<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1999
REGISTRATION NO. 333-80627
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 4 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 BRUCE F. PERCE
FREEBORN & PETERS MAYER, BROWN & PLATT
311 SOUTH WACKER DRIVE 190 SOUTH LASALLE STREET
CHICAGO, IL 60606 CHICAGO, IL 60603
(312) 360-6000 (312) 782-0600
(312) 360-6575 (FAX) (312) 701-7711 (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. / /
------------------
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 AUGUST 12, 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. Our
common stock has been approved for quotation on the Nasdaq National Market under
the symbol "TUNZ".
--------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 10.
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.
Photograph of Jennifer Lopez on other fold-out page:
List of choices on tunes.com overlaying picture
Pop
Favorite Artists
On the 6
<PAGE>
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.............................................................................................. 10
Information Regarding Forward-Looking Statements.......................................................... 27
Use of Proceeds........................................................................................... 28
Dividend Policy........................................................................................... 28
Capitalization............................................................................................ 29
Dilution.................................................................................................. 30
Selected Consolidated Financial Data...................................................................... 31
Selected Pro Forma Consolidated Financial Data............................................................ 32
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 33
Business.................................................................................................. 44
Management................................................................................................ 60
Related Party Transactions................................................................................ 69
Principal Stockholders.................................................................................... 73
Description of Capital Stock.............................................................................. 76
Shares Eligible for Future Sale........................................................................... 80
Underwriting.............................................................................................. 81
Legal Matters............................................................................................. 83
Experts................................................................................................... 83
Where You Can Find More Information....................................................................... 83
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 an 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 31.4 million during July
1999. Registered users have increased from 308,000 as of December 31, 1998 to
817,000 as of July 31, 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 $3.5 million in 1997, $13.2 million in 1998 and $13.1
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 that attracts and
engages our visitors by 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 that attracts and engages our visitors;
- 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.
RECENT EVENTS
On July 25, 1999, we entered into a letter of intent with musicmaker.com,
Inc. to form a strategic marketing and e-commerce relationship. Musicmaker.com
is a Web-based provider of custom CD compilations and offers secure downloads of
recorded music from its Web sites. The letter of intent provides that
musicmaker.com will be the exclusive provider of custom CD compilations to our
Web sites and will have the non-exclusive right to sell music recordings which
may be downloaded from our Web sites. In exchange for these rights,
musicmaker.com will purchase advertising on our Web sites in the amount of $1.0
million each year for the next five years. In addition, we will receive a sales
commission on all sales of musicmaker.com CDs and downloads of recorded music
from our Web sites. We will also cooperate with musicmaker.com to develop
co-branded pages on our Web sites with links to digital content for sale by
musicmaker.com. This marketing agreement will have an initial term of five
years.
Under the letter of intent, we will also exchange 357,143 shares of our
common stock, with an estimated value of $5.0 million based on an assumed
initial public offering price of $14.00 per share, for common stock of
musicmaker.com having a value of approximately $5.0 million. These shares will
be issued in a private placement, and musicmaker.com will have the right to
request to have their shares registered under the Securities Act any time we
file a registration statement for our own account or for the account of any of
our other stockholders. This transaction is subject to the approval of our board
of directors, the board of directors of musicmaker.com and musicmaker.com's
financial advisor, and the negotiation and execution of definitive agreements.
We expect to close the private placement with musicmaker.com prior to the
closing of this offering. However, there is no assurance that this transaction
will close.
On August 9, 1999, we entered into an agreement with Clear Channel
Communications, Inc. to issue to Clear Channel $15.0 million of our common stock
and a warrant to purchase up to $22.5 million of our common stock. The number of
shares to be issued to Clear Channel and the number of shares subject to the
warrant will be equal to these dollar amounts divided by the lesser of $14.00 or
the price per share in this offering. The exercise price per share of the
warrant will be the lesser of $14.00 or the public offering price. At an assumed
offering price of $14.00 per share, we will issue 1,071,428 shares and a warrant
to purchase 1,607,142 shares to Clear Channel. We expect the aggregate net
proceeds from the sale to be $14.3 million. If the warrant is exercised in full,
we will realize additional net proceeds of $21.7 million, although there is no
assurance that the warrant will be exercised. Clear Channel is a diversified
media company with operations in the radio, outdoor advertising and television
industries and operates, or does business with, 489 radio stations, 19
television stations and approximately 200,000 outdoor advertising displays in 25
countries. The
6
<PAGE>
agreement provides that the parties will also seek to establish arrangements
under which we may provide music content to Clear Channel's radio-related Web
sites, engage in joint sales efforts and share consumer data, although there can
be no assurance that we will do so.
We will issue the common stock and the warrant in a private placement that
will close upon completion of this offering. The warrant may be exercised at any
time during the three-year period beginning upon the completion of this
offering. Clear Channel will agree not to sell, for a period of 180 days
following the date of this offering, the common stock, the warrant or the common
stock issuable upon exercise of the warrant. We will also grant Clear Channel
the right to have the shares of common stock it purchases upon completion of
this offering registered under the Securities Act after this 180-day period and
the shares issuable under the warrant registered beginning one year after this
offering. The transaction with Clear Channel and this offering are conditioned
upon each other. There is no assurance that this transaction will close.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................ 4,000,000 shares
Common stock to be outstanding after this
offering.................................. 14,538,877 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 A 1.25-FOR-1 STOCK SPLIT OF OUR COMMON STOCK WHICH WILL
OCCUR IMMEDIATELY PRIOR TO COMPLETION OF THIS OFFERING;
- 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 THE ISSUANCE OF 357,143 SHARES OF COMMON STOCK TO
MUSICMAKER.COM IN A PRIVATE PLACEMENT TO OCCUR PRIOR TO THIS OFFERING;
- GIVES EFFECT TO THE ISSUANCE OF 1,071,428 SHARES OF COMMON STOCK TO CLEAR
CHANNEL, BASED UPON AN ASSUMED PUBLIC OFFERING PRICE OF $14.00 PER SHARE,
IN A PRIVATE PLACEMENT TO OCCUR UPON COMPLETION OF THIS OFFERING;
- 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;
- EXCLUDES 2,414,688 SHARES THAT MAY BE ISSUED UPON EXERCISE OF OUTSTANDING
OPTIONS AS OF JULY 31, 1999 AT A WEIGHTED AVERAGE EXERCISE PRICE OF $4.97
PER SHARE AND 2,079,740 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 1,492,305 SHARES AT A WEIGHTED AVERAGE
EXERCISE PRICE OF $3.21 PER SHARE OUTSTANDING AT AUGUST 9, 1999, AND A
WARRANT TO PURCHASE 1,607,142 SHARES AT AN EXERCISE PRICE OF $14.00 PER
SHARE, BASED UPON AN ASSUMED PUBLIC OFFERING PRICE OF $14.00 PER SHARE, TO
BE ISSUED TO CLEAR CHANNEL UPON COMPLETION OF THIS OFFERING; 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.
8
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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 issuance of 357,143 shares of common stock to musicmaker.com to occur
prior to this offering;
- the issuance of 1,071,428 shares of common stock to Clear Channel to 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 $1.5 million license fee triggered by our 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
JULY 2, 1996 PRO FORMA
(INCEPTION) YEAR ENDED SIX MONTHS ENDED PRO FORMA SIX MONTHS
TO DECEMBER 31, JUNE 30, YEAR ENDED ENDED JUNE
DECEMBER 31, -------------------- -------------------- DECEMBER 31, 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 1,528 230 4,518 1,731 4,518
------------- --------- --------- --------- --------- ------------ -----------
Total operating expenses...... 224 2,934 12,057 2,984 13,173 15,265 13,756
------------- --------- --------- --------- --------- ------------ -----------
Loss from operations.......... (224) (3,637) (13,617) (3,892) (13,178) (17,004) (13,850)
Other income, net................. 7 115 428 194 47 351 47
------------- --------- --------- --------- --------- ------------ -----------
Net loss...................... (217) (3,522) (13,189) (3,698) (13,131) $ (16,653) $ (13,803)
------------ -----------
------------ -----------
Accretion of redeemable
convertible preferred stock..... -- (363) (1,570) (541) (1,321)
------------- --------- --------- --------- ---------
Net loss attributable to
common stockholders......... $ (217) $ (3,885) $ (14,759) $ (4,239) $ (14,452)
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Basic and diluted net loss per
share(1)........................ $ (0.31) $ (2.70) $ (9.99) $ (2.95) $ (8.62) $ (2.33) $ (1.66)
------------- --------- --------- --------- --------- ------------ -----------
------------- --------- --------- --------- --------- ------------ -----------
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 7,143,690 8,305,613
------------- --------- --------- --------- --------- ------------ -----------
------------- --------- --------- --------- --------- ------------ -----------
</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 $ 28,479 $ 79,309
Working capital........................................................... 13,746 27,996 78,826
Total assets.............................................................. 22,028 43,028 93,858
Long-term debt, less current portion...................................... 121 121 121
Redeemable convertible preferred stock.................................... 41,883 -- --
Total stockholders' equity (deficit)...................................... (22,828) 40,055 90,885
</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.
9
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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. 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. 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.
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, 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
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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 that attract and engage our visitors, we may be unable to
attract and retain a significant number 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 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, Inc. In addition, BMG
Entertainment and Universal Music Group
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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 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 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.
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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 $3.5 million in 1997, $13.2 million in 1998 and $13.1 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."
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
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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 July 1999, the JAMTV.COM Web site generated 2.5 million page
views, or 8% of the 31.4 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
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 four
arrangements accounted for 9% 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
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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;
- 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. In the six months ended
June 30, 1999, we recorded $317,500 of barter revenue from two Web-based
companies for which the contracts have expired. 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
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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."
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 $13.2
million in 1998 and $13.1 million for the six months ended June 30, 1999. As of
June 30, 1999, we had an accumulated deficit of $33.3 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."
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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.
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. In July 1999, we amended our agreement with CDnow to reduce
the percentage of fees that we receive under the agreement. As a result of this
amendment which became 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 -- Technology and E-commerce
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
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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
currently available funds and the proceeds from the private placement to Clear
Channel, 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, FINANCE ACQUISITIONS OR DEVELOP STRATEGIC
RELATIONSHIPS BY ISSUING CAPITAL STOCK WHICH WOULD REDUCE THE PERCENTAGE
OWNERSHIP OF EXISTING STOCKHOLDERS
We may seek to raise additional funds, finance acquisitions or develop
strategic relationships 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 July 31, 1999, we grew from five to approximately 94
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 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,
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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 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 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
constraints. 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
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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, 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 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
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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. Our employee turnover rate was
approximately 24% for the six-month period ended June 30, 1999, excluding
terminations due to the consolidation of the operations of Tunes Network.
