified by the Corporation. Such
undertaking shall be an unlimited general obligation of the Director but need
not be secured, except as otherwise provided herein.
Advances pursuant to this Section 8 shall be made no later than ten days
after receipt by the Corporation of the undertaking described in this Section 8,
and, except as provided in Section 10, shall be made without regard to the
Director's ability to repay the amount advanced and without regard to the
Director's ultimate entitlement to indemnification under this Agreement. The
Corporation may establish a trust, escrow account or other secured funding
source for the payment of advances made and to be made pursuant to this Section
8 or of other liability incurred by the Director in connection with any
Proceeding.
9. NONEXCLUSIVITY AND CONTINUITY OF RIGHTS
The indemnification, advancement of Expenses and exculpation from liability
provided by this Agreement shall not be deemed exclusive of any other rights to
which the Director may be entitled under any other agreement, any certificate of
incorporation, bylaws or vote of shareholders or directors, or otherwise, both
as to action in the Director's official capacity and as to action in another
capacity while holding such office. The indemnification under this Agreement
shall cover the Director's service as a director and all of his acts in such
capacity, whether prior to or on or after the date of this Agreement, and such
indemnification shall continue as to the Director even though the Director may
have ceased to be a director of the Corporation or a director, officer, employee
or agent of an enterprise related to the Corporation and shall inure to the
benefit of the heirs, executors, administrators and personal representatives of
the Director.
10. PROCEDURE UPON APPLICATION FOR INDEMNIFICATION
Any indemnification under Sections 4, 5, or 6 shall be made no later than
45 days after receipt of the written request of the said Director, unless a
determination is made within such 45-day period by (a) the Board of Directors by
a majority vote of directors who were not parties to the applicable Proceeding,
even though less than a quorum; (b) a committee of such directors designated by
a majority vote of such directors, even though less than a quorum;
(c) independent legal counsel in a written opinion; or (d) a majority vote of
the shareholders, that, on the basis of
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<PAGE>
facts then known the said Director is not entitled to indemnification under
this Agreement. In the event that the board, committee, independent counsel
or shareholders cannot reasonably determine entitlement to indemnification
within the 45-day period, the director shall be entitled to an advancement of
the amount of the indemnification requested, subject to such security for
repayment as the board of directors may require.
11. ENFORCEMENT
The Director may enforce any right to indemnification or advances provided
by this Agreement in any court of competent jurisdiction if (a) the Corporation
denies the claim for indemnification or advances, in whole or in part, or (b)
the Corporation does not dispose of such claim within the time period required
by this Agreement. It shall be a defense to any such enforcement action (other
than an action brought to enforce a claim for advancement of Expenses pursuant
to, and in compliance with, Section 8 of this Agreement) that the Director is
not entitled to indemnification under this Agreement. However, except as
provided in Section 13 of this Agreement, the Corporation shall have no defense
to an action brought to enforce a claim for advancement of Expenses pursuant to
Section 8 of this Agreement if the Director has tendered to the Corporation the
affirmation and undertaking required thereunder. The burden of proving by clear
and convincing evidence that indemnification is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors or independent legal counsel) to have made a determination prior to
the commencement of such action that indemnification or advancement of expenses
is proper in the circumstances because the Director has met the applicable
standard of conduct nor an actual determination by the Corporation (including
its Board of Directors or independent legal counsel) that indemnification is
improper because the said Director has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
Director is not entitled to indemnification under this Agreement or otherwise.
The Director's expenses incurred in connection with successfully establishing
the Director's right to indemnification, advances or exculpation, in whole or in
part, in any Proceeding shall also be indemnified by the Corporation.
The termination of any Proceeding by judgment, order of court, settlement,
conviction or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of
itself, create a presumption that (a) the Director is not entitled to
indemnification under Sections 4 or 5 of this Agreement, or (b) the Director is
not entitled to exculpation under Section 3 of this Agreement.
12. NOTIFICATION AND DEFENSE OF CLAIM
Not later than 90 days after receipt by the Director of notice of the
commencement of any Proceeding, the Director shall, if a claim in respect of the
Proceeding is to be made against the Corporation under this Agreement, notify
the Corporation of the commencement of the Proceeding. The omission to notify
the Corporation will not relieve the Corporation from any liability which it may
have to the Director otherwise than under this Agreement. With respect to any
Proceeding as to which the Director notifies the Corporation of the
commencement:
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<PAGE>
(a) The Corporation shall be entitled to participate in the Proceeding at
its own expense.
(b) Except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense of the Proceeding, with
legal counsel reasonably satisfactory to the Director. The Director shall have
the right to use separate legal counsel in the Proceeding, but the Corporation
shall not be liable to the Director under this Agreement, including Section 9
above, for the fees and expenses of separate legal counsel incurred after notice
from the Corporation of its assumption of the defense, unless (i) the Director
reasonably concludes that there may be a conflict of interest between the
Corporation and the Director in the conduct of the defense of the Proceeding, or
(ii) the Corporation does not use legal counsel to assume the defense of such
Proceeding. The Corporation shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Corporation or as to which the
Director has made the conclusion provided for in (i) above.
(c) If two or more persons who may be entitled to indemnification from
the Corporation, including the Director, are parties to any Proceeding, the
Corporation may require the Director to use the same legal counsel as the other
parties. The Director shall have the right to use separate legal counsel in the
Proceeding, but the Corporation shall not be liable to the Director under this
Agreement, including Section 8 above, for the fees and expenses of separate
legal counsel incurred after notice from the Corporation of the requirement to
use the same legal counsel as the other parties, unless the Director reasonably
concludes that there may be a conflict of interest between the Director and any
of the other parties required by the Corporation to be represented by the same
legal counsel.
(d) Notwithstanding any other provision of this agreement, the
Corporation shall not be liable to indemnify the Director under this Agreement
for any amounts paid in settlement of any Proceeding effected without its
written consent, which shall not be unreasonably withheld. The Director shall
permit the Corporation to settle any Proceeding that the Corporation assumes the
defense of, except that the Corporation shall not settle any action or claim in
any manner that would impose any penalty or limitation on the Director without
the Director's written consent, which may be given or withheld in the said
Director's sole discretion.
13. PARTIAL INDEMNIFICATION
If the Director is entitled under any provisions of this Agreement to
indemnification by the Corporation for some or a portion of the Expenses,
judgments, fines or amounts paid in settlement, actually and reasonably incurred
by the Director in connection with such Proceeding, but not, however, for the
total amount thereof, the Corporation shall nevertheless indemnify the Director
for the portion of such Expenses, judgments, fines or amounts paid in settlement
to which the Director is entitled.
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<PAGE>
14. SEVERABILITY
If this Agreement or any portion thereof shall be invalidated on any ground
by any court of competent jurisdiction, then the remainder of this Agreement
shall continue to be valid and the Corporation shall nevertheless indemnify the
Director as to Expenses, judgments, fines and amounts paid in settlement, and
advance Expenses, with respect to any Proceeding, to the fullest extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated or by any other applicable law.
15. SUBROGATION
In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Director. The Director shall execute all documents required and shall do all
acts that may be necessary to secure such rights and to enable the Corporation
effectively to bring suit to enforce such rights.
16. NOTICES
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given
(a) upon delivery by hand to the party to whom the notice or other communication
shall have been directed, (b) on the first business day after the date on which
it is mailed if sent by nationally recognized overnight courier service, or
(c) on the third business day after the date on which it is mailed by certified
or registered mail with postage prepaid, addressed as follows:
(i) If to the Director, to the address indicated on the signature page of
this Agreement, below said Director's signature.
(ii) If to the Corporation, a copy to each of:
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Attention: Chief Financial Officer
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Attention: General Counsel
or to any other address as either party may designate to the other in
writing.
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<PAGE>
17. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall constitute the original.
18. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Delaware without regard to the principles of
conflict of laws.
19. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the Corporation and its successors and
assigns.
IN WITNESS WHEREOF, the parties hereby have caused this Directorship
Agreement to be duly executed and signed as of the day and year first above
written.
CORPORATION:
TUNES.COM INC.
a Delaware corporation
Attest:_________________________ By:___________________________
Stuart B. Frankel Howard A. Tullman
Chief Financial Officer, Chairman of the Board and
Treasurer and Secretary Chief Executive Officer
DIRECTOR:
_______________________________
Address:
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<PAGE>
Exhibit 10.12
FIRST AMENDMENT TO LEASE
This First Amendment to Lease, made and entered into this 20th day of
October 1997, by and between Amalgamated Trust & Savings Bank, as Trustee under
Trust No. 5261 ("Lessor") and JAMtv Corporation, a Delaware corporation,
("Lessee").
RECITALS
WHEREAS, Lessor and Lessee entered into a certain Lease dated May 29, 1997,
(hereinafter referred to as the "Lease") for certain premises identified as
Suite 560, consisting thereunder of approximately 9,622 rentable square feet as
outlined on Attachment "A-1" to the Lease, located on the Fifth Floor of the
Building located at 640 North LaSalle Street, Chicago, Illinois (sometimes
referred to therein as the "Premises"); and
WHEREAS, Lessor and Lessee now desire to modify the Lease and certain
particulars.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. AREA OF PREMISES. As of the Effective Date, as defined herein,
Lessee's Premises shall include an additional 2,433 rentable square feet on the
Fifth Floor of the Building, as cross hatched and outlined in Attachment "1A-1"
attached hereto and made a part of this First Amendment to Lease.