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. 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.
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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" and "Tunes" brands 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 a 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 -- Content Providers" 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, 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
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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, 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.
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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 33% 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 33% 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 July 31, 1999,
we had outstanding options to purchase 2,414,688 shares of our common stock. We
also have reserved 2,079,740 shares for future grants under our option plans. In
addition, we have adopted 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 14,538,877 shares of common stock. All the
shares sold in this offering will be freely tradable. Of the remaining
10,538,877 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 6,177,382 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 July 31, 1999,
options to purchase 2,414,688 shares were outstanding, 1,825,668 of which will
be exercisable upon completion of this offering. Warrants to purchase 3,099,447
shares will be outstanding upon completion of this offering. 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 1,729,606 shares will have registration rights, although the
registration rights with respect to 1,607,142 of these shares do not become
effective until one year following this offering.
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;
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- provide for a staggered board of directors, so it will take two successive
annual meetings to replace a majority of our directors;
- 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 $8.15 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 $5.43 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.
27
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 4.0 million shares of our
common stock will be approximately $50.8 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 from this
offering will be approximately $58.6 million. We estimate that the net proceeds
from the sale of 1,071,428 shares of common stock and a warrant to purchase
1,607,142 shares of common stock to Clear Channel, which will close upon the
completion of this offering, will be approximately $14.3 million.
We have no current specific plans for the net proceeds of this offering or
the private placement to Clear Channel. 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.
28
<PAGE>
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;
(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;
(3) the issuance of 357,143 shares of common stock to musicmaker.com to
occur prior to completion of this offering; and
(4) the issuance of 1,071,428 shares of common stock to Clear Channel to
occur upon completion of this offering; and
- 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:
- 2,345,264 shares of common stock that may be issued upon the exercise of
options outstanding as of June 30, 1999 at a weighted average exercise
price of $4.87 per share and 2,161,899 shares reserved for future awards
under our stock option plans and 250,000 shares reserved for issuance
under our employee stock purchase plan;
- warrants outstanding at June 30, 1999 to purchase 1,512,294 shares at a
weighted average exercise price of $3.31 per share; and
- a warrant to purchase 1,607,142 shares at an assumed exercise price of
$14.00 per share to be issued to Clear Channel upon completion of this
offering.
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 $ 28,479 $ 79,309
--------- ----------- -----------
--------- ----------- -----------
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..................................................... 41,883 -- --
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 -- 10,509,524 shares
issued and outstanding; and pro forma as adjusted -- 50,000,000 shares
authorized and 14,509,524 shares issued and outstanding.................. 18 105 145
Additional paid-in capital................................................. 10,411 73,207 123,997
Common stock to be issued.................................................. 55 55 55
Accumulated deficit........................................................ (33,312) (33,312) (33,312)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (22,828) 40,055 90,885
--------- ----------- -----------
Total capitalization....................................................... $ 19,176 $ 40,176 $ 91,006
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
29
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$34.1 million, or $3.24 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;
- 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;
- the issuance of 357,143 shares of common stock to musicmaker.com to occur
prior to this offering; and
- the issuance of 1,071,428 shares of common stock to Clear Channel to occur
upon completion of 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 $84.9 million, or $5.85 per share. This represents an immediate
increase in pro forma net tangible book value of $2.61 per share to existing
stockholders and an immediate dilution of $8.15 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............ $ 3.24
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 2.61
---------
Pro forma net tangible book value per share, as adjusted for this offering... 5.85
---------
Dilution per share to new investors.......................................... $ 8.15
---------
---------
</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, by Clear Channel 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..................... 9,438,096 65.0% $ 51,239,620 41.9% $ 5.43
Clear Channel............................. 1,071,428 7.4 15,000,000 12.3 14.00
New investors............................. 4,000,000 27.6 56,000,000 45.8 14.00
------------ --------- -------------- ---------
Total................................. 14,509,524 100.0% $ 122,239,620 100.0%
------------ --------- -------------- ---------
------------ --------- -------------- ---------
</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 2,345,264 shares of common stock with a weighted average
exercise price of $4.87 per share, and there were outstanding warrants to
purchase 1,512,294 shares of common stock with a weighted average exercise price
of $3.31 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.
30
<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 1,528 230 4,518
------------- ----------- ----------- ----------- -----------
Total operating expenses..................... 224 2,934 12,057 2,984 13,173
------------- ----------- ----------- ----------- -----------
Loss from operations......................... (224) (3,637) (13,617) (3,892) (13,178)
Other income, net................................ 7 115 428 194 47
------------- ----------- ----------- ----------- -----------
Net loss..................................... $ (217) $ (3,522) $ (13,189) $ (3,698) $ (13,131)
Accretion of redeemable convertible preferred
stock........................................... -- (363) (1,570) (541) (1,321)
------------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders............................... $ 217 $ (3,885) $ (14,759) $ (4,239) $ (14,452)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share(1).......... $ (0.31) $ (2.70) $ (9.99) $ (2.95) $ (8.62)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
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 41,883
Total stockholders' equity (deficit)..................................... 533 (3,342) (13,618) (22,828)
</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.
31
<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;
- the amortization of a $1.5 million license fee triggered by our May 1999
preferred stock issuance;
- the issuance of 357,143 shares of common stock to musicmaker.com to occur
prior to completion of this offering; and
- the issuance of 1,071,428 shares of common stock to Clear Channel to occur
upon completion of this offering.
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............................................................ 1,731 4,518
----------------- -------------
Total operating expenses.................................................... 15,265 13,756
----------------- -------------
Loss from operations........................................................ (17,004) (13,850)
Other income.................................................................... 351 47
----------------- -------------
Net loss.................................................................... $ (16,653) $ (13,803)
----------------- -------------
----------------- -------------
Pro forma basic and diluted net loss per share(1)............................... $ (2.33) $ (1.66)
----------------- -------------
----------------- -------------
Weighted average shares outstanding used in pro forma basic and diluted per
share calculation(1)........................................................... 7,143,690 8,305,613
----------------- -------------
----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 28,479 $ 79,309
Working capital................................................................... 27,996 78,826
Total assets...................................................................... 43,028 93,858
Long-term debt, less current portion.............................................. 121 121
Redeemable convertible preferred stock............................................ -- --
Total stockholders' equity........................................................ 40,055 90,885
</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.
32
<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 an 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. In the
six months ended June 30, 1999, we recorded $317,500 of barter revenue from two
Web-based companies, for which the contracts have expired. 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.
33
<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 $30.1 million. As of June 30, 1999, we had an accumulated deficit of $33.3
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
34
<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 licensing revenue in future periods, we
expect to experience a continued decrease in product development revenue and
content licensing revenue as a percentage of total revenue due to our emphasis
on generating increased advertising and e-commerce revenue.
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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
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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 $4.3 million, from $230,000 to $4.5 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
issuance of the warrant to Clear Channel and the accelerated vesting of stock
options held by non-employees upon the closing of this offering. We estimate
that this expense will be approximately $10.7 million based on an assumed
initial public offering price of $14.00 per share. 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 $30.1 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,
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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.
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.
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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 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 $1.5 million from $10,000 to $1.5
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 profit (deficit)......... (537 ) (371 ) (240 ) (412 ) (7 ) 2
Operating expenses............. 1,205 1,779 3,666 5,407 3,971 9,202
------------- ------------- ------------- ------------ ------------- -------------
Loss from operations......... $ (1,742 ) $ (2,150 ) $ (3,906 ) $ (5,819 ) $ (3,978 ) $ (9,200 )
------------- ------------- ------------- ------------ ------------- -------------
------------- ------------- ------------- ------------ ------------- -------------
</TABLE>
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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 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. 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
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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 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 and the Clear
Channel private placement, 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.
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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 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 during 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.
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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 an 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 31.4 million during July
1999. Registered users have increased from 308,000 as of December 31, 1998 to
817,000 as of July 31, 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.
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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 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
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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.
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 that attracts and
engages our visitors by 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, and we are working with Microsoft to
develop an enhanced broadband video section of the ROLLINGSTONE.COM Web
site. 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
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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,
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.
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- 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 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.
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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
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
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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 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.
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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 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>
- -3Com -Excite -New City Net
- -Animalhouse.com -Fans Only -Oldsmobile
- -Ashford.com -Fortune City -On Now
- -Berkeley Systems -IBM -Sony
- -Brown-Forman -Lycos -Sprint
- -CDnow -Microsoft -USA Today
- -College Club -musicmaker.com -Virgin Atlantic
- -Columbia House -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
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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.
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 $1.3 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, 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 93,750 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
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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 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 four
largest distribution channels accounted for 9% of traffic to our sites and no
single distribution channel accounted for more than 5% 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. See "Management's Discussion
and Analysis
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of Financial Condition and Results of Operations--Liquidity and Capital
Resources." 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 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 Web
tenancy fee based upon the amount of traffic generated to ROLLINGSTONE.COM. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." 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.
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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 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, for which Microsoft receives promotion of its Windows Media
Player and sponsorship of our BIG VIDEO section. 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. In February 1998, we also
entered into a CD Merchant agreement with Microsoft to 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. In consideration for these information services, Microsoft displays our logo
on the Deluxe CD Player and directs users to our Web site.
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.
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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 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;
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- 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 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."
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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.
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 July 31, 1999, we had 94 full-time employees, including 56 in
operations and development, 23 in sales and marketing and 15 in general and
administrative, as well as 9 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.
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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 August 11, 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
Emily J. Rupp.................................. 30 Vice President -- Finance and Controller
Robert R. Gheewalla............................ 32 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 the audit committee upon the completion of the
offering.
HOWARD A. TULLMAN has served as our Chairman since February 1999 and served
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 served 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 and an M.B.A.
and M.S. in Management Information Systems from Benedictine University.
EMILY J. RUPP has served as our Vice President -- Finance and Controller
since June 1999 and our Controller since September 1998. Prior to joining
Tunes.com, Ms. Rupp was an audit manager with PricewaterhouseCoopers LLP, where
she spent seven years in the Assurance and Business Advisory Services group. Ms.
Rupp holds a B.S. in Business from Miami University and is a Certified Public
Accountant.
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.
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
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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, US 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 directors 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 from 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 a 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 auditors. The audit
committee will consist of Messrs. Goldstein and Kaplan after the completion of
this offering.
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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 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."
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(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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<PAGE>
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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<PAGE>
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 82,457 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 July 31, 1999, options to purchase a total of 1,908,125 shares of
common stock at a weighted average exercise price of $4.17 per share were
outstanding under the 1997 plan. Of these options, options to purchase 1,825,668
shares of common stock will be fully vested and exercisable upon the completion
of this offering. As of July 31, 1999, we had 23,803 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 July 31, 1999, options to
purchase 506,563 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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<PAGE>
EMPLOYEE STOCK PURCHASE PLAN. We have adopted 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 we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions.
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<PAGE>
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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<PAGE>
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 and will add musicmaker.com and Clear Channel to this agreement upon
closing of those transactions. 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 us 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 July 31, 1999, the number
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<PAGE>
of shares issuable under this warrant was 1,276,091. Jann Wenner, one of our
directors, is the 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.
JAM PRODUCTIONS OPERATING EXPENSES. We reimbursed Jam Productions $75,000
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.
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
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<PAGE>
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, our
Chairman and Chief Executive Officer, 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.
These shares of Series A-I preferred stock were sold at $3.00 per share. In
addition, we issued 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 10.2% 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.
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
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<PAGE>
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. In addition, we issued to Scott Mednick, one of our directors, $100,000
in principal amount of notes and warrants to purchase 1,250 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 offering 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., one of our directors, serves as President of
netWorth. 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 August 9, 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>
Clear Channel Communications, Inc.(3)............................... 2,678,570 --% 16.6%
200 Concord Plaza, Suite 600
San Antonio, Texas
Robert R. Gheewalla(4).............................................. 2,417,081 25.5 16.6
Joseph H. Gleberman(4).............................................. 2,417,081 25.5 16.6
The Goldman, Sachs Group, Inc.(4)................................... 2,417,081 25.5 16.6
85 Broad Street,
New York, New York
Jann S. Wenner(5)................................................... 1,276,091 11.9 8.1
Straight Arrow Publishers Company, L.P.(5).......................... 1,276,091 11.9 8.1
1290 Avenue of the Americas
New York, New York
Doerge-Internet, L.P................................................ 968,714 10.2 6.7
30 S. Wacker Drive, Suite 2112
Chicago, Illinois
Burton B. Goldstein, Jr.(6)......................................... 937,500 9.9 6.4
netWorth Partners I, LLC(6)......................................... 937,500 9.9 6.4
One Buckhead Plaza, Suite 780
3060 Peachtree Road
Atlanta, Georgia
Jerry Mickelson(7).................................................. 508,971 5.2 3.4
207 West Goethe Street
Chicago, Illinois
Jam Enterprises Corp.(7)............................................ 508,971 5.2 3.4
207 West Goethe Street
Chicago, Illinois
SBIC Partners II, L.P............................................... 500,000 5.3 3.4
201 Main Street, Suite 2302
Fort Worth, Texas
Howard A. Tullman(8)................................................ 479,951 4.9 3.2
Patrick J. Blake(9)................................................. 255,388 2.6 1.7
Stuart B. Frankel(10)............................................... 112,500 1.2 *
Howard J. Katz(11).................................................. 111,338 1.2 *
Matthew S. Kaplan................................................... 30,035 * *
Scott Mednick(12)................................................... 13,927 * *
All directors and executive officers as a group (13 persons)........ 5,531,548 48.0 33.3
</TABLE>
- ------------------------
* Less than one percent
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(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 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, common stock to
be issued to musicmaker.com prior to the completion of this offering, an
assumed 125,000 additional shares that may be issued shortly following this
offering in connection with our July 1998 acquisition of Tunes Network 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
August 9, 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 common
stock to be issued to Clear Channel upon completion of this offering. 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 1,071,428 shares and 1,607,142 shares issuable upon exercise of
a warrant, assuming an initial public offering price of $14.00 per share.
(4) Consists of 5,883 shares issuable upon exercise of warrants and 2,411,198
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:
- 79,000 shares held of record by Bridge Street Fund 1997, L.P.;
- 55,928 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.;
- 602,894 shares held of record by GS Capital Partners II Offshore, L.P.;
and
- 162,707 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.
(5) 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.
(6) 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.
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(7) 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.
(8) Consists of 71,913 shares and options to purchase 408,038 shares.
(9) 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.
(10) Represents options to purchase 112,500 shares held by Mr. Frankel.
(11) Represents options to purchase 111,338 shares held by Mr. Katz.
(12) Represents 12,677 shares and a warrant to purchase 1,250 shares held by
The Mednick Living Trust, a revocable grantor trust. Mr. Mednick is a
co-trustee of The Mednick Living Trust.
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<PAGE>
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 31, 1999, we had 9,081,188 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, assumes the issuance of an additional
125,000 shares of common stock related to the acquisition of Tunes Network, 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 July 31,
1999, the warrant was exercisable into approximately 1,276,091 shares of common
stock. The warrant expires in 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
- December 31, 2008.
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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 warrant expires in June
2004.
In August 1999 we agreed to issue to Clear Channel, upon the closing of this
offering, a warrant to purchase 1,607,142 shares at $14.00 per share, based upon
an assumed public offering price of $14.00 per share. The warrant will be
exercisable immediately upon issuance and will expire in 2002.
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, the issuance of 357,143 shares of
common stock to musicmaker.com and the issuance of 1,071,428 shares of common
stock and a warrant to purchase 1,607,142 shares to Clear Channel, and assuming
exercise of these warrants, holders of 10,337,248 shares of our common stock, or
64% 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, the holders of all of our outstanding preferred stock and the
holders of the warrants described above. Clear Channel and musicmaker.com will
become parties to this agreement upon the closing of those transactions. 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 17.5% 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 $40.0 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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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. The
1,607,142 shares subject to the warrant to be issued to Clear Channel will be
eligible for registration rights beginning one year after this offering.
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. In
accordance with our letter of intent with musicmaker.com, the 357,143 shares of
common stock that are expected to be issued to musicmaker.com will also have
piggyback registration rights.
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 and could reduce the price investors are
willing to pay for our stock."
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;
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- 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 a majority of our board of
directors or a special committee of our board that has been delegated the
power to call special meetings.
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.
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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, 14,538,877 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 10,538,877 shares of common stock were sold by us in reliance
upon exemptions from the registration requirements of the Securities Act. All
10,538,877 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
6,177,382 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 10,538,877 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.
Upon the completion of this offering, the holders of 10,337,248 restricted
shares will have rights with respect to the registration of those shares under
the Securities Act, assuming the exercise of warrants to purchase 1,729,606
shares that will be entitled to registration rights following this offering. 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 and 1999 stock option plan and shares
under our 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.
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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
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Salomon Smith Barney Inc.........................................................
SG Cowen Securities Corporation..................................................
U.S. Bancorp Piper Jaffray Inc...................................................
----------
Total........................................................................ 4,000,000
----------
----------
</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, including the
closing of the private placement with Clear Channel. 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 600,000 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
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be our record of operations, our current financial condition, our future
prospects, our markets, the 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.
Our common stock has been approved 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
$1.25 million, including $450,000 of legal fees, $300,000 of printing expenses
and $200,000 of accounting fees.
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 a
warrant to purchase 101,644 shares of our common stock at an exercise price of
$8.00 per share. In addition, Salomon Smith Barney Inc. has been engaged to act
as our placement agent in connection with the Clear Channel private placement,
for which it will receive customary fees. 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.
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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.
Attorneys of Freeborn & Peters intend to purchase approximately 9,000 shares in
this offering. In addition, subject to the completion of this offering, we will
grant a partner of Freeborn & Peters an option to acquire 5,000 shares of our
common stock under our 1997 option plan, which will be immediately exercisable
upon issuance, at an exercise price equal to the price per share in this
offering. 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.
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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 41,883,053
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 4,170,677 10,411,108
Common stock to be issued....................................... -- 1,055,420 55,420
Accumulated deficit............................................. (4,101,655) (18,860,820) (33,312,522)
------------- -------------- --------------
Total stockholders' deficit....................................... (3,341,955) (13,617,966) (22,827,934)
------------- -------------- --------------
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 1,527,734 230,411 4,517,563
------------- ------------- -------------- -------------- --------------
Total operating expenses............... 223,950 2,933,788 12,056,938 2,984,055 13,172,367
------------- ------------- -------------- -------------- --------------
Loss from operations................... (223,950) (3,636,615) (13,617,339) (3,892,377) (13,177,010)
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) (13,189,643) (3,698,157) (13,130,337)
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) $ (14,759,165) $ (4,239,535) $ (14,451,702)
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
Basic and diluted net loss per common
share................................ $ (0.31) $ (2.70) $ (9.99) $ (2.95) $ (8.62)
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
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..................... $ (2.64) $ (2.14)
-------------- --------------
-------------- --------------
Weighted average shares used in pro
forma per share calculation.......... 5,590,119 6,752,042
-------------- --------------
-------------- --------------
</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........... -- -- -- -- -- 1,527,734 --
Accretion of redeemable convertible
preferred stock..................... -- -- -- -- -- -- (1,569,522)
Net loss............................. -- -- -- -- -- -- (13,189,643)
--------- ---------- ---------- ----------- -------------- ------------ -------------
Balance at December 31, 1998......... -- -- 1,675,663 16,757 1,055,420 4,170,677 (18,860,820)
Issuance of warrants (unaudited)..... -- -- -- -- -- 713,011 --
Stock compensation expense
(unaudited)......................... -- -- -- -- -- 4,517,563 --
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)................. -- -- -- -- -- -- (13,130,337)
--------- ---------- ---------- ----------- -------------- ------------ -------------
Balance at June 30, 1999
(unaudited)......................... -- $ -- 1,806,000 $ 18,060 $ 55,420 $ 10,411,108 $ (33,312,522)
--------- ---------- ---------- ----------- -------------- ------------ -------------
--------- ---------- ---------- ----------- -------------- ------------ -------------
<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........... 1,527,734
Accretion of redeemable convertible
preferred stock..................... (1,569,522)
Net loss............................. (13,189,643)
-------------
Balance at December 31, 1998......... (13,617,966)
Issuance of warrants (unaudited)..... 713,011
Stock compensation expense
(unaudited)......................... 4,517,563
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)................. (13,130,337)
-------------
Balance at June 30, 1999
(unaudited)......................... $ (22,827,934)
-------------
-------------
</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) $ (13,189,643) $ (3,698,157) $ (13,130,337)
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 1,527,734 230,411 4,517,563
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. In the six months
ended June 30, 1999 the Company recorded barter revenue of $535,000 of which
$317,500 was from two Web-based companies for which the contracts have expired.