Specifically, the opening paragraph on Page 1 of the Lease shall be amended
as follows: after the words, "consisting of approximately" delete "9,622
rentable square feet (as outlined in Attachment "A-1" attached hereto and made
a part of this Lease) at:" and substitute in its place, "12,055 rentable square
feet (as outlined in Attachment "1A-1" attached hereto and made a part of this
First Amendment to Lease) at:"
2. BASE RENT. As of the Effective Date, as later defined herein, the
first sentence of Paragraph 1 of the Lease, "Base Rent" is hereby deleted with
the following inserted in its place:
"1. BASE RENT. Lessee shall pay to Lessor at the office of Lessor or
at such other place as Lessor may designate, the annual base rent as
follows:
1
<PAGE>
<TABLE>
<CAPTION>
Term Annual Base Monthly Base
---- Rent Rent
---- ----
<S> <C> <C>
06/01/97 - Effective Date $153,952. $12,829.33
Effective Date - 05/31/98 $192,880. $16,073.33
06/01/98 - 05/31/99 $198,666. $16,555.00
06/01/99 - 05/31/00 $204,626 $17,052.17
06/01/00 - 05/31/01 $210,765 $17,563.75
06/01/01 - 05/31/02 $217,088 $18,090.67
</TABLE>
which shall be paid and due in equal monthly installments, each in
advance on the first day of each and every calendar month during the
Term and at the then current rate for fractions of a month if the Term
shall commence or be terminated on any day other than the last day of
any month."
3. RENT ADJUSTMENT. As of the Effective Date, Paragraph 19(a) "Rent
Adjustment" is hereby modified as follows:
Delete all of Paragraph 19(a) after the words, "Adjusted Rent," as
follows:" and insert therein the following:
"The rental for each calendar year or fraction thereof after the Base
Year shall be increased or decreased for the following periods by the
following percentage:
06/01/97 - Effective Date 4.613%
Effective Date - 05/31/02 5.780%
of said increase or decrease in said Operating Expenses for the
calendar year immediately ended, provided, however, that in the event
of a decrease the reduction in the Adjusted Rent may never result in a
rent lower than the stipulated Base Rent as set forth in this Lease."
4. ADDITIONAL RENT. Paragraph 20 "Additional Rent" of the Lease shall be
amended as follows: wherever the term Base Rent is referred to or an amount
representing the Base Rent, such Base Rent shall mean, as of the Effective Date,
that amount as provided by Paragraph 2 of this First Amendment to Lease. The
computation of the Additional Rent shall be made in accordance with the terms as
originally provided in Paragraph 20 of the Lease, except as specifically
provided herein.
5. CONDITION OF PREMISES. Anything in this First Amendment to Lease and
the Lease to the contrary notwithstanding, it is understood and agreed between
the Lessor and Lessee that the Premises cross hatched in Attachment "1A-1" to
this First Amendment to Lease are being
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<PAGE>
delivered by Lessor to Lessee in the condition as described on the
Workletter, attached hereto and made a part hereof.
6. EFFECTIVE DATE. This First Amendment to Lease shall be effective as of
November 1, 1997 (herein sometimes referred to as the "Effective Date").
7. CONFIRMATION OF LEASE. Lessee confirms and certifies that the Lease as
amended is in full force and effect and has not been modified (except as set
forth herein): the Term of the Lease expires on May 31, 2002; that Lessor is
not in default under the Lease; and on this date there are no existing defenses
or offsets which Lessee has against the enforcement of this Lease by Lessor.
8. EFFECTIVENESS OF LEASE. Except as expressly provided herein, nothing
in this First Amendment to Lease shall be deemed to waive or modify any of the
provisions of the Lease, or any amendment or addendum thereto. In the event of
any conflict between the Lease and this First Amendment to Lease, this First
Amendment to Lease shall prevail.
9. SUCCESSORS AND ASSIGNS. This First Amendment to Lease shall be binding
upon and inure to the benefit of the heirs, executors, administrators,
successors and assigns of the respective parties hereto.
10. COUNTERPARTS. This First Amendment to Lease may be executed in
several counterparts, each of which may be deemed an original, but all of which
together shall constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Lease as of the day and year first written above.
LESSOR:
MAC MANAGEMENT CO., INC., as
agent for the holder of the
beneficial interest under
Amalgamated Trust & Savings
Bank, not individually, but as
Trustee under Trust No. 5261
By /s/ Lessor
---------------------------
Its _______________________
ATTEST:
By /s/ Lessor
------------------------
Its ______ Secretary
LESSEE:
JAMtv Corporation, a Delaware corporation
By /s/ Company
---------------------------
Its _______________________
ATTEST:
By /s/ Company
----------------------
Its ______ Secretary
4
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, /s/ Notary, a Notary Public in and for said County in the State
aforesaid, do hereby certify that /s/ Company, an Officer of JAMtv
Corporation, personally known to me to be the same person whose name is
subscribed to the foregoing instrument, appeared before me this day in person
and acknowledged that he signed and delivered the said instrument as his own
free and voluntary act.
Given under my hand and notarial seal this _______ day of _______________,
199__.
/s/
-------------------
Notary Public
My commission expires: ____________________
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<PAGE>
640 NORTH LA SALLE STREET
OFFICE LEASE
THIS LEASE (hereinafter referred to as "Lease"), made this 29th day of May,
1997.
W I T N E S S E T H:
AMALGAMATED TRUST & SAVINGS BANK, as Trustee under Trust No. 5261
("Lessor"),hereby leases unto JAMtv Corporation, a Delaware Corporation
("Lessee"), and the Lessee hereby accepts the Premises ("Premises") known as
Suite 560, consisting of approximately 9,622 rentable square feet (as outlined
in Attachment "A-1" attached hereto and made a part of this Lease) at:
640 NORTH LA SALLE STREET, CHICAGO, ILLINOIS
("Building") for a term ("Term") commencing on the earlier of June 1, 1997, or
the substantial completion of the Work, as defined in the Work Letter attached
hereto and made part of this Lease, (sometimes hereinafter referred to as the
"Commencement Date"), and ending May 31, 2002, unless sooner terminated as
provided herein, to be occupied and used by the Lessee for general office space.
Occupancy shall be available on the earlier of (i) the substantial completion of
the work provided in the Work Letter or (ii) the Commencement Date.
IN CONSIDERATION THEREOF, the Parties covenant and agree:
1. BASE RENT.
Lessee shall pay to Lessor at the office of Lessor or at such other
place as Lessor may designate, the annual Base Rent (hereinafter referred to as
"Base Rent") as follows:
<TABLE>
<CAPTION>
Base Rent Period Annual Base Rent Monthly Base Rent:
<S> <C> <C>
06/01/97 - 05/31/98 $153,952.00 $12,829.33
06/01/98 - 05/31/99 $158,571.00 $13,214.25
06/01/99 - 05/31/00 $163,328.00 $13,610.67
06/01/00 - 05/31/01 $168,228.00 $14,019.00
06/01/01 - 05/31/02 $173,274.00 $14,439.00
</TABLE>
<PAGE>
which shall be paid and due in equal monthly installments, each in advance on
the first day of each and every calendar month during the Term and at the then
current rate for fractions of a month if the Term shall be commence or terminate
on any day other than the last day of a month. The Base Rent, Adjusted Rent (as
hereinafter defined), Estimated Rent (as hereinafter defined) and other sums and
charges payable by Lessee under this Lease are hereinafter referred to as
"rent". Unpaid rent shall bear interest at the Default Rate in effect during
the time interest is due Lessor on account of unpaid rent. The Default Rate
shall be two (2%) percent above the Designated Rate. The Designated Rate shall
be the rate of interest announced from time to time by Continental Bank N.A. as
its Designated Rate, which may not be the lowest or best rate charged by said
bank. Interest shall be due on unpaid rent from five (5) days after the date
such unpaid rent is due until the unpaid rent is paid.
2. SERVICE. The Lessor shall provide:
(a) Janitor Service in and about the Premises, Saturdays, Sundays and
holidays excepted. The Lessee shall not provide any janitor service without the
Lessor's written consent. If the Lessor's consent be given, such janitor
service shall be subject to Lessor's supervision but at the Lessee's sole
responsibility. The Lessee shall not provide any janitor service in the
Premises except through a janitor contractor or employees who are and shall
continuously be in each and every instance satisfactory to the Lessor.
(b) Heat and Air Conditioning daily from 8:00 a.m. to 6:00 p.m.,
Saturday 8:00 a.m. to 1:00 p.m., Sundays and holidays excepted, whenever heat or
air conditioning shall, in the Lessor's reasonable judgment, be required for the
comfortable occupation and use of the Premises.
(c) Water from City of Chicago mains for drinking, lavatory and
toilet purposes, drawn through fixtures installed by the Lessor or by the Lessee
with the Lessor's written consent. The Lessee shall pay, at rates fixed by the
Lessor, for water used for air conditioning, refrigerating or any purpose other
than drinking, lavatory and toilet purposes.
(d) Passenger Elevator Service in common with other tenants daily
from 8:00 a.m. to 6:00 p.m. (Saturdays to 1:00 p.m.) Sundays and holidays
excepted and Freight Elevator Service in common with other tenants daily from
8:00 a.m. to 5:00 p.m. Saturdays, Sundays and holidays excepted. At all other
times at least one elevator shall be available for Lessee's use.
(e) Electricity: Lessee acknowledges that the monthly Base Rent
includes electricity for standard building lighting provided by Lessor (not to
exceed 260 hours per month) and for Lessee's incidental use (not to exceed 260
hours per month), based upon the following:
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<PAGE>
(i) With respect to lighting, the amount so included is based
upon a connected electrical load not exceeding an
average of 2.4 watts per square foot of the premises.
(ii) With respect to incidental use, the amount so included is
based upon: (1) a connected electrical load not
exceeding an average of one watt per square foot of the
Premises; (2) electricity furnished at nominal 120
volts and with no electrical circuit for supply having
a current capacity exceeding 15 amperes; and (3)
electricity being used only for equipment and
accessories normal to office usage.
Lessor shall maintain but Lessee shall bear the cost of maintaining
the lighting fixtures and replacement of all parts, including lamps and
ballasts.