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) (17,157,312)
Net loss per common share...................................... (5.01) (10.23)
</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 1,266,963 shares of the Company's
common stock was outstanding. The estimated fair value of the warrant, as
calculated using the Black-Scholes method at each date of issuance, totaled
$2,290,099 at December 31, 1998 and $4,832,281 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 $615,124 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
($4,207,457) 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 $292,500, as calculated using the Black-Scholes 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 Black-Scholes method at the date of issuance,
was $483,011 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.
In applying the Black-Scholes method, the Company has used an expected
dividend yield of zero, a risk-free interest rate of 5% and a volatility factor
of 66%. The lives used to value each of the warrants was based on the term of
each warrant as described above.
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 $14,339,000 and
$9.70 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. In 1999 all options were granted with an exercise price of $8.00, the
estimated fair value of the Company's common stock on each date of grant.
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 $75,000 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>
13. SUBSEQUENT EVENTS
In July 1999, the Company entered into a letter of intent with
musicmaker.com, Inc. to exchange 357,143 shares of its common stock, with an
estimated value of approximately $5.0 million, for common stock of
musicmaker.com having a value of approximately $5.0 million as of the date of
the letter of intent.
In August 1999, the Company entered into an agreement with Clear Channel
Communications, Inc. to sell approximately $15.0 million of the Company's common
stock to Clear Channel and to issue to Clear Channel a warrant to purchase up to
one and one half times the number of shares of the Company's common stock
purchased by Clear Channel at an exercise price of the lesser of $14.00 per
share or the initial public offering price. This transaction is expected to
close concurrently with the Company's proposed initial public offering.
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; (v) the
amortization related to a license fee payment made as a result of the issuance
of preferred stock in May 1999; (vi) the issuance of 357,143 shares of common
stock to musicmaker.com, Inc. in a private placement prior to the completion of
this offering; and (vii) the issuance of 1,071,428 shares of common stock to
Clear Channel in a private placement upon completion of this offering 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............................... 1,527,734 203,628 1,731,362
-------------- ------------- ------------- --------------
Total operating expenses........................... 12,056,938 942,980 2,265,358 15,265,276
-------------- ------------- ------------- --------------
Loss from operations............................... (13,617,339) (931,116) (2,454,832) (17,003,287)
Other income (expense)............................. 427,696 (76,673) -- 351,023
-------------- ------------- ------------- --------------
Net loss........................................... $ (13,189,643) $ (1,007,789) $ (2,454,832) $ (16,652,264)
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Basic and diluted net loss per common share........ $ (2.33)
--------------
--------------
Weighted average number shares used in per share
calculation...................................... 7,143,690
--------------
--------------
</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.......................................... 4,517,563 4,517,563
-------------- ----------- --------------
Total operating expenses...................................... 13,172,367 583,333 13,755,700
-------------- ----------- --------------
Loss from operations.......................................... (13,177,010) (672,535) (13,849,545)
Other income.................................................. 46,673 46,673
-------------- ----------- --------------
Net loss...................................................... $ (13,130,337) (672,535) $ (13,802,872)
-------------- ----------- --------------
-------------- ----------- --------------
Basic and diluted net loss per common share................... $ (1.66)
--------------
--------------
Weighted average number shares used in per share
calculation................................................. 8,305,613
--------------
--------------
</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
HISTORICAL (1) ADJUSTMENTS PRO FORMA
------------ ------------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 14,229,074 $ 14,250,000(d) $ 28,479,074
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 14,250,000 30,847,541
Equipment and leasehold improvements.............. 1,824,452 1,824,452
Less: Accumulated depreciation.................... (638,420) (638,420)
------------ ------------------ ------------
1,186,032 1,186,032
Investment........................................ -- 5,000,000(c) 5,000,000
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 21,000,000 $ 43,028,013
------------ ------------------ ------------
------------ ------------------ ------------
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............ 41,883,053 (41,883,053)(a)
Stockholders' equity (deficit):
Common stock.................................... 18,060 71,500(a)
1,250(b)
3,571(c) 105,095
10,714(d)
Additional paid-in capital...................... 10,411,108 41,811,553(a)
1,748,750(b)
4,996,429(c) 73,207,126
14,239,286(d)
Common stock to be issued....................... 55,420 55,420
Accumulated deficit............................. (33,312,522) (33,312,522)
------------ ------------------ ------------
Total stockholders' equity (deficit).............. (22,827,934) 62,883,053 40,055,119
------------ ------------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 22,028,013 $ 21,000,000 $ 43,028,013
------------ ------------------ ------------
------------ ------------------ ------------
</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.
(c) To record the issuance of 357,143 shares of common stock to
musicmaker.com, Inc. and the receipt of 273,038 shares of
musicmaker.com, Inc. common stock in connection with a stock exchange
agreement. This investment represents approximately 1% of the
outstanding common stock of musicmaker.com, Inc. and will be
accounted for using the cost method.
(d) To record the issuance of 1,071,428 shares of common stock to Clear
Channel at $14.00 per share net of estimated stock issuance costs of
$750,000.
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,
--------------------- JUNE 30,
1996 1997 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1996 1997 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, SIX MONTHS ENDED
------------------------ JUNE 30,
1996 1997 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................................................................................... 300,000
Legal fees and expenses............................................................................. 450,000
Accounting fees and expenses........................................................................ 200,000
Blue Sky fees and expenses.......................................................................... 10,000
Transfer agent and registrar fees................................................................... 10,000
Miscellaneous expenses.............................................................................. 163,418
------------
Total........................................................................................... 1,250,000
------------
------------
</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: (1) for breaches of
the duty of loyalty to us and our stockholders; (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (3) for transactions from which a director derives improper personal
benefit; and (4) 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: (1) a majority of our
disinterested directors; (2) by a committee of disinterested directors
designated by a majority vote of the disinterested
II-1
<PAGE>
directors; (3) 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 (4) 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 solely to 23 of its members, including
Matthew S. Kaplan, one of our directors. 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 30
members of Digital Entertainment Network in exchange for all outstanding equity
interests of Digital Entertainment Network as part of our reorganization of
Digital Entertainment Network into our company. The
II-2
<PAGE>
members receiving common stock, including Howard A. Tullman, Jam Enterprises,
Red 5 Management and Matthew S. Kaplan. Howard A. Tullman is our Chairman of the
Board and Chief Executive Officer. Jerry Mickelson, our former chairman, is a
principal shareholder, executive officer and director of Jam Enterprises.
Patrick Blake, our former president, is a principal shareholder, executive
officer and director of Red 5. Matthew S. Kaplan is one of our directors. No
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
affiliates of 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 23 holders of Digital
Entertainment Network's notes which were issued as of March 31, 1997, as
described above. The noteholders, consisting solely of existing members,
including one of our directors, 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 affiliates of 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 to 41
accredited investors, including 17 existing stockholders and one director. 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 July 31, 1999, the warrant was exercisable into approximately
1,276,091 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 to five accredited entities,
including one existing stockholder. No underwriter was involved in the offering
and no selling commissions were paid. We issued these shares to entity investors
who were 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 affiliates of 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 to 12 accredited investors, including six
existing stockholders. 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 June 1999. 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 greater of
the initial public offering price per share or the average of the highest
closing price of our
II-3
<PAGE>
common stock for any five days 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 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 warrant, which
expires on the completion of this offering, 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 10 accredited investors,
including affiliates of The Goldman Sachs Group, one director and five existing
stockholders, 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 to
affiliates of The Goldman Sachs Group 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 32 accredited
investors including all purchasers of the convertible promissory notes and
netWorth Partners in reliance upon an exemption from registration under Rule 506
of Regulation D. Burton B. Goldstein, Jr., a director of our company, serves as
President of netWorth Partners. 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 July 31, 1999, we have granted options under
our 1997 and 1999 stock option plans to acquire an aggregate of 2,501,538 shares
of common stock. The exercise prices of those options range from $0.80 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 regulations 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. 4 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 August 12, 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. 4 to the Registration Statement has been signed by the following persons in
the capacities indicated on August 12, 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
/s/ SCOTT MEDNICK*
------------------------------------------- Director
SCOTT MEDNICK
/s/ JANN S. WENNER*
------------------------------------------- Director
JANN S. WENNER
</TABLE>
* Signed by Stuart B. Frankel pursuant to a power of attorney that was
previously filed.
II-7
<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 Second 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
4.17 Form of Warrant to Purchase Shares of Common Stock to be issued to Clear Channel Communications, Inc.
5.1 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
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**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
**+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
**+10.14 Interactive Services Agreement with America Online, Inc., Straight Arrow Publishers Company, L.P. and
Tunes.com Inc. dated as of October 1, 1998, as amended by letter agreement dated as of December 17,
1998.