Upon request of Lessor or Lessee, Lessor or Lessor's designated
independent electrical consultant shall make a survey of Lessee's Premises in
order to ascertain the quantity and type of electrical equipment, appliances,
and fixtures utilizing electrical power within Lessee's Premises and thereby
determine the amount of electricity consumed by Lessee. As a result of such
survey, if it is determined that Lessee's requirements for electricity for
lighting and incidental use exceed those set forth in this Paragraph, Lessor
shall have the right to increase Lessee's rent accordingly. Also, in the event
of an increase in the rate payable by Lessor to the public utility furnishing
electricity and/or for sales, excise, or similar tax thereon, and/or an increase
in fuel adjustment charges all in effect as of the date of this Lease, Lessor
shall have the right to increase Lessee's rent accordingly. Any such increase
in rent shall become effective immediately upon notice from Lessor accompanied
by supporting information indicating the excess quantity of electricity used by
Lessee and/or the amount of the increase in electric rates or taxes or fuel
adjustment charges by the public utility.
(f) Lessor reserves the right to discontinue furnishing electricity
and require Lessee to procure electricity at Lessee's expense by arrangement
with Commonwealth Edison Company or another approved local utility provided,
however, commencing with the date when Lessee receives such direct service, the
fixed annual Base Rent payable under the Lease shall be reduced by $9,622.00 per
annum, plus any adjustment made in Paragraph 2(e).
The Lessor does not warrant that any of the services above mentioned
will be free from interruptions caused by war, insurrection, civil commotion,
riots, acts of God or the enemy or Government action, repairs, renewals,
improvements, alterations, strikes, lockouts, picketing, whether legal or
illegal, accidents, inability of Lessor to obtain fuel or supplies, or any other
cause or causes beyond the reasonable control of the Lessor. Any such
interruption of service shall never be deemed an eviction or disturbance of the
Lessee's use and possession of the Premises or any part thereof, or render the
Lessor liable to the Lessee for damages, or relieve the Lessee from performance
of the Lessee's obligations under this Lease. Notwithstanding the foregoing, in
the event of any interruption of service which is not beyond the reasonable
control
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<PAGE>
of Lessor, (i) the Lessor will act diligently to restore any required service
which is interrupted; and , (ii) if an interruption of services renders the
Premises untenantable (i.e., unusable by the Lessee for the intended purpose)
for more than five (5) consecutive business days, the Base Rent beginning on
the sixth day will abate until the Premises are restored to tenantable
condition.
3. LESSOR'S TITLE. The Lessor's title is and always shall be
paramount to the title of the Lessee, and nothing herein contained shall empower
the Lessee to do any act which can, shall or may encumber the title of the
Lessor.
4. CERTAIN RIGHTS RESERVED TO THE LESSOR The Lessor reserves the
following rights: (a) to change the name or street address of the Building
without notice or liability of the Lessor to the Lessee; (b) to install and
maintain a sign or signs on the exterior of the Building; (c) to have access for
the Lessor and the other tenants of the Building to any mail chutes located on
the Premises according to the rules of the United States Post Office; (d) to
designate all sources for furnishing sign painting and lettering on any exterior
surfaces of the Premises or those within the Premises, which can be seen from
outside the Premises or the Building, ice, drinking water, towels and toilet
supplies used on the Premises; (e) during the last 180 days of the Term or any
part thereof, if during or prior to that time the Lessee vacates the Premises,
to decorate, remodel, repair, alter or otherwise prepare the Premises for
reoccupancy; (f) to constantly have pass keys to the Premises; (g) to grant to
anyone the exclusive right to conduct any particular business or undertaking in
the Building; provided no such grant shall prohibit Lessee from using the
Premises for general office space; (h) to exhibit the Premises to others and to
display "For Rent" signs on the exterior or interior of the Premises during the
last 180 days of the Term; (i) to take any and all measures, including
inspections, repairs, alterations, additions and improvements to the Premises or
to the Building, as may be necessary or desirable for the safety, protection or
preservation of the Premises or the Building or the Lessor's interests, or as
Lessor may deem necessary in the operation of the Building, Lessor shall at all
times when proceeding hereunder, use its best efforts not to unreasonably
interfere with Lessee's business operations.
The Lessor may enter upon the Premises after 24 hour prior oral or written
notice to Lessee, except in case of emergency in which no notice shall be
required, and may exercise any or all of the foregoing rights hereby reserved
without being deemed guilty of an eviction or disturbance of the Lessee's use or
possession of the Premises or any part thereof or render the Lessor liable to
the Lessee for damages, or relieve the Lessee from performance of the Lessee's
obligations under this Lease.
5. DEFAULT UNDER OTHER LEASE. If the term of any lease, other than
this Lease, made by the Lessee for any premises in the Building shall be
terminated or terminable after the making of this Lease because of any default
by the Lessee under such other lease, such fact shall empower the Lessor, at the
Lessor's sole option, to terminate this Lease by notice to the Lessee.
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6. WAIVER OF CLAIMS. To the fullest extent permitted by law, the Lessee
releases the Lessor and the Lessor's agents, beneficiaries, and servants from,
and waives all claims for, damage to person or property sustained by the Lessee
or any occupant of the Building or Premises resulting from the Building or
Premises or any part of either or any equipment or appurtenance becoming out of
repair, or resulting from any accident in or about the Building, or resulting
directly or indirectly from any act or neglect of any lessee or occupant of the
Building or of any other person, other than by reason of Lessor's negligence or
intentional misconduct. This Paragraph 6 shall apply especially, but not
exclusively, to the flooding of basements or other subsurface areas, and to
damage caused by refrigerators, sprinkling devices, air conditioning apparatus,
water, snow, frost, steam, excessive heat or cold, falling plaster, broken
glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or
plumbing fixtures, and shall apply equally whether any such damage results from
the act or neglect of other tenants, occupants or servants in the Building or of
any other person, and whether such damage be caused or result from any thing or
circumstance above mentioned or referred to, or any other thing or circumstance
whether of a like nature or of a wholly different nature. If any such damage,
whether to the demised Premises or to the Building or any part thereof, or
whether to the Lessor or to other tenants in the Building, result from any act
or neglect of the Lessee, the Lessor may, at the Lessor's option, repair such
damage and the Lessee shall, upon demand by the Lessor, reimburse the Lessor
forthwith for the total cost of such repairs. The Lessee shall not be liable
for any damages caused by its act or neglect if the Lessor or a tenant has
recovered the full amount of the damages from insurance and the insurance
company has waived in writing its right of subrogation against the Lessee as
rent hereunder. Lessee's failure to pay any such rembursement upon demand shall
entitle Lessor to interest at the Default Rate from the date of demand until
paid. All property belonging to the Lessee or any occupant of the Premises that
is in the Building or the Premises shall be there at the risk of the Lessee or
other person only, and the Lessor shall not be liable for damage thereto or
theft or misappropriation thereof.
Lessor and the Lessor's agents, beneficiaries and servants shall not be
liable in damages to the Lessee for any direct or consequential injury sustained
by any person or property of Lessee, or that of Lessee's employees,
beneficiaries, agents or invitees, occasioned in whole or in part by war,
insurrection, civil commotion, riots, acts of God or the enemy or Government
action, repairs, renewals, improvements, alterations, strikes, lockouts,
picketing, whether legal or illegal, accidents, inability of Lessor to obtain
fuel or supplies, planned or intentional action by any person resulting in fire,
explosion or panic, or any other cause or causes beyond the reasonable control
of the Lessor.
7. HOLDING OVER. If the Lessee retains possession of the Premises or any
part thereof after the expiration of the Term by lapse of time or otherwise, the
Lessee shall pay the Lessor rent at double the rate of rent specified in
Paragraph 1 for the time the Lessee thus remains in possession, and in addition
thereto, shall pay the Lessor all damages sustained by reason of the Lessee's
retention of possession. If the Lessee remains in possession of the Premises,
or any part thereof, after the expiration of the Term by lapse of time or
otherwise, such holding over shall, at the election of the Lessor expressed in a
written notice to the Lessee and
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not otherwise, constitute a renewal of this Lease for one year. The
provisions of this Paragraph do not waive the Lessor's rights of reentry or
any other right hereunder.
8. ASSIGNMENT AND SUBLETTING. The Lessee shall not, without Lessor's
written consent, which consent may not be unreasonably withheld: (a) assign or
convey this Lease or any interest under it; (b) allow any transfer hereof or any
lien upon the Lessee's interest herein or in the Premises by operation of law;
(c) sublet the Premises or any part thereof; or (d) permit the use or occupancy
of the Premises or any part thereof by any one other than the Lessee.
9. CONDITION OF PREMISES.
(a) CONDITION OF IMPROVEMENTS. Anything in this Lease to the
contrary notwithstanding, it is understood and agreed between the Lessor and
Lessee that the Premises covered by this Lease are being delivered by Lessor to
Lessee in "AS IS" condition. The Lessee's taking possession of the Premises
shall be conclusive evidence as against the Lessee that the Premises were in
satisfactory condition when the Lessee took possession. No promise of the
Lessor to alter, remodel or improve the Premises or the Building and no
representation respecting the condition of the Premises or the Building have
been made by the Lessor to the Lessee, unless the same is contained herein, or
made a part hereof. This Lease does not grant any rights to light or air over
property, except over public streets kept open by public authority.
The Lessee shall remove the Lessee's furniture, machinery, safe or
safes, trade fixtures and other items of personal property of every kind and
description from the Premises prior to the end of the Term, however ended. If
not so removed, the Lessor may request their removal, and if the Lessee does not
remove them, the Lessor may do so and the Lessee shall pay the cost of such
removal to the Lessor upon demand. If the Lessor does not request their
removal, all such items shall be conclusively presumed to have been conveyed by
the Lessee to the Lessor under this Lease as a bill of sale without further
payment or credit by the Lessor to the Lessee.
(b) At the end of each calendar quarter, Lessor may request Lessee to
notify Lessor in writing of all assignments, liens, encumbrances, granting of
chattel mortgages, or creation of security interests, all as same relate to
Lessee's sign and trade fixtures or other personal property in the Premises,
effected during the quarter. Any consent by Lessor to such security interest
shall be held to apply only to the specific transaction thereby authorized and
to any subsequent transaction. Any violation of the terms of this Subparagraph
by Lessee shall be without force and effect and shall not be binding upon the
Lessor. In no event shall Lessee assign, lien, encumber, grant a chattel
mortgage or create a security interest in leasehold improvements which have been
incorporated into the Premises, including, but not limited to, affixed lighting
fixtures, heating, ventilating and air conditioning equipment.
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10. ALTERATIONS. The Lessee shall not make any alterations in or
additions to the Premises without the Lessor's advance written consent in each
and every instance, not to be unreasonably withheld. All alterations or
additions shall be made pursuant to the following conditions:
(a) Before commencement of any work or delivery of any materials onto
the Premises or into the Building, the Lessee shall furnish the Lessor with
plans and specifications, names and addresses of contractors, copies of
contracts, necessary permits and indemnification in form and amount satisfactory
to Lessor and waivers of lien against any and all claims, costs, damages,
liabilities and expenses which may arise in connection with the alterations or
additions, together with certificates of insurance from all contractors
performing labor or furnishing materials insuring the Lessor against any and all
liabilities which may arise out of or be connected in any way with said
additions or alterations. In addition, Lessee shall provide an "All Physical
Loss" Builders Risk insurance policy with respect to all alterations and
additions in an amount equal to l00% of the replacement cost of the alterations
and additions. Lessor shall be named an insured as its interest may appear.
Whether the Lessee furnishes the Lessor the foregoing or not, the Lessee hereby
agrees to defend, indemnify and hold the Lessor harmless from any and all
liabilities of every kind and description which may arise out of or be connected
in any way with said alterations or additions.
(b) Alterations and additions shall comply with all insurance
requirements and with all ordinances and regulations of the City of Chicago or
any department or agency thereof and with the requirements and statutes and
regulations of the State of Illinois or of any department or agency thereof, and
shall be installed in a good, workmanlike manner and only new, high-grade
materials shall be used. Lessee shall permit the Lessor to supervise
construction operations in connection with alterations or additions if the
Lessor requests to do so.
(c) The Lessee shall pay all the costs of such alterations and
additions plus a reasonable amount to Lessor for Lessor's overhead with respect
to supervision necessary to satisfy Lessor that no damage will result to the
Building. Such charge shall not, however, relieve Lessee of any responsibility
or liability for any such damage. Lessee shall also pay the cost of decorating
the Premises occasioned by such alterations and additions. Each payment upon
said costs shall be only upon receipt of all such contractor's and
subcontractor's sworn statements, full or partial waivers of lien, certificates
and other documentation, if any, as Lessor or any title insurance company shall
request in order to fully protect the building and the Premises against all
possible claims in the nature of mechanic's liens arising out of the performance
of said work and to enable said title insurance company to insure the title to
the Premises and the building against such claims. Without limitation of the
foregoing, upon completing any alterations or additions, the Lessee shall
furnish the Lessor with contractors' affidavits and full and final waivers of
lien and receipted bills covering all labor and materials expended and used,
together with all such of the other documentation described above as Lessor
shall require.
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(d) All alterations, additions, hardware, non-trade fixtures and all
improvements, temporary or permanent, in or upon the Premises, including all
affixed lighting fixtures, heating, ventilating and air conditioning equipment,
and all pipes, ducts, conduits, wiring, paneling, partitions, railing, galleries
and the like, whether placed there by the Lessee or by the Lessor, shall, unless
the Lessor requests their removal, become the Lessor's property and shall remain
upon the Premises at the termination of this Lease by lapse of time or otherwise
without compensation or allowance or credit to the Lessee. If, upon the
Lessor's request, the Lessee does not remove said additions, hardware, non-trade
fixtures and improvements, the Lessor may remove the same and the Lessee shall
pay the cost of such removal to the Lessor upon demand. In any event, Lessee
shall repair or pay on demand all costs of repair of, any damage to the Premises
or the Building done during the course of such removal.
11. USE OF PREMISES. (a) The Lessee shall occupy and use the Premises
during the Term for the business purposes set forth on page 1 hereof and none
other. (b) The Lessee shall not, without prior written consent of the Lessor,
exhibit, sell or offer for sale on the Premises or in the Building any article
or thing except those articles and things essentially connected with the stated
use of the Premises without the advance written consent of the Lessor. (c) The
Lessee will not make or permit to be made any use of the Premises which,
directly or indirectly is forbidden by public law, ordinance or governmental
regulation or which may be dangerous to life, limb or property, or which may
invalidate or increase the premium cost of any policy of insurance carried on
the Building or covering its operation. (d) the Lessee shall not display,
inscribe, print, paint, maintain or affix on any place in or about the Building
any sign, notice, legend, direction, figure or advertisement, except on or next
to the doors of the Premises and on the Directory Boards, and then only such
name or names and matter, and in such color, size, style, place and material, as
shall first have been approved by the Lessor in writing. (e) The Lessee shall
not advertise the business, profession, or activities of the Lessee conducted in
the Building in any manner which violates the letter or spirit of any code of
ethics adopted by any recognized association or organization pertaining to such
business, profession or activities, and shall not use the name of the Building
for any purpose other than that of business address of the Lessee, and shall
never use any picture or likeness of the Building in any circulars, notices,
advertisements or correspondence without the Lessor's express consent in
writing. (f) The Lessee shall not obstruct, or use for storage, or for any
purpose other than ingress and egress, the sidewalks, entrances, passages,
courts, corridors, vestibules, halls, elevators and stairways of the Building.
(g) No bicycle or other vehicle and no dog or othe animal or bird shall be
brought or permitted to be in the Building or any part thereof. (h) The Lessee
shall not make or permit any noise or odor that is objectionable to other
occupants of the Building to emanate from the Premises and shall not create or
maintain a nuisance thereon, and shall not disturb, solicit or canvass any
occupant of the Building, and shall not do any act tending to injure the
reputation of the Building. (i) The Lessee shall not install any piano in the
Building, or any antennae, aerial wires or other equipment inside or outside the
Building, without, in each and every instance, prior approval in writing by the
Lessor. The use thereof, if permitted shall be subject to control by the Lessor
to the end that others shall not be disturbed or annoyed. (j) The Lessee shall
not
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place or permit to be placed any article of any kind on the window ledges or
on the exterior walls, and shall not throw or permit to be thrown or dropped
any article from any window of the Building. (k) The Lessee shall not
undertake to regulate any thermostat, and shall not waste water by tying,
wedging or otherwise fastening open any faucet. (1) No additional locks or
similar devices shall be attached to any door or window. No keys for any
door other than those provided by the Lessor shall be made. If more than two
keys for one lock are desired by the Lessee, the Lessor may provide the same
upon payment by the Lessee. Upon termination of this Lease or of the
Lessee's possession the Lessee shall surrender all keys of the Premises and
shall make known to the Lessor the explanation of all combination locks on
safes, cabinets and vaults. (m) The Lessee shall be responsible for the
locking of doors and the closing of transoms and windows in and to the
Premises. (n) If the Lessee desires telegraphic, telephonic, burglar alarm
or signal service, the Lessor will, upon request, direct where and how
connections and all wiring for such services shall be introduced and run.
Without such directions, no boring, cutting orinstallation of wires or cables
is permitted. (o) If the Lessee desires and the Lessor permits blinds,
shades, awnings, or other form of inside or outside window covering, or
window ventilators or similar devices, they shall be furnished, installed and
maintained at the expense of the Lessee and must be of such shape, color,
material and make as approved by the Lessor. (p) All persons entering or
leaving the Building between the hours of 6 p.m. and 8 a.m., Monday through
Friday, or at any time on Saturdays, Sundays or holidays, may be required to
identify themselves to a watchman by registration or otherwise and to
establish their rights to enter or leave the Building. The Lessor may
exclude or expel any peddler, solicitor or beggar at any time. (q) The
Lessee shall not overload any floor. The Lessor may direct the routing and
location of safes and other heavy articles. Safes, furniture and all large
articles shall be brought through the Building and into the Premises at such
times and in such manner as the Lessor shall direct and at the Lessee's sole
risk and responsibility. The Lessee shall list all furniture, equipment and
similar articles to be removed from the Building, and the list must be
approved at the Office of the Building or by a designated person before
Building employees will permit any article to be removed. (r) Unless the
Lessor gives advance written consent in each and every instance, the Lessee
shall not install or operate any steam or internal combustion engine, boiler,
machinery, refrigerating or heating device or air conditioning apparatus in
or about the Premises, or carry on any mechanical business therein, or use
the Premises for housing accommodations or lodging or sleeping purposes, or
do any cooking therein, or use any illumination other than electric light, or
use or permit to be brought into the Building or Premises any inflammable
oils or fluids such as gasoline, kerosene, naphtha and benzine, or any
explosives or other articles deemed extra hazardous to life, limb or propert.
(s) The Lessee shall not place or allow anything to be against or near the
glass of partitions or doors of the Premises which may diminish the light in,
or be unsightly from, halls or corridors. (t) The Lessee shall not install
in the Premises any equipment which uses a substantial amount of electricity
without the advance written consent of the Lessor. The Lessee shall
ascertain from the Lessor the maximum amount of electrical current which can
safely be used in the demised Premises, taking into account the capacity of
the electric wiring in the Building and the Premises and the needs of other
tenants in the Building and shall not use more than such safe capacity. The
Lessor's consent to the installation of electric equipment shall not relieve
the Lessee from the obligation not to use more
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electricity than such safe capacity. (u) The Lessee shall not lay linoleum
or other similar floor covering so that such floor covering shall come in
direct contact with the floor of the Premises, and if linoleum or other
similar floor covering is used, an interliner of builder's deadening felt
shall first be affixed to the floor by paste or other material soluble in
water. The use of cement or other similar material is prohibited. (v) In
addition to all other liabilities for breach of any covenant of this
Paragraph 11, the Lessee shall pay to the Lessor all damages caused by such
breach and shall also pay to the Lessor an amount equal to any increase in
insurance premium or premiums caused by such breach. The violation of any
covenant of this Paragraph 11 may be restrained by injunction.