+10.15 Letter of Intent with musicmaker.com, Inc. dated July 25, 1999
10.16 Stock Purchase Agreement with Clear Channel Communications, Inc. dated as of August 9, 1999
**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
**27.1 Financial Disclosure Schedule
</TABLE>
- ------------------------
* To be filed by amendment
+ Confidential treatment has been requested
** Previously filed
E-2
<PAGE>
EXHIBIT 4.3
SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
Dated as of August 9, 1999
by and among
TUNES.COM INC.
and
THE INVESTORS NAMED ON THE SIGNATURE PAGES HERETO
AND THE SCHEDULES ATTACHED HERETO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Definitions...........................................................................................2
Section 2. Demand Registration Rights............................................................................6
(a) Demands for Registration.................................................................................6
(b) Limitations on Demand Registrations......................................................................7
(c) Registration Statement Form..............................................................................7
(d) Registration Expenses....................................................................................7
(e) Priority in Cutback Registrations........................................................................7
(f) Preemption of Demand Registration........................................................................7
(f) Preemption of Demand Registration........................................................................8
Section 3. Piggyback Registration................................................................................8
(a) Right to Include Registrable Securities..................................................................8
(b) Registration Expenses....................................................................................8
(c) Priority in Cutback Registrations........................................................................8
Section 4. Registration Procedures...............................................................................9
Section 5. Underwritten Offerings...............................................................................12
(a) Underwritten Offerings in Connection with Demand Registrations..........................................13
(b) Underwritten Piggyback Offerings........................................................................13
Section 6. Holdback Agreements..................................................................................13
(a) By the Holders..........................................................................................14
(b) By the Company and Other Securityholders................................................................14
Section 7. Indemnification......................................................................................14
(a) Indemnification by the Company..........................................................................14
(b) Indemnification by the Sellers..........................................................................15
(c) Notices of Claims.......................................................................................16
(d) Contribution............................................................................................16
(e) Other Indemnification...................................................................................17
(f) Indemnification Payments................................................................................17
(g) Underwriting Agreement..................................................................................17
Section 8. Covenants Relating to Rule 144.......................................................................18
Section 9. Other Rights.........................................................................................18
(a) No Existing Agreements..................................................................................18
(b) Future Agreements.......................................................................................18
Section 10. Selection of Underwriters...........................................................................18
Section 11. Miscellaneous.......................................................................................19
(a) Notices.................................................................................................19
(b) Entire Agreement........................................................................................21
(c) Amendment...............................................................................................21
d) Waiver..................................................................................................21
(e) Consents and Waivers by Holders.........................................................................21
(f) No Third Party Beneficiary..............................................................................21
(g) Successors or Assigns...................................................................................21
(h) Headings................................................................................................21
(i) Invalid Provisions......................................................................................21
(j) Remedies................................................................................................22
<PAGE>
(k) Governing Law...........................................................................................22
(l) Counterparts............................................................................................22
(l) Termination of Registration Rights......................................................................22
(n) Legends.................................................................................................22
</TABLE>
-ii-
<PAGE>
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT,
dated as of August 9, 1999, is made and entered into by and among Tunes.com
Inc., a Delaware corporation (the "Company"), and the Investors (as defined
herein).
WHEREAS, the Company and the Investors named on Schedule 1
hereto entered into a certain Registration Rights Agreement dated as of June
2, 1997 (as amended by that certain Amendment No. 1 to Registration Rights
Agreement dated as of October 31, 1997, that certain Amendment No. 2 to
Registration Rights Agreement dated as of February 11, 1998, and that certain
Amendment No. 3 to Registration Rights Agreement dated as of May 4, 1998 and
as otherwise heretofore amended or modified, the "Original Registration
Rights Agreement") in connection with that certain Preferred Stock Purchase
Agreement dated as of June 2, 1997 between the Company and certain of the
Investors;
WHEREAS, in accordance with paragraph (c) of Section 11 of
the Original Registration Rights Agreement and subsequent to June 2, 1997,
the additional Investors named on Schedule 2 hereto have become parties to
the Original Registration Rights Agreement pursuant to Amendment No. 1,
Amendment No. 2, Amendment No. 3, certain Joinders, and certain Joinder
Agreements to the Original Registration Rights Agreement;
WHEREAS, the Company has issued and sold, and certain of
the Investors purchased from the Company, shares of Series E Convertible
Preferred Stock, par value $.01 per share (the "Series E Preferred Stock"),
and, if applicable, shares of Series A-IV Convertible Preferred Stock, par
value $.01 per share, pursuant to the terms and conditions of that certain
Series E Convertible Preferred Stock Purchase Agreement dated as of May 4,
1999 (the "Series E Stock Purchase Agreement") among the Company and certain
of the Investors, and in connection with the Series E Stock Purchase
Agreement, the Original Registration Rights Agreement was amended and
restated (the "First Amended and Restated Registration Rights Agreement");
WHEREAS, simultaneously with the closing of the Company's
initial Public Offering of its Common Stock, the Company shall issue to Clear
Channel Communications, Inc. ("CCU") shares of common stock of the Company
and a warrant to purchase additional shares of Common Stock (the "CCU
Warrant"), pursuant to the terms and conditions of that certain Stock
Purchase Agreement dated as of the date hereof (the "Stock Purchase
Agreement") by and between the Company and CCU;
WHEREAS, it is a condition precedent to the consummation of
the transactions contemplated by the Stock Purchase Agreement that the
Company and the Investors that are parties to the First Amended and Restated
Registration Rights Agreement amend and restate the
<PAGE>
First Amended and Restated Registration Rights Agreement on the terms and
subject to the conditions set forth herein; and
WHEREAS, the Company and the Holders of more than
two-thirds (2/3) of the Registrable Securities currently outstanding or
subject to issuance on the date hereof, do hereby amend and restate the First
Amended and Restated Registration Rights Agreement in its entirety on the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants
and agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
Section 1. DEFINITIONS.
(a) Except as otherwise specifically indicated, the
following terms will have the following meanings for all purposes of this
Agreement:
"AGREEMENT" means this Second Amended and Restated
Registration Rights Agreement, as the same shall be amended from time to time.
"BOARD" means the Board of Directors of the Company.
"BUSINESS DAY" means any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks
are open for business in New York City.
"COMMISSION" means the United States Securities and
Exchange Commission, or any successor governmental agency or authority.
"COMMON STOCK" means the Common Stock, par value $.01 per
share, of the Company, as constituted on the date hereof, and any stock into
which such Common Stock shall have been changed or any stock resulting from
any reclassification of such Common Stock.
"COMPANY" has the meaning ascribed to it in the preamble.
"CUTBACK REGISTRATION" means any Demand Registration or
Piggyback Registration to be effected as an underwritten Public Offering in
which the Managing Underwriter with respect thereto advises the Company and
the Requesting Holders in writing that, in its opinion, the number of
securities requested to be included in such registration (including
securities of the Company which are not Registrable Securities) exceeds the
number which can be sold in such offering without a reduction in the selling
price anticipated to be received for the securities to be sold in such Public
Offering.
"DEMAND FOR REGISTRATION" has the meaning ascribed to it in
SECTION 2(a).
"DEMAND REGISTRATION" means any registration of Registrable
Securities under the Securities Act effected pursuant to a Demand for
Registration in accordance with SECTION 2.
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<PAGE>
"EFFECTIVE REGISTRATION" means, subject to the last
sentence of SECTION 2(f), a Demand Registration which (i) has been declared
or ordered effective in accordance with the rules of the Commission, and (ii)
has been kept effective for the period of time contemplated by SECTION 4(b).
Notwithstanding the foregoing, a registration that does not become effective
after it has been filed with the Commission solely by reason of the refusal
to proceed of the Holders demanding or requesting such registration shall be
deemed to be an Effective Registration for purposes of this Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"HOLDER" means a holder of Registrable Securities.
"INDEMNIFIED PARTY" means a party entitled to
indemnification in accordance with SECTION 7.
"INDEMNIFYING PARTY" means a party obligated to provide
indemnification in accordance with SECTION 7.
"INSPECTORS" has the meaning ascribed to it in SECTION 4(j).
"INVESTORS" means the "Investors" under and as defined in
the Original Registration Rights Agreement and the First Amended and Restated
Registration Rights Agreement (including, without limitation, the Persons so
named in the Joinder and Joinder Agreements to the Original Registration
Rights Agreement and the First Amended and Restated Registration Rights
Agreement), the other investors designated on Schedule 1 and Schedule 2
hereto, and the Persons so designated on the signature pages of the First
Amended and Restated Registration Rights Agreement and of this Agreement
(certain of which may also be set forth on Schedule 1 and Schedule 2 hereto).
Notwithstanding the foregoing definition of "Investors," no Person shall be
added as an Investor under this Agreement after the date hereof unless such
Person shall have been expressly added as a party as an Investor hereto
pursuant to an amendment executed and delivered in accordance with the
requirements of paragraph (c) of Section 11 of this Agreement. The term
"Investor" means any one of the Investors and, in the case of an Investor who
is a natural person, the term "Investor" shall also include such Investor's
legal representatives, executors or administrators when the context so
requires.
"LOSSES" has the meaning ascribed to it in SECTION 7(a).
"MANAGING UNDERWRITER" means, with respect to any Public
Offering, the lead managing underwriter for such Public Offering, selected in
accordance with SECTION 10.
"NASD" means the National Association of Securities Dealers.
"NASDAQ" means the Nasdaq Stock Market.
3
<PAGE>
"NOTICE OF DEMAND FOR REGISTRATION" has the meaning
ascribed to it in SECTION 2(a).
"NOTICE OF PIGGYBACK REGISTRATION" has the meaning ascribed
to it in SECTION 3(a).
"PERSON" means any natural person, corporation, general
partnership, limited partnership, limited liability company, proprietorship,
other business organization, trust, union or association.
"PIGGYBACK REGISTRATION" means any registration of equity
securities of the Company under the Securities Act (other than a registration
in respect of a dividend reinvestment or similar plan for stockholders of the
Company or on Form S-4 or Form S-8 promulgated by the Commission, or any
successor or similar forms thereto), whether for sale for the account of the
Company or for the account of any holder of securities of the Company (other
than Registrable Securities), including a registration by the Company under
the circumstances described in SECTION 2(f).
"PREFERRED STOCK" means the Company's Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock and Series E Preferred
Stock.
"PUBLIC OFFERING" means any offering of Shares to the
public, either on behalf of the Company or any of its security holders,
pursuant to an effective registration statement under the Securities Act.
"QUALIFIED INDEPENDENT UNDERWRITER" means an underwriter
meeting the requirements of Section 2(1) of Schedule E to the NASD By-Laws as
the same may be amended from time to time.
"QUALIFYING HOLDER" means any Holder who, alone or together
with one or more other Holders, holds Registrable Securities that constitute
at least seventeen and one half percent (17 1/2%) of the Registrable
Securities, including those subject to issuance.
"RECORDS" has the meaning ascribed to it in SECTION 4(j).
"REGISTRABLE SECURITIES" means (a) Shares that are at any
time outstanding and that are owned by Investors (or any Person that acquires
such Shares from any such Investor), (b) Shares issuable upon conversion of
the shares of Preferred Stock into Shares pursuant to the terms of the
Certificate of Incorporation (including the Certificates of Designation
thereto) of the Company and that are owned by any of the Investors (or any
Person that acquires such Shares or such Preferred Stock from any such
Investor), and (c) Shares issuable upon the exercise of warrants to purchase
Shares outstanding as of the effectiveness of this Second Amended and
Restated Registration Rights Agreement issued to any of the Investors (or any
Person that acquires such Shares or warrants from any such Investor). As to
any particular Registrable Securities, once issued such securities shall
cease to be Registrable Securities when (x) a
4
<PAGE>
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (y) they shall
have been distributed to the public pursuant to Rule 144, or (z) they shall
have ceased to be outstanding.