12. REPAIRS. Subject to the provisions of Paragraph 13, the Lessee shall,
at the Lessee's own expense, keep the Premises in good order, condition and
repair during the Term, including the replacement of all broken glass with glass
of the same size and quality, with signs thereon, under the supervision and with
the approval of the Lessor. If the Lessee does not make repairs promptly and
adequately, the Lessor may, but need not, make repairs, and the Lessee shall pay
promptly the cost thereof. At any time or times, the Lessor, either voluntarily
or pursuant to governmental requirement, may, at the Lessor's own expense, make
repairs, alterations or improvements in or to the Building or any part thereof,
including the Premises, and, during operations, may close entrances, doors,
corridors, elevators or other facilities, all without any liability to the
Lessee by reason of interference, inconvenience or annoyance. The Lessor and
its beneficiaries shall not be liable to the Lessee for any expense, injury,
loss or damage resulting from work done in or upon, or the use of, any adjacent
or nearby building, land, street or alley. The Lessee shall pay the Lessor for
overtime and for any other expense incurred in event repairs, alterations,
decorating or other work in the Premises are not made during ordinary business
hours at the Lessee's request.
Lessor, at Lessor's own expense, shall maintain in good order,
condition and repair during the Term, the roof, foundation and structural
components of the Building other than the Premises, such that the same shall be
at all times in a clean and sanitary condition, in full compliance with all
applicable laws, and in a condition at least as good as that maintained at other
comparable office buildings within the City of Chicago. Lessor may include
within the Operating Expenses, Lessor's expenses incurred in complying with this
paragraph.
13. UNTENANTABILITY. If the Premises or the Building are made
untenantable by fire or other casualty, the Lessor may elect to terminate this
Lease as of the date of the fire or casualty by notice to the Lessee within
sixty (60) days after that date. In the event that the Lessor does not
terminate this Lease, the Lessor shall repair, restore or rehabilitate the
Building or the Premises at the Lessor's expense within one hundred twenty (120)
days after the Lessor is enabled to take possession of the Premises and
undertake reconstruction or repairs, in which latter event the Lease shall not
terminate but rent shall be abated on a per diem basis while the Premises are
untenantable. If the Lessor elects so to repair, restore or rehabilitate the
Building or the Premises and does not substantially complete the work within the
one hundred twenty (120) day period, either party can terminate this Lease as of
the date of the fire or casualty
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by notice to the other party not later than one hundred thirty (130) days
after the Lessor is enabled to take possession of the Premises and undertake
reconstruction or repairs. In the event of termination of the Lease pursuant
to this Paragraph 13, rent shall be apportioned on a per diem basis and be
paid to the date of the fire or casualty.
14. EMINENT DOMAIN. If the Building, or any portion thereof which
includes a substantial part of the Premises, or which prevents the operation of
the Building, shall be taken or condemned by any competent authority for any
public use or purpose, the Term of this Lease shall end upon, and not before,
the date when the possession of the part so taken shall be required for such use
or purpose, and without apportionment of the condemnation award. The Lessee
shall have no right to share in such award. Current rent shall be apportioned
as of the date of such termination. If any condemnation proceeding shall be
instituted in which it is sought to take or damage any part of the Building, or
the land under it, or if the grade of any street or alley adjacent to the
Building is changed by any competent authority and such change of grade makes it
necessary or desirable to remodel the Building to conform to the changed grade,
the Lessor shall have the right to cancel this Lease upon not less than ninety
days' notice prior to the date of cancellation designated in the notice. No
money or other consideration shall be payable by the Lessor to the Lessee for
the right of cancellation and the Lessee shall have no right to share in the
condemnation award or in the judgment for damages caused by the change of grade.
15. LESSOR'S REMEDIES. All rights and remedies of the Lessor herein
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law.
(a) If any voluntary or involuntary petition or similar pleading
under any section or sections of any bankruptcy act shall be filed by or against
the Lessee, or any voluntary or involuntary proceeding in any court or tribunal
shall be instituted to declare the Lessee insolvent or unable to pay the
Lessee's debts, and in the case of an involuntary petition or proceeding, the
petition or proceeding is not dismissed within thirty days from the date it is
filed, the Lessor may elect, but is not required, and with or without notice of
such election, and with or without entry or other action by the Lessor, to
forthwith terminate this Lease, and, notwithstanding any other provision of this
Lease, the Lessor shall forthwith upon such termination be entitled to recover
damages in an amount equal to the then present value of the rent specified in
Paragraph 1 of this Lease for the residue of the stated Term hereof, less the
fair rental value of the Premises for the residue of the stated Term.
(b) If the Lessee defaults in the payment of rent, and the Lessee
does not cure the default within five (5) days after written demand for payment
of such rent, or if the Lessee defaults in the prompt and full performance of
any other provision of this Lease, and the Lessee does not cure the default
within twenty days (forthwith if the default involves a hazardous condition)
after written demand by the Lessor that the default be cured unless the default
involves a hazardous condition, which shall be cured forthwith upon the Lessor's
demand, or if
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the leasehold interest of the Lessee be levied upon under execution or be
attached by process of law, or if the Lessee makes an assignment for the
benefit of creditors, or if a receiver be appointed for any property of the
Lessee, or if the Lessee abandons the Premises, then and in any such event
the Lessor may, if the Lessor so elects but not otherwise, and with or
without notice of such election and with or without any demand whatsoever,
either forthwith terminate this Lease and the Lessee's right to possession of
the Premises or, without terminating this Lease, forthwith terminate the
Lessee's right to possession of the Premises.
(c) Upon any termination of this Lease, whether by lapse of time or
otherwise, or upon termination of the Lessee's right to possession without
termination of the Lease, the Lessee shall surrender possession and vacate the
Premises immediately, and deliver possession thereof to the Lessor, and hereby
grants to the Lessor and its beneficiaries full and free license to enter into
and upon the Premises in such event with or without process of law and to
repossess the Lessor of the Premises as of the Lessor's former estate and to
expel or remove the Lessee and any others who may be occupying or within the
Premises and to remove any and all property therefrom, using such force as may
be necessary, without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer and without relinquishing the Lessor's rights to rent
or any other right given to the Lessor hereunder or by operation of law.
(d) If the Lessee abandons the Premises or otherwise entitles the
Lessor so to elect, and the Lessor elects to terminate the Lessee's right to
possession only, without terminating the Lease, the Lessor may, at the Lessor's
option enter into the Premises, remove the Lessee's signs and other evidences of
tenancy, and take and hold possession thereof as in this Paragraph 15 provided,
without such entry and possession terminating the Lease or releasing the Lessee,
in whole or in part, from the Lessee's obligation to pay the rent hereunder for
the full Term, and in any such case the Lessee shall pay forthwith to the
Lessor, if the Lessor so elects, a sum equal to the entire amount of the rent
specified in Paragraph 1 of this Lease for the residue of the stated Term plus
any other sums then due hereunder. Upon and after entry into possession without
termination of the Lease, the Lessor may, but need not, relet the Premises or
any part thereof for the account of the Lessee to any person, firm or
corporation other than the Lessee for such rent, for such time and upon such
terms as the Lessor in the Lessor's sole discretion shall determine, and the
Lessor shall not be required to accept any tenant offered by the Lessee or to
observe any instructions given by the Lessee about such reletting. In any such
case, the Lessor may make repairs, alterations and additions in or to the
Premises, and redecorate the same to the extent deemed by the Lessor necessary
or desirable, and the Lessee shall, upon demand, pay the cost thereof, together
with the Lessor's expenses of the reletting. If the consideration collected by
the Lessor upon any such reletting for the Lessee's account is not sufficient to
pay monthly the full amount of the rent reserved in this Lease, together with
the costs of repairs, alterations, additions, redecorating and the Lessor's
expenses, the Lessee shall pay to the Lessor the amount of each monthly
deficiency upon demand; and if the consideration so collected from any such
reletting is more than sufficient to pa the full amount of the rent reserved
herein, together with the costs and expenses of the Lessor, the Lessor, at the
end of the stated Term of the Lease, shall account for the surplus to the
Lessee.
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(e) Deleted in its entirety.
(f) Any and all property which may be removed from the Premises by
the Lessor pursuant to the authority of the Lease or of law, to which the
Lessee is or may be entitled, may be handled, removed or stored by the Lessor
at the risk, cost and expense of the Lessee, and the Lessor and its
beneficiaries shall in no event be responsible for the value, preservation or
safekeeping thereof. The Lessee shall pay to the Lessor, upon demand, any and
all expenses incurred in such removal and all storage charges against such
property so long as the same shall be in the Lessor's possession or under the
Lessor's control. Any such property of the Lessee not removed from the
Premises or retaken from storage by the Lessee within thirty days after the
end of the Term, however terminated, shall be presumed to have been conveyed
by the Lessee to the Lessor under this Lease as a bill of sale without
further payment or credit by the Lessor to the Lessee.
(g) The Lessee shall pay upon demand all the Lessor's costs,
reasonable charges and expenses, including the fees of counsel, agents and
others retained by the Lessor, incurred in enforcing the Lessee's obligations
hereunder or incurred by the Lessor in any litigation, negotiation or
transaction in which the Lessee causes the Lessor, without the Lessor's
fault, to become involved or concerned.
16. SUBORDINATION OF LEASE. Without the necessity of any additional
document being executed by Lessee for the purpose of effecting a
subordination, this Lease shall be subject and subordinate at all times to
ground or underlying leases and to the lien of any mortgages or deeds of
trust now (provided Lessee is furnished a Non-Disturbance Agreement in a
commercially reasonable form) or hereafter placed on, against or affecting
the Building, Lessor's Site (which shall mean the land on which the Building
is situated and, where appropriate, the sidewalks and landscaping from the
boundaries of the land to the surrounding streets), Lessor's interest or
estate therein, or in any ground or underlying lease; provided, however, that
if the mortgagee, trustee, or holder of any such mortgage or deed of trust
elects to have Lessee's interest in this Lease be superior to any such
instrument, then by notice to Lessee this Lease shall be deemed superior,
whether this Lease was executed before or after said instrument.
Notwithstanding the foregoing, Lessee covenants and agrees to execute and
deliver upon demand such further instruments evidencing such subordination or
superiority of this Lease as may be required by Lessor.
17. NOTICES.
(a) In every instance where it shall be necessary or desirable for
either party hereto to serve any notice or demand upon the other party
hereto, it shall be sufficient (i) to deliver or cause to be delivered to the
party on whom such notice or demand is to be served a written or printed copy
thereof, or (ii) to send a written or printed copy thereof by United States
certified or registered mail, postage prepaid, addressed to the party on whom
such notice or
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<PAGE>
demand is to be served, in which event the notice or demand shall be deemed
to have been served at the time the notice or demand is postmarked, or (iii)
with respect to notices or demands to be served on Lessee, to leave a written
or printed copy thereof with some person above the age of thirteen (l3) years
in possession of the Premises or to affix the same upon any door leading into
the Premises, in which event the notice or demand shall be deemed to have
been served at the time the copy is so left or affixed.
(b) In every instance where notice or demand is served by mail as
aforesaid, it shall be sufficient to send such notice or demand, as above
provided, to Lessor at:
Amalgamated Trust & Savings Bank,
as Trustee under Trust 526l
One West Monroe Street
Chicago, Illinois 60690
with a copy to:
Michael Cahan and Associates
640 North LaSalle Street, Suite 300
Chicago, Illinois 60610
Attn: Michael Cahan
and to Lessee at:
JAMtv Corporation
640 North LaSalle Street, Suite 560
Chicago, Illinois 60610
Attn: Howard Tullman
or to such other address or addresses as either party may select upon notice
to the other party as herein provided.
18. MISCELLANEOUS.
(a) No receipt of money by the Lessor from the Lessee after the
termination of this Lease or after the service of any notice or after the
commencement of any suit, or after final judgment for possession of the
Premises shall renew, reinstate, continue or extend the Term of this Lease or
affect any such notice, demand or suit.
(b) No waiver of any default of the Lessee hereunder shall be
implied from any omission by the Lessor to take any action on account of such
default if such default persists or be repeated, and no express waiver shall
affect any default other than the default specified in
14
<PAGE>
the express waiver and that only for the time and to the extent therein
stated. The invalidity or unenforceability of any provision hereof shall not
affect or impair any other provision.
(c) No person, firm or corporation, or the heirs, legal
representatives, successors and assigns, respectively, thereof, executing
this Lease on behalf of Lessor as agent, trustee or in any other
representative capacity shall ever be deemed or held individually liable
hereunder for any reason or cause whatsoever.
(d) The words "Lessor" and "Lessee" wherever used in this Lease
shall be construed to mean Lessors or Lessees in all cases where there is
more than one lessor or lessee, and the necessary grammatical changes
required to make the provisions hereof apply either to corporations or
individuals, men or women, shall in all cases be assumed as though in each
case fully expressed. Lessee agrees to furnish promptly upon demand a
corporate resolution, proof of due authorization by partners, or appropriate
documentation evidencing the due authorization of Lessee to enter into this
Lease. The term "rentable square feet" shall mean the rentable area of the
Premises or the Building as calculated by Lessor on the basis of the plans
and specifications (which were available for inspection by Lessee at the time
the Lease was executed) of the Building and including a proportionate share
of any common areas. Lessee hereby consents and agrees that the calculation
of rentable square feet on Page 1 hereof shall be controlling.
(e) Intentionally Deleted
(f) Provisions inserted herein or affixed hereto shall not be
valid unless appearing in the duplicate original hereof held by the Lessor.
In event of variation or discrepancy, the Lessor's duplicate shall control.
(g) Each provision hereof shall extend to and shall, as the case
may require, bind and inure to the benefit of the Lessor and the Lessee and
their respective heirs, legal representatives and successors, and assigns in
the event this Lease has been assigned with the express, written consent of
the Lessor as herein provided.
(h) The headings of Paragraphs are for convenience only and do not
limit or construe the contents of the Paragraphs.
(i) Submission of this instrument for examination does not
constitute a reservation of or option for the Premises. The instrument
becomes effective as a Lease upon execution and delivery by both Lessor and
Lessee.
(j) Except as otherwise expressly provided for herein, all amounts
(other than rent) owed by the Lessee to the Lessor hereunder shall be paid
within ten (10) days from the date the Lessor renders statements of account
therefor and shall bear interest at the Default Rate from and after such
tenth day until paid.
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(k) All riders attached to this Lease and signed by the Lessor and
the Lessee are hereby made a part of this Lease as though inserted at length
herein.
(l) If the Lessee shall occupy the Premises prior to the beginning
of the Term with the Lessor's consent, all the provisions of this Lease
shall be in full force and effect as soon as the Lessee occupies the
Premises. Rent for any period prior to the beginning of the Term shall be
fixed by agreement between the Lessor and the Lessee.
(m) This Lease is the entire understanding of the parties and the
terms and provisions of this Lease shall only be modified or amended in
writing.
(n) All sums due hereunder and accruing prior to the expiration of
the Term, whether by lapse of time or otherwise, shall be due notwithstanding
such expiration.
19. RENT ADJUSTMENT.
(a) The rent adjustment reserved herein by this Paragraph is based
upon the Operating Expenses, as hereinafter defined, for the calendar year
1996, hereinafter referred to as the "Base Year". Should there be an increase
or decrease in said Operating Expenses for any calendar year during the term
of this Lease or any extension of the Term of this Lease, after the Base
Year, the amount of such increase or decrease shall be ascertained and the
rent reserved herein shall be adjusted, hereinafter referred to as "Adjusted
Rent", as follows: The rent for each calendar year or fraction thereof after
the Base Year shall be increased or decreased by 4.613% of said increase or
decrease in said Operating Expenses for the calendar year immediately ended
provided, however, that in the event of a decrease the reduction in the
Adjusted Rent may never result in a rent lower than the stipulated Base Rent
set forth in this Lease.
(b) In the event of an Operating Expense increase Lessee shall pay
Adjusted Rent to Lessor within ten (10) days of Lessor's written notice to
Lessee. Lessee's obligation for its payments hereunder shall survive the
Term of this Lease.
(c) In the event of an Operating Expense decrease Lessee shall be
given a credit towards Adjusted Rent within thirty (30) days of written
notice from Lessor to Lessee.
(d) Lessee shall also pay Lessor estimated rent (hereinafter
referred to as "Estimated Rent") in equal monthly installments each in
advance on the first day of each and every month during the Term in an amount
equal to one twelfth (1/12th) of Lessor's estimate of the increase in
Operating Expenses for the then current calendar year over the Base Year
based on Lessee's proportionate share as set forth in subparagraph (a) above
provided, however, that all Estimated Rent paid by Lessee in each calendar
year shall be applied as a credit against the Adjusted Rent to be paid by
Lessee to Lessor in accordance with subparagraph (a) above as calculated at
the end of each calendar year.
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(e) "Operating Expenses" as used herein include, but not by way of
limitation, ad valorem real property taxes paid, as well as special taxes,
without limitation, special assessments, and any tax or excise levied by the
State of Illinois or the City of Chicago or any political subdivision
thereof, either on rents or other income from the Building and other
portions of Lessor's Site, excluding net income taxes required to be paid by
Lessor to the State of Illinois or the City of Chicago. Operating Expenses
shall also include, but not by way of limitation, all other expenses incurred
by Lessor in the maintenance and operation of the Building and other portions
of Lessor's Site, calculated in accordance with generally accepted accounting
principles, except as specifically modified herein, excluding the following:
(i) pro rata operating expenses and taxes for owner occupied
space;
(ii) costs recovered by Lessor directly from Lessee and other
tenants of the Building and other portions of Lessor's Site;
(iii) real estate brokers' leasing commissions or compensation;
(iv) costs of improvements and replacements that are capitalized
in accordance with generally accepted accounting principles;
(v) consulting fees associated with capital improvements; and
(vi) depreciation, interest and principal payments on mortgages,
and other debt costs, if any, except that depreciation of any
capital improvements made after expiration of the Base Year which
are intended to reduce Operating Expenses or which are required
under any governmental laws, regulations, or ordinances which
were not applicable to the Building or Lessor's site as of the
date hereof, shall not be excluded from Operating Expenses.
20. ADDITIONAL RENT.
(a) "Consumer Price Index" shall mean the Consumer Price Index of
Urban Wage Earners and Clerical Workers - as revised from time to time - all
items, City of Chicago, issued by the Bureau of Labor Statistics, United
States Department of Labor, 1967 equals 100. In the event of a change in the
base index year or other index change, the adjustment factor issued by the
United States Department of Labor or other appropriate agency shall be
applied to the Consumer Price Index for purposes of this paragraph. If the
Consumer Price Index shall become unavailable to the public because
publication is discontinued, or otherwise, Lessor will substitute therefor a
comparable index based upon changes in the cost of living or purchasing power
of the consumer dollar published by any other governmental agency or, if no
such index shall then be available, a comparable index published by a major
bank or other financial institution or by a university or a recognized
financial publication.