"REGISTRATION EXPENSES" means all expenses incident to the
Company's performance of or compliance with its obligations under this
Agreement to effect the registration of Registrable Securities in a Demand
Registration or a Piggyback Registration, including, without limitation, all
registration, filing, securities exchange listing, NASD fees and NASDAQ fees,
all registration, filing, qualification and other fees and expenses of
complying with securities or blue sky laws, all word processing, duplicating
and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, the
reasonable fees and disbursements of a single firm of accountants and counsel
retained by the Holders of a majority of the Registrable Securities being
registered, premiums and other costs of policies of insurance against
liabilities arising out of the Public Offering of the Registrable Securities
being registered and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting
discounts and commissions in respect of Registrable Securities, which shall
be payable by the Holders thereof PRO RATA among such Holders in proportion
to the number of Registrable Securities being sold.
"REQUEST FOR REGISTRATION" means a written request by a
Holder to the Company for registration of Registrable Securities in response
to a Notice of Demand for Registration or a Notice of Piggyback Registration,
which request shall specify the Registrable Securities intended to be
disposed of and the intended method of disposition thereof.
"REQUESTING HOLDERS" means, with respect to any
registration, the Holders demanding or requesting to have Registrable
Securities included in a registration in accordance with SECTION 2 or 3.
"RULE 144" means Rule 144 promulgated by the Commission
under the Securities Act, and any successor provision thereto.
"SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"SHARES" means the shares of Common Stock.
"STOCKHOLDERS' AGREEMENT" means the Amended and Restated
Stockholders' Agreement, of even date herewith, by and among the parties
thereto.
(b) Unless the context of this Agreement otherwise
requires, (i) words of any gender include each other gender; (ii) words using
the singular or plural number also include the plural or singular number,
respectively; (iii) the terms "hereof," "herein," "hereby," "herewith," and
derivative or similar words refer to this entire Agreement; and (iv) the term
"Section" refers
5
<PAGE>
to the specified Section of this Agreement. Whenever this Agreement refers to
a number of days, such number shall refer to calendar days unless Business
Days are specified.
Section 2. DEMAND REGISTRATION RIGHTS
(a) DEMANDS FOR REGISTRATION. Subject to Section 6 below,
at any time after June 2, 2002, or such earlier time as the Company shall
have effected a Public Offering, any Qualifying Holder may demand that the
Company use its best efforts to effect the registration under the Securities
Act of all or part of such Qualifying Holder's Registrable Securities. Such
demand for registration (a "DEMAND FOR REGISTRATION") shall be in writing,
delivered to the Company in accordance with SECTION 11(a), and shall specify
the number of Registrable Securities to be registered and the intended method
of disposition thereof. No later than ten (10) Business Days after receipt of
such Demand for Registration, the Company shall give written notice (a
"NOTICE OF DEMAND FOR REGISTRATION") of such Demand for Registration to all
other Holders, and shall use its best efforts to effect the registration
under the Securities Act of:
(i) the Registrable Securities included in the Demand for
Registration, and
(ii) all other Registrable Securities as to which any Holder
has delivered to the Company a Request for Registration within fifteen
(15) days after the giving of the Notice of Demand for Registration,
all to the extent required to permit the disposition of the Registrable
Securities so to be registered in accordance with the methods of disposition
specified. At the request of the Holders of a majority of the Registrable
Securities to be registered, or in the case of a Demand Registration on Form
S-1 or its equivalent, the method of disposition of all Registrable
Securities included in such registration shall be an underwritten offering
effected in accordance with SECTION 5(a). Notwithstanding the foregoing, the
Company may postpone taking action with respect to a Demand Registration for
a reasonable period of time after receipt of the original Demand for
Registration (not exceeding one hundred eighty (180) days) if, in the good
faith opinion of the Board, effecting the registration would adversely affect
a material financing, acquisition, disposition of assets or stock, merger or
other comparable transaction or would require the Company to make public
disclosure of information the public disclosure of which would have a
material adverse effect upon the Company, PROVIDED that the Company shall not
delay such action pursuant to this sentence more than once in any twelve (12)
month period. Subject to SECTION 2(e), the Company may include in such
registration Shares or other securities for sale for its own account. Neither
the Company nor any Holder shall have the right to include any securities in
a registration statement to be filed as part of a Demand Registration unless
(i) such securities are of the same class as the Registrable Securities
included in the Demand for Registration (or the demanding Holders consent to
such inclusion in writing), and (ii) if such Demand Registration is an
underwritten offering, the Company and such other Holders agree in writing to
sell, subject to SECTION 2(e), their securities on the same terms and
conditions as apply to the Registrable Securities being sold pursuant to the
Demand for Registration.
6
<PAGE>
(b) LIMITATIONS ON DEMAND REGISTRATIONS. Notwithstanding
anything herein to the contrary, the Company shall not be required to honor a
Demand for Registration if:
(i) the proposed aggregate Public Offering price for the
Registrable Securities included in the Demand for Registration is less
than (a) Forty Million dollars ($40,000,000) for a Demand Registration
on Form S-1 or its equivalent or for an underwritten Public Offering on
Form S-3 or its equivalent, or (b) Seven Million Five Hundred Thousand
dollars ($7,500,000) for a non-underwritten Public Offering on Form S-3
or its equivalent, based on the fair value estimated by the
underwriters in the case of an underwritten Public Offering or the
then-current market price in the case of a non-underwritten Public
Offering; or
(ii) such Demand for Registration is received by the Company
less than one hundred eighty (180) days following the effective date of
any previous Effective Registration.
(c) REGISTRATION STATEMENT FORM. Demand Registrations shall
be on such appropriate registration form selected by the Company as shall be
reasonably acceptable to the Holders of a majority of the Registrable
Securities to which such registration relates, and shall permit the
disposition of such Registrable Securities in accordance with the intended
method or methods specified by the Holders participating therein.
(d) REGISTRATION EXPENSES. The Company will pay all
Registration Expenses incurred in connection with (i) the first two (2)
Demand Registrations on Form S-1 or its equivalent, and (ii) the first two
(2) Demand Registrations on any other form, except Form S-1 or its
equivalent. The Registration Expenses for all other Demand Registrations
shall be allocated among all Persons (including the Company) on whose behalf
securities of the Company are included for offer and sale in such
registration, pro rata on the basis of the respective amounts of the
securities then being registered on their behalf; further provided that the
Company shall not be responsible for the Registration Expenses in connection
with any Demand for Registration which has been subsequently withdrawn by the
Holders, in which case such expenses shall be borne by the Holders requesting
such withdrawal.
(e) PRIORITY IN CUTBACK REGISTRATIONS. If a Demand
Registration becomes a Cutback Registration, the Company shall include in
such registration the amount of securities which the Managing Underwriter
advises the Company can be sold in such offering without a reduction in the
selling price anticipated to be received for the securities to be sold in
such Public Offering: (i) FIRST, the Registrable Securities included in the
Demands for Registration or the Requests for Registration PRO RATA among the
Holders making such Demands for Registration or Requests for Registration in
proportion to the number of Registrable Securities included in their Demands
for Registration or Requests for Registration, and (ii) SECOND, the
securities of the Company included in such registration by the Company for
sale for its own account.
(f) PREEMPTION OF DEMAND REGISTRATION. Notwithstanding
anything to the contrary contained herein, and without limitation as to the
rights of the Company to include in a Demand Registration securities for sale
for its own account as provided in SECTION 2(a), at any
7
<PAGE>
time within thirty (30) days after receiving a Demand for Registration, the
Company may elect to effect an underwritten primary registration in lieu of
the Demand Registration. If the Company so elects, the Company shall give
prompt written notice to all Holders of its intention to effect such a
registration and shall afford Holders the rights contained in SECTION 3 with
respect to Piggyback Registrations; the Demands for Registration shall be
deemed to have been withdrawn; and such primary registration shall not be
deemed to be an Effective Registration.
(g) LIMITATION ON DEMAND REGISTRATION. Notwithstanding that
the Shares issuable upon the exercise of the CCU Warrant are Registrable
Securities and that such Shares shall be considered part of CCU's aggregate
holdings of Shares for purposes of determining its right to participation in
any Demand Registration or Piggyback Registration, no Shares issued or
issuable under the CCU Warrant shall be permitted to be registered pursuant
to any demand for a Demand Registration or Piggyback Registration made
earlier than 12 months after the date of issuance of the CCU Warrant.
Section 3. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES.
Notwithstanding any limitation contained in SECTION 2, if the Company at any
time proposes after the date hereof to effect a Piggyback Registration,
including a registration in lieu of a Demand Registration pursuant to
SECTIONS 2(b)(iii) and 2(f), it will each such time give prompt written
notice (a "NOTICE OF PIGGYBACK REGISTRATION") to all Holders of its intention
to do so and of such Holders' rights under this SECTION 3, which Notice of
Piggyback Registration shall include a description of the intended method of
disposition of such securities. If any Holder delivers a Request for
Registration to the Company within fifteen (15) days after such Holder
receives a Notice of Piggyback Registration, the Company will use its best
efforts to include in the registration statement relating to such Piggyback
Registration all Registrable Securities which the Company has been so
requested to register. Notwithstanding the foregoing, if, at any time after
giving a Notice of Piggyback Registration and prior to the effective date of
the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election, give
written notice of such determination to each Holder and, thereupon, (i) in
the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of any
Requesting Holder entitled to do so to demand that such registration be
effected as a Demand Registration under SECTION 2, and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering
any Registrable Securities for the same period as the delay in registering
such other securities. Subject to the provisions of SECTION 2(f), no
registration effected under this SECTION 3 shall relieve the Company of its
obligations to effect a Demand Registration under SECTION 2.
(b) REGISTRATION EXPENSES. The Company will pay all
Registration Expenses incurred in connection with each Piggyback Registration.