(b) Effective as of each January 1 ("Adjustment Date") during the
Term, commencing January 1, 1998, the annual Base Rent for each year, shall
be increased by
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multiplying the Base Rent times twenty (20%) percent of the percentage
increase, if any, in the Consumer Price Index for the immediately preceding
calendar year over the Price Index for the calendar year 1996 ("Base Year").
The Consumer Price Index for any year shall be determined by adding the
Consumer Price Index published for each month of the year and dividing the
total by twelve. In no event shall the Base Rent for any Lease year be less
than those amounts provided in Paragraph 1 hereof, unless Lessor has
exercised its right under Paragraph 2(f) of this Lease regarding the
discontinuance of furnishing electricity to the Premises.
(c) Lessor shall notify Lessee in writing as to the amount due
Lessor as a result of any change in the Consumer Price Index and Lessor shall
provide to the Lessee the Consumer Price Index for the Base Year and such
subsequent calendar year. Lessee shall remit its payment for the adjustment
to rent attributed by the Consumer Price Index within ten (10) days of the
above referred written notice from Lessor to Lessee.
(d) Lessee shall also pay Lessor estimated rent (hereinafter
referred to as "Estimated Rent") in equal monthly installments each in
advance on the first day of each and every month during the Term in an amount
equal to one twelfth (1/12th) of Lessor's estimate of the increase in
Consumer Price Index for the then current calendar year over the Base Year
computed as set forth in subparagraph (b) of this Paragraph 20, above
provided, however, that all Estimated Rent paid by Lessee in each calendar
year shall be applied as a credit against the Additional Rent to be paid by
Lessee to Lessor in accordance with subparagraph (b) above as calculated at
the end of each calendar year. At the expiration of Lessee's Term, Lessor
shall notify Lessee in writing of the actual Additional Rent due from Lessee
for the period, the Consumer Price Index for said period, and the Consumer
Price Index for the Base Year. All estimated Consumer Price Index rent
adjustment payments made by Lessee under this subparagraph (d) for the
period, shall be applied as a credit against the actual Additional Rent due
Lessor. Lessee's payment, if any, shall be due within ten (10) days of said
notification from Lessor to Lessee. Lessee's obligation for said payment
shall survive the Term of this Lease.
(e) In the event of a Lease expiration on a day other than the
last day of the calendar year, rent adjustment for any Consumer Price Index
increase will be prorated for that portion of the Lease year extending beyond
the first day of the calendar year in which the Lease expires.
21. INTENTIONALLY DELETED.
22. SECURITY DEPOSIT. Lessee has this day deposited with the Lessor,
the sum of Twelve Thousand Eight Hundred Twenty-Nine Dollars and Thirty-Three
Cents ($12,829.33) as security for the full and faithful performance by the
Lessee of all the terms, covenants and conditions upon the Lessee's part to
be performed, which said sum shall be returned to the Lessee within thirty
(30) days after the time fixed as the expiration of the Term herein. In the
event of default by the Lessee in respect of any of the terms, covenants,
conditions or provisions of said Lease, the Lessor may use, apply or retain
all or any part of the said security
18
<PAGE>
deposit in payment of any expense incurred by Lessor in curing any default by
Lessee, or (b) of damages suffered by Lessor by reason of Lessee's default.
Where applicable, vouchers and/or paid receipts will be submitted to the
Lessee within thirty (30) days, however Lessor's failure to submit said
documents within said time period shall not relieve Lessee's liability for
the above referred defaults under this Lease. The Lessor may return the
security or unused portion to the original Lessee, regardless of any
assignments of the within Lease in the absence of evidence satisfactory to
the Lessor of an assignment of the right to receive such security or any part
or balance thereof.
23. AFTER HOUR HVAC. During the Term of the Lease, the Lessee shall
have the right to purchase after hour heating, ventilation and air
conditioning at the rate of Forty Five ($45.00) Dollars per hour during the
first year of the Term and thereafter at its prevailing rates for such
services. Lessee must notify Lessor during the business hours and at least
two (2) hours in advance of its requirement for after hour HVAC. Lessee
shall pay for such services within ten (10) days after receipt of invoice
from Lessor.
24. EFFECT OF WAIVER. The failure of Lessor to insist in any one or
more instances upon the strict performance of any of the terms, covenants,
conditions and agreements of this Lease, or to exercise any option herein
conferred, shall not be considered as waiving or relinquishing for the future
any such terms, covenants or conditions, agreements or options, but the same
shall continue and remain in full force and effect; and the receipt of any
rent or any part thereof, whether the rent be that specifically reserved or
that which may become payable under any of the covenants herein contained,
and whether the same be received from Lessee or from any one claiming under
or through it or otherwise shall not be deemed to operate as a waiver of the
rights of Lessor to enforce the payment of rent or charges of any kind
previously due or which may thereafter become due, or the right to terminate
this Lease and to recover possession of the Premises by summary proceedings
or otherwise, as Lessor may deem proper, or to exercise any of the rights or
remedies reserved to Lessor hereunder or which Lessor may have at law, in
equity or otherwise.
25. CONSTRUCTION OF LEASE. Should any of the provisions of this Lease
require judicial interpretation, it is agreed that the court interpreting or
construing the same shall not apply a presumption that the terms of any such
provision shall be more strictly construed against one party by reason of the
rule of construction that a document is to be construed most strictly against
the party who itself or through its agent prepared the same, it being agreed
that the agents of all parties have participated in the preparation of this
Lease.
26. INSURANCE.
(a) Lessee, at Lessee's expense, agrees to maintain in force
during the Term:
(i) Comprehensive General Liability Insurance on an occurrence
basis with minimum limits of liability in an amount of
$500,000
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for bodily injury, personal injury or death to any one
person and $100,000 with respect to damage to property,
including water and sprinkler damage; and
(ii) Fire Insurance with extended coverage and vandalism and
malicious mischief endorsements, in an amount adequate to
cover the full replacement value of all leasehold
improvements paid for by Lessee and wall and floor coverings
in the Premises.
(b) The policy referred to in Paragraph 26(a)(i) shall name
Lessor, its beneficiaries, and its respective agents and employees as
additional insureds and shall not provide for deductible amounts. The policy
referred to in Paragraph 26(a)(ii) shall not provide for deductible amounts
in excess of $1,000. Each policy referred to in Paragraph 26 shall be issued
by one or more responsible insurance companies reasonably satisfactory to
Lessor and shall contain the following provisions and endorsements:
(i) that such insurance may not be canceled or amended without
thirty (30) days prior written notice to Lessor;
(ii) an express waiver of any right of subrogation by the
insurance company against Lessor and its agents and
employees; and
(iii) that the policy shall not be invalidated should the
insured waive in writing prior to a loss any or all rights
of recovery against any other party for losses covered by
such policies.
(c) Lessee shall deliver to Lessor certificates of insurance
of all insurance policies and renewals thereof to be maintained by Lessee
hereunder, not less than ten (10) days prior to the expiration date of each
policy. Provided that the insurance policies of Lessee will not be
invalidated nor will the right of the insured to collect the proceeds payable
under such policies be adversely affected by the waiver contained in the
following portion of this sentence, Lessee herein expressly waives all rights
of recovery which it might otherwise have against Lessor and its agents and
employees, for loss or damage to person, property or business to the extent
that such loss or damage is covered by valid and collectible insurance
policies. Lessee shall use its best efforts to obtain from its insurer the
right to waive claims as set forth in the preceding sentence without thereby
invalidating its insurance or affecting its right to proceeds payable
thereunder.
(d) Any insurance policy maintained by Lessor shall contain if
available an express waiver of any right of subrogation by the insurance
company against Lessee and its agents or employees.
20
<PAGE>
27. REAL ESTATE BROKERS. Lessee represents that Lessee has not dealt
with any real estate broker, sales person or finder in connection with this
Lease, and no such person initiated or participated in the negotiation of
this Lease or showed the Premises to Lessee. Lessee hereby agrees to
indemnify and hold harmless Lessor from and against any and all liabilities
and claims for commissions and fees arising out of a breach of the foregoing
representation. Lessor shall be responsible for the payment of a commission
to the broker specified in this Paragraph 27, based upon the leasing
commission policy of Lessor applicable to the Building and in effect as of
the date of this Lease.
28. GOVERNING LAW. This Lease and the terms and provisions hereof
shall be construed in accordance with the Laws of the State of Illinois.
29. SIGNAGE. Lessee shall obtain Lessor's written consent, which shall
not be unreasonably withheld, prior to placing any signage on or next to the
entrance door to the Premises.
30. SALE BY LESSOR. In the event of a sale or conveyance by Lessor of
the Building and Lessor's site, the same shall operate to release Lessor from
any future liability upon any of the covenants or conditions, expressed or
implied, herein contained in favor of Lessee, and in such event Lessee agrees
to look solely to the responsibility of the successor in interest of Lessor
in and to this Lease. Except as set forth in this Paragraph, this Lease
shall not be affected by any such sale, and Lessee agrees to attorn to the
purchaser or assignee. If any security has been given by Lessee to secure
the faithful performance of any of the covenants of this Lease, Lessor may
transfer or deliver said security, as such, to Lessor's successor in interest
and thereupon Lessor shall be discharged from any further liability with
regard to said security, provided that any successor shall not be liable for
such security unless such successor receives the same.