(c) PRIORITY IN CUTBACK REGISTRATIONS. If a Piggyback
Registration becomes a Cutback Registration, the Company will include in such
registration to the extent of the amount
8
<PAGE>
of the securities which the Managing Underwriter advises the Company can be
sold in such offering without a reduction in the selling price anticipated to
be received for the securities to be sold in such Public Offering:
(i) FIRST, the securities proposed by the Company to be sold
for its own account; and
(ii) SECOND, the Registrable Securities included in the
Requests for Registration of Requesting Holders, PRO RATA among such
Requesting Holders in proportion to the number of Registrable
Securities included in their Requests for Registration.
Any securities excluded shall be withdrawn from and shall not be included in
such Piggyback Registration.
Section 4. REGISTRATION PROCEDURES. If and whenever the Company is
required to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act pursuant to SECTION 2 or
SECTION 3, the Company will use its best efforts to effect the registration
and sale of such Registrable Securities in accordance with the intended
methods of disposition thereof specified by the Holders participating
therein. Without limiting the foregoing, the Company in each such case will,
as expeditiously as possible:
(a) prepare and file with the Commission (in the case of a
Demand Registration), the requisite registration statement to effect such
registration (including such audited financial statements as may be required
by the Securities Act or the rules and regulations promulgated thereunder)
and use its best efforts to cause such registration statement to become
effective; PROVIDED, that as far in advance as practical before filing such
registration statement or any amendment thereto, the Company will furnish to
counsel for the Requesting Holders copies of reasonably complete drafts of
all such documents proposed to be filed (including exhibits), and any such
Holder shall have the opportunity to object to any information pertaining
solely to such Holder that is contained therein and the Company will make the
corrections reasonably requested by such Holder with respect to such
information prior to filing any such registration statement or amendment;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and any prospectus used in
connection therewith as may be necessary to maintain the effectiveness of
such registration statement and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
included in such registration statement, in accordance with the intended
methods of disposition thereof, until the earlier of (i) such time as all of
such securities have been disposed of in accordance with the intended methods
of disposition by the seller or sellers thereof set forth in such
registration statement and (ii) one hundred eighty (180) days after such
registration statement becomes effective;
(c) promptly notify each Requesting Holder and the
underwriter or underwriters, if any:
9
<PAGE>
(i) when such registration statement or any
prospectus used in connection therewith, or any amendment or supplement
thereto, has been filed and, with respect to such registration statement
or any post-effective amendment thereto, when the same has become
effective;
(ii) of any written request by the Commission for
amendments or supplements to such registration statement or prospectus;
(iii) of the notification to the Company by the
Commission of its initiation of any proceeding with respect to the
issuance by the Commission of, or of the issuance by the Commission of,
any stop order suspending the effectiveness of such registration
statement; and
(iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale under the applicable securities or blue
sky laws of any jurisdiction;
(d) furnish to each seller of Registrable Securities
included in such registration statement such number of conformed copies of
such registration statement and of each amendment and supplement thereto (in
each case including all exhibits and documents incorporated by reference),
such number of copies of the prospectus contained in such registration
statement (including each preliminary prospectus and any summary prospectus)
and any other prospectus filed under Rule 424 promulgated under the
Securities Act relating to such Holder's Registrable Securities, and such
other documents, as such seller may reasonably request to facilitate the
disposition of its Registrable Securities;
(e) use its best efforts to register or qualify all
Registrable Securities included in such registration statement under such
other securities or blue sky laws of such jurisdictions as each Holder
thereof shall reasonably request and to keep such registration or
qualification in effect for so long as such registration statement remains in
effect, and take any other action which may be reasonably necessary or
advisable to enable such Holder to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such Holder, except that
the Company shall not for any such purpose be required (i) to qualify
generally to do business as a foreign corporation in any jurisdiction wherein
it would not but for the requirements of this paragraph (e) be obligated to
be so qualified, or (ii) to consent to general service of process in any such
jurisdiction;
(f) use its best efforts to cause all Registrable
Securities included in such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable each Holder thereof to consummate the disposition of such
Registrable Securities;
(g) to the extent any of the following are obtained by or
furnished to the Company or the underwriters, furnish to each Requesting
Holder a signed counterpart, addressed to such Holder (and the underwriters,
if any), of
10
<PAGE>
(i) an opinion of counsel for the Company, dated the
effective date of such registration statement (or, if such registration
includes an underwritten Public Offering, dated the date of any closing
under the underwriting agreement), reasonably satisfactory in form and
substance to such Holder, and
(ii) a "cold comfort" letter, dated the effective
date of such registration statement (and, if such registration includes
an underwritten Public Offering, dated the date of any closing under
the underwriting agreement), signed by the independent public
accountants who have certified the Company's financial statements
included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to the underwriters in underwritten Public Offerings of
securities; and, in the case of the accountants' letter, with respect to
events subsequent to the date of such financial statements and such other
financial matters as such Holder (or the underwriters, if any) may reasonably
request;
(h) notify each Holder whose Registrable Securities are
included in such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which any prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and at the request
of any such Holder promptly prepare and furnish to such Holder a reasonable
number of copies of a supplement to or an amendment of such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(i) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months, but not more than
eighteen (18) months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder, and not file any amendment or supplement to such
Registration Statement or prospectus to which any such seller or any
Requesting Holder shall have reasonably objected on the grounds that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations thereunder;
(j) make available for inspection by any Requesting Holder,
any underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent retained
by such Holder or underwriter (collectively, the "INSPECTORS"), all financial
and other records, pertinent corporate documents and properties of the
Company
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(collectively, the "RECORDS") reasonably necessary to enable the Inspectors
to exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement;
(k) provide a transfer agent and registrar for all
Registrable Securities included in such registration statement not later than
the effective date of such registration statement; and
(l) use its best efforts to cause all Registrable
Securities included in such registration statement to be listed, upon
official notice of issuance, on any securities exchange on which any of the
securities of the same class as the Registrable Securities are then listed.
The Company may require each Holder whose Registrable
Securities are being registered to, and each such Holder, as a condition to
including Registrable Securities in such registration, shall, furnish the
Company and the underwriters with such information and affidavits regarding
such Holder and the distribution of such securities as the Company and the
underwriters may from time to time reasonably request in writing in
connection with such registration.
Upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (h) of this SECTION
4, each Holder will forthwith discontinue such Holder's disposition of
Registrable Securities pursuant to the registration statement relating to
such Registrable Securities until such Holder receives the copies of the
supplemented or amended prospectus contemplated by paragraph (h) of this
SECTION 4 and, if so directed by the Company, shall deliver to the Company
(at the Company's expense) all copies, other than permanent file copies, then
in such Holder's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice. In the event the
Company shall give any such notice, the period referred to in paragraph (b)
of this SECTION 4 shall be extended by a number of days equal to the number
of days during the period from and including the giving of notice pursuant to
paragraph (h) of this SECTION 4 and to and including the date when each
Holder whose Registrable Securities are included in such registration
statement receives the copies of the supplemented or amended prospectus
contemplated by paragraph (h) of this SECTION 4.
Section 5. UNDERWRITTEN OFFERINGS. If a Demand for Registration is
made pursuant to SECTION 2, or if the Company at any time proposes to
register any of its securities in a Piggyback Registration or otherwise, and,
in either case, the securities included in such registration are to be
distributed by or through one or more underwriters, such securities shall be
distributed by or through, and the Company shall enter into a firm commitment
underwriting agreement in customary form with, (i) a Managing Underwriter
selected in accordance with SECTION 10, (ii) such other underwriters,
reasonably satisfactory to the Company, as may be selected by the Managing
Underwriter to assist or participate in the distribution, and (iii) if a
Qualified Independent Underwriter is required for such registration pursuant
to Schedule E to the NASD By-Laws or otherwise, a Qualified Independent
Underwriter selected in accordance with SECTION 10.
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(a) UNDERWRITTEN OFFERINGS IN CONNECTION WITH DEMAND
REGISTRATIONS. If a Demand for Registration is made pursuant to SECTION 2 and
the distribution of the Registrable Securities included in such Demand for
Registration is to be underwritten, the underwriting agreement shall include,
among other provisions, indemnities substantially to the effect and to the
extent provided in SECTION 7. The Holders whose Registrable Securities are to
be distributed by such underwriters shall be parties to such underwriting
agreement. No Requesting Holder may participate in such underwritten offering
unless such Holder agrees to sell its Registrable Securities on the basis
provided in such underwriting agreement and completes and executes all
questionnaires, powers of attorney, indemnities and other documents
reasonably required under the terms of such underwriting agreement. If any
Requesting Holder disapproves of the terms of an underwriting, such Holder
may elect to withdraw therefrom and from such registration by notice to the
Company and the Managing Underwriter, and each of the remaining Requesting
Holders shall be entitled to increase the number of Registrable Securities
being registered to the extent of the Registrable Securities so withdrawn (i)
in the case of a Cutback Registration, in accordance with the priorities set
forth in SECTION 2(e) and (ii) in all other cases in the proportion which the
number of Registrable Securities being registered by such remaining
Requesting Holder bears to the total number of Registrable Securities being
registered by all such remaining Requesting Holders.
(b) UNDERWRITTEN PIGGYBACK OFFERINGS. If the Company at any
time proposes to register any of its securities in a Piggyback Registration
and such securities are to be distributed by or through one or more
underwriters, the Company will, subject to the provisions of SECTION 3(c),
use its best efforts, if requested by any Holder whose Registrable Securities
are included in such registration to arrange for such underwriters to include
the Registrable Securities to be offered and sold by such Holder among the
securities to be distributed by such underwriters, and such Holders shall be
obligated to sell their Registrable Securities in such Piggyback Registration
through such underwriters on the same terms and conditions as apply to the
other Company securities to be sold by such underwriters in connection with
such Piggyback Registration. The Holders whose Registrable Securities are to
be distributed by such underwriters shall be parties to the underwriting
agreement between the Company and such underwriter or underwriters. No
Requesting Holder may participate in such underwritten offering unless such
Holder agrees to sell its Registrable Securities on the basis provided in
such underwriting agreement and completes and executes all questionnaires,
powers of attorney, indemnities and other documents reasonably required under
the terms of such underwriting agreement. If any Requesting Holder
disapproves of the terms of an underwriting, such Holder may elect to
withdraw therefrom and from such registration by notice to the Company and
the Managing Underwriter, and each of the remaining Requesting Holders shall
be entitled to increase the number of Registrable Securities being registered
to the extent of the Registrable Securities so withdrawn (i) in the case of a
Cutback Registration, in accordance with the priorities set forth in SECTION
3(c) and (ii) in all other cases in the proportion which the number of
Registrable Securities being registered by such remaining Requesting Holder
bears to the total number of Registrable Securities being registered by all
such remaining Requesting Holders.