31. ESTOPPEL CERTIFICATE. Within ten (10) days following any written
request which Lessor may make from time to time, Lessee shall execute and
deliver to Lessor or any prospective Lessor or mortgagee or prospective
mortgagee a sworn statement certifying: (a) the date of commencement of this
Lease; (b) the fact that this Lease is unmodified and in full force and
effect (or, if there have been modifications hereto, that this Lease is in
full force and effect, as modified, and stating the date and nature of such
modifications), (c) the date to which the rent and other sums payable under
this Lease have been paid, (d) the fact that there are no current defaults
under this Lease by either Lessor or Lessee, except as specified in Lessee's
statement, and (e) such other matters requested by Lessor. Lessor and Lessee
intend that any statement delivered pursuant to this Paragraph may be relied
upon by any mortgagee, beneficiary or purchaser and Lessee shall be liable
for all loss, cost or expense resulting from the failure of any sale or
funding of any loan caused by any material misstatement contained in such
estoppel certificate. Lessee hereby irrevocably appoints Lessor, or if
Lessor is a trust, Lessor's beneficiary or agent, as attorney-in-fact, for
the Lessee with full power and authority to execute and deliver the same
after such ten (10) day period and such certificate as signed by Lessor,
Lessor's
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<PAGE>
beneficiary or agent, as the case may be, shall be fully binding on Lessee,
if Lessee fails to deliver a contrary certificate within five (5) days after
receipt by Lessee of a copy of the certificate executed by Lessor, Lessor's
beneficiary or agent, as the case may be, on behalf of Lessee. This
Paragraph shall also be binding on any subtenant of Lessee.
32. UNAVOIDABLE DELAYS. The provisions of this Paragraph shall be
applicable if there shall occur, in and after the Rent Commencement Date, any
strikes, lockouts for labor disputes, inability to obtain labor or materials
or reasonable substitutes therefor or acts of God, governmental restrictions,
regulations or controls, enemy or hostile government action, civil commotion,
fire or other casualty or other conditions similar or dissimilar to those
enumerated in this Paragraph beyond the reasonable control of the party
obligated to perform. If Lessor or Lessee shall, as a result of any of the
above mentioned events, fail punctually to perform any obligation on its part
to be performed under this Lease, then such failure shall be excused and not
be a breach of this Lease by the party in question, but only to the extent
and for the time occasioned by such event. Notwithstanding anything to the
contrary herein contained, however, the provisions of this Paragraph shall
not be applicable to Lessee's obligation to pay, when due and payable, the
Base Rent, Adjusted Rent, Estimated Rent, or any other rent or sums or
charges; and in addition, lack of funds or inability to procure financing
shall not be deemed to be an event beyond the reasonable control of Lessee in
the event of any unavoidable delays as in this Paragraph provided. As a
condition precedent to Lessee claiming or relying upon such delay, Lessee
shall give notice in writing of such event to Lessor within ten (10) days
after the occurrence of the same.
33. TAXES. Lessee shall pay before delinquency all taxes, assessments,
license fees and public charges levied, assessed or imposed upon its business
operation, as well as upon its leasehold interest, trade fixtures,
furnishings, equipment, leasehold improvements, alterations, changes and
additions made by Lessee, merchandise and personal property of any kind
owned, installed or used by Lessee in, on or upon the Premises. In the event
any such items of property are assessed together with property of Lessor for
purposes of ad valorem real estate taxes, then, and in such event, such
assessment shall be equitably divided. Lessor shall determine the basis of
dividing any such assessments and such determination shall, if not arbitrary
or capricious, be binding upon both Lessor and Lessee. Lessee shall
reimburse Lessor upon demand for any such tax based on property of Lessee and
such amount shall be deducted in determining Operating Expenses hereunder.
Lessee, and not Lessor, shall pay when due and payable, any sales or use
tax, or other excise, tax or assessment, if any, now or hereafter levied or
assessed upon or against Lessee's or Lessor's interest in this Lease. If at
any time during the Term a tax, imposition, assessment or excise on rents or
other tax, however described, is levied or assessed against Lessor's interest
in this Lease or the rents hereunder, as a substitute in whole or in part for
any real property taxes as hereinbefore described, then Lessee hereby agrees
to pay Lessor, as additional rent hereunder, the amount of such tax,
imposition, assessment or excise on rents to the extent of such substitution.
Should the appropriate taxing authority require that any such tax, excise
and/or assessment be
22
<PAGE>
collected by Lessor for or on behalf of such taxing authority, then such tax,
excise and/or assessment shall be paid by Lessee to Lessor monthly as
additional rent in accordance with the terms of any notice from Lessor to
Lessee to such effect.
34. EXCULPATION OF LESSOR. Notwithstanding anything contained herein
to the contrary, the covenants contained in this Lease to be performed by
Lessor shall not be binding personally, but instead said covenants are made
for the purpose of binding only the fee simple or leasehold estate which
Lessor owns in the demised Premises. The Lessee shall look solely to the
equity of the Lessor in the property for the satisfaction of the remedies of
the Lessee in the event of a breach by the Lessor.
(Signatures on following page)
23
<PAGE>
IN WITNESS WHEREOF, the parties hereunder have caused this Lease to
be executed under their seals, on the date first above written.
LESSOR:
ATTEST: MAC MANAGEMENT CO., INC., as agent for the holder
of the Beneficial Interest under AMALGAMATED TRUST
& SAVINGS BANK, not individually, but as Trustee
under Trust No. 5261
By: BY
---------------------- -----------------------------------------------
Its Secretary Its President
ATTEST: LESSEE:
JAMtv Corporation, a Delaware Corporation
By: BY:
---------------------- -----------------------------------------------
Its Secretary Its Chief Executive Officer
-----
24
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, _________________ a Notary Public in and for said County in the State
aforesaid, do hereby certify that Howard Tullman, Chief Executive Officer of
the JAMtv Corporation a Delaware Corporation, personally known to me to be
the same person whose name is subscribed to the foregoing instrument,
appeared before me this day in person and acknowledged that he signed and
delivered the said instrument as his own free and voluntary act.
Given under my hand and notarial seal this ____ day of _______, 199 .
-------------------------------------
Notary Public
My commission expires:
-------------------------
25
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PARAGRAPH PAGE
- --------- ----
<S> <C>
1. BASE RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. LESSOR'S TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. CERTAIN RIGHTS RESERVED TO THE LESSOR . . . . . . . . . . . . . . . . . . . . . . 4
5. DEFAULT UNDER OTHER LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. WAIVER OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9. CONDITION OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12. REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
13. UNTENANTABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
14. EMINENT DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
15. LESSOR'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
16. SUBORDINATION OF LEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
18. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
19. RENT ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
26
<PAGE>
20. ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
21. CONDITION OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
22. SECURITY DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
23. AFTER HOUR HVAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
24. EFFECT OF WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
25. CONSTRUCTION OF LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
26. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
27. REAL ESTATE BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
28. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
29. SIGNAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
30. SALE BY LESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
31. ESTOPPEL CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
32. UNAVOIDABLE DELAYS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
33. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
34. EXCULPATION OF LESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
27
<PAGE>
LEASE AGREEMENT
DATED May 29, 1997
BY AND BETWEEN
MAC MANAGEMENT CO., INC., as
agent for 640 LASALLE PARTNERS
LIMITED PARTNERSHIP, an Illinois limited
partnership and the sole beneficiary of
AMALGAMATED TRUST & SAVINGS BANK, as
Trustee under Trust Agreement
dated May 1, 1987 and known as
Trust 5261 as Lessor
JAMtv CORPORATION
a Delaware Corporation
as Lessee
To Premises Commonly Known As
SUITE 560
640 N. LA SALLE STREET
CHICAGO, ILLINOIS 60610
28
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 26, 1999 with respect to the consolidated
financial statements and schedule of Tunes.com Inc. and to the use of our
report dated June 22, 1998 with respect to the financial statements of Tunes
Network, Inc. included in Amendment No. 1 of the Registration Statement (Form
S-1) and related Prospectus of Tunes.com Inc.
/s/ Ernst & Young LLP
Chicago, Illinois
July 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 6-MOS YEAR YEAR 6-MOS
6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 JUN-30-1998
JUN-30-1999
<PERIOD-START> JUL-02-1996 JAN-01-1997 DEC-31-1998 JAN-01-1998
JAN-01-1999
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 JUN-30-1998
JUN-30-1999
<CASH> 561,407 2,674,236 4,251,082 11,124,150
14,229,074
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 130,016 385,720 135,068
390,529
<ALLOWANCES> 0 0 (17,000) 0
(16,105)
<INVENTORY> 0 0 0 0
0
<CURRENT-ASSETS> 578,865 3,892,408 5,993,997 13,376,430
16,597,541
<PP&E> 29,857 840,430 1,712,802 1,237,487
1,824,452
<DEPRECIATION> (475) (131,185) (498,636) (267,836)
(638,420)
<TOTAL-ASSETS> 634,066 5,601,653 11,413,172 14,874,023
22,028,013
<CURRENT-LIABILITIES> 100,663 513,500 2,754,192 1,136,807
2,851,701
<BONDS> 0 0 160,507 0
121,193
0 8,430,108 22,116,439 21,451,323
42,186,358
0 0 0 0
0
<COMMON> 0 14,382 16,757 14,382
18,060
<OTHER-SE> 533,403 (3,356,337) (13,634,723) (7,728,489)
(23,149,299)
<TOTAL-LIABILITY-AND-EQUITY> 634,066 5,601,653 11,413,172 14,874,023
22,028,013
<SALES> 0 150 193,225 0
122,788
<TOTAL-REVENUES> 0 564,694 2,484,655 1,131,494
1,997,989
<CGS> 0 100 167,345 0
132,942
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2,002,632
<OTHER-EXPENSES> 223,950 2,933,788 11,903,743 2,905,925
12,508,467
<LOSS-PROVISION> 0 0 17,000 0
0
<INTEREST-EXPENSE> 0 0 9,438 336
72,166
<INCOME-PRETAX> (216,597) (3,522,035) (13,036,448) (3,620,027)
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<INCOME-TAX> 0 0 0 0
0
<INCOME-CONTINUING> (216,597) (3,522,035) (13,036,448) (3,620,027)
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<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
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<CHANGES> 0 0 0 0
0
<NET-INCOME> (216,597) (3,522,035) (13,036,448) (3,620,027)
(12,466,437)
<EPS-BASIC> (0.31) (2.70) (9.88) (2.89)
(8.23)
<EPS-DILUTED> (0.31) (2.70) (9.88) (2.89)
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</TABLE>