Section 6. HOLDBACK AGREEMENTS.
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(a) BY THE HOLDERS. Unless the Managing Underwriter (or, in
the case of a non-underwritten Public Offering, the Company) otherwise
agrees, no Holder shall effect any public sale or distribution (including a
sale under Rule 144) of, or any demand for Registration of, any Registrable
Securities, or any securities convertible into or exchangeable or exercisable
for Registrable Securities, during the fourteen (14) days prior to and (i)
the earlier of (A) the one hundred eighty (180) days after the effective date
of the registration statement filed in connection with an initial Public
Offering (or for such shorter period of time as is sufficient and
appropriate, in the opinion of the Managing Underwriter, (or, in the case of
a non-underwritten Public Offering, the Company) in order to complete the
sale and distribution of the securities included in such registration), or
(B) in the case of an underwritten Public Offering, the date on which the
Managing Underwriter's lock-up with respect to such offering is waived by the
Managing Underwriter with respect to stockholders holding in the aggregate
more than twenty percent (20%) of the outstanding capital stock of the
Company. or (ii) the ninety (90) days after the effective date of the
registration statement filed in connection with any registration statement
filed by the Company with respect to all other Public Offerings (or for such
shorter period of time as is sufficient and appropriate, in the opinion of
the Managing Underwriter, (or, in the case of a non-underwritten Public
Offering, the Company) in order to complete the sale and distribution of the
securities included in such registration), except as part of such
registration statement, whether or not such Holder participates in such
registration.
(b) BY THE COMPANY AND OTHER SECURITYHOLDERS. Unless the
Managing Underwriter otherwise agrees, the Company (i) shall not effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during
the fourteen (14) days prior to and the ninety (90) days after the effective
date of the registration statement filed in connection with an underwritten
offering made pursuant to a Demand Registration or a Piggyback Registration
(or for such shorter period of time as is sufficient and appropriate, in the
opinion of the Managing Underwriter, in order to complete the sale and
distribution of the securities included in such registration), except as part
of such underwritten registration and except pursuant to registrations on
Form S-4 or Form S-8 promulgated by the Commission or any successor or
similar forms thereto, and (ii) shall cause each holder of its equity
securities, or of any securities convertible into or exchangeable or
exercisable for such securities, in each case purchased from the Company at
any time after the date of this Agreement (other than in a Public Offering),
to agree not to effect any such public sale or distribution of such
securities (including a sale under Rule 144), during such period, except as
part of such underwritten registration.
Section 7. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company shall, to
the full extent permitted by law, indemnify and hold harmless each seller of
Registrable Securities included in any registration statement filed in
connection with a Demand Registration or a Piggyback Registration, its
directors, officers, and partners, and each other Person, if any, who
controls any such seller within the meaning of the Securities Act, against
any losses, claims, damages, expenses or liabilities, joint or several
(together, "LOSSES"), to which such seller or any such director, officer,
partner or controlling Person may become subject under the Securities Act or
otherwise, insofar as such Losses (or actions or proceedings, whether
commenced or threatened,
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in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement thereto,
or any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein (in the case
of a prospectus, in the light of the circumstances under which they were
made) not misleading, and the Company will reimburse such seller and each
such director, officer, partner and controlling Person for legal and other
expenses reasonably incurred by them in connection with investigating or
defending any such Loss (or action or proceeding in respect thereof) in
accordance with paragraph (c) below; PROVIDED, that the Company shall not be
liable in any such case to the extent that any such Loss (or action or
proceeding in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any such registration statement, preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such seller
specifically stating that it is for use in the preparation thereof. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such director,
officer, partner or controlling Person, and shall survive the transfer of
such securities by such seller. The Company shall also indemnify each other
Person who participates (including as an underwriter) in the offering or sale
of Registrable Securities, their officers and directors, and partners, and
each other Person, if any, who controls any such participating Person within
the meaning of the Securities Act to the same extent as provided above with
respect to sellers of Registrable Securities.
(b) INDEMNIFICATION BY THE SELLERS. Each Holder whose
Registrable Securities are included or are to be included in any registration
statement filed in connection with a Demand Registration or a Piggyback
Registration, as a condition to including Registrable Securities in such
registration statement, shall, to the full extent permitted by law, indemnify
and hold harmless the Company, its directors and officers, and each other
Person, if any, who controls the Company within the meaning of the Securities
Act, against any Losses to which the Company or any such director or officer
or controlling Person may become subject under the Securities Act or
otherwise, insofar as such Losses (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein (in the case of a prospectus, in the light of the
circumstances under which they were made) not misleading, if such untrue
statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such seller specifically stating that it is for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement; PROVIDED, HOWEVER,
that the obligation to provide indemnification pursuant to this SECTION 7(b)
shall be several, and not joint and several, among such Indemnifying Parties
on the basis of the number of Registrable Securities of each such
Indemnifying Party included in such registration statement; PROVIDED FURTHER,
HOWEVER, that in no event shall any indemnity by a Holder under this SECTION
7(b) exceed the net proceeds from the offering received by such Holder. Such
indemnity
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shall remain in full force and effect regardless of any investigation made by
or on behalf of the Company or any such director, officer or controlling
Person and shall survive the transfer of such securities by such seller. Such
Holders shall also indemnify each other Person who participates (including as
an underwriter) in the offering or sale of Registrable Securities, their
officers and directors and each other Person, if any, who controls any such
participating Person within the meaning of the Securities Act to the same
extent as provided above with respect to the Company.
(c) NOTICES OF CLAIMS. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding paragraph (a) or (b) of this
SECTION 7, such Indemnified Party shall, if a claim in respect thereof is to
be made against an Indemnifying Party pursuant to such paragraphs, give
written notice to the latter of the commencement of such action, PROVIDED
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under the
preceding paragraphs of this SECTION 7, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice. In
case any such action is brought against an Indemnified Party, the
Indemnifying Party shall be entitled to participate in and, unless, in the
reasonable judgment of any Indemnified Party, a conflict of interest between
such Indemnified Party and any Indemnifying Party exists with respect to such
claim, to assume the defense thereof, jointly with any other Indemnifying
Party similarly notified to the extent that it may wish, with counsel
reasonably satisfactory to such Indemnified Party, and after notice from the
Indemnifying Party to such Indemnified Party of its election so to assume the
defense thereof, the Indemnifying Party shall not be liable to such
Indemnified Party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable costs
of investigation; PROVIDED that the Indemnified Party may participate in such
defense at the Indemnified Party's expense; and PROVIDED FURTHER that the
Indemnified Party or Indemnified Parties shall have the right to employ one
counsel to represent it or them if, in the reasonable judgment of the
Indemnified Party or Indemnified Parties, it is advisable for it or them to
be represented by separate counsel by reason of having legal defenses which
are different from or in addition to those available to the Indemnifying
Party, and in that event the reasonable fees and expenses of such one counsel
shall be paid by the Indemnifying Party. If the Indemnifying Party is not
entitled to, or elects not to, assume the defense of a claim, it will not be
obligated to pay the fees and expenses of more than one counsel for the
Indemnified Parties with respect to such claim, unless in the reasonable
judgment of any Indemnified Party a conflict of interest may exist between
such Indemnified Party and any other Indemnified Parties with respect to such
claim, in which event the Indemnifying Party shall be obligated to pay the
fees and expenses of up to one such additional counsel for the Indemnified
Parties. No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement without the consent of the Indemnified Party which
does not include as an unconditional term thereof the giving by the claimant
or plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. No Indemnifying Party shall be subject
to any liability for any settlement made without its consent, which consent
shall not be unreasonably withheld.
(d) CONTRIBUTION. If the indemnity and reimbursement
obligation provided for in any paragraph of this SECTION 7 is unavailable or
insufficient to hold harmless an Indemnified Party in respect of any Losses
(or actions or proceedings in respect thereof) referred to therein, then the
Indemnifying Party shall contribute to the amount paid or payable by the
Indemnified
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Party as a result of such Losses (or actions or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party on the one hand and the Indemnified Party on the
other hand in connection with statements or omissions which resulted in such
Losses, as well as any other relevant equitable considerations; PROVIDED,
HOWEVER, that in no event shall any contribution by a Holder under this
SECTION 7(d) exceed the net proceeds from the offering received by such
Holder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, then the Indemnifying Party shall contribute to
the amount paid or payable by the Indemnified Party as a result of such
Losses (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect not only the relative fault of, but also the
relative benefits received by, the Indemnifying Party on the one hand and the
Indemnified Party on the other hand in connection with statements or
omissions which resulted in such Losses, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Indemnifying Party or the Indemnified
Party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
parties hereto agree that it would not be just and equitable if contributions
pursuant to this paragraph were to be determined by PRO RATA allocation or by
any other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this paragraph. The
amount paid by an Indemnified Party as a result of the Losses referred to in
the first sentence of this paragraph shall be deemed to include any legal and
other expenses reasonably incurred by such Indemnified Party in connection
with investigating or defending any Loss which is the subject of this
paragraph.
No Indemnified Party guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from the Indemnifying Party if the Indemnifying Party was not
guilty of such fraudulent misrepresentation.
(e) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this SECTION 7 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification
of securities under any federal or state law or regulation of any
governmental authority other than the Securities Act. The provisions of this
SECTION 7 shall be in addition to any other rights to indemnification or
contribution which an Indemnified Party may have pursuant to law, equity,
contract or otherwise.
(f) INDEMNIFICATION PAYMENTS. The indemnification required
by this SECTION 7 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills are
received or Losses are incurred.
(g) UNDERWRITING AGREEMENT. Notwithstanding the foregoing,
to the extent that the provisions concerning indemnification and contribution
contained in the underwriting agreement entered into in connection with an
underwritten Public Offering are in conflict with the foregoing provisions,
the provisions in the underwriting agreement shall control.
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Section 8. COVENANTS RELATING TO RULE 144. If at any time the
Company is required to file reports in compliance with either Section 13 or
Section 15(d) of the Exchange Act, the Company will (a) file reports in
compliance with the Exchange Act, (b) comply with all rules and regulations
of the Commission applicable in connection with the use of Rule 144 and take
such other actions and furnish each Holder with such other information as
such Holder may request in order to avail itself of such rule or any other
rule or regulation of the Commission allowing such Holder to sell any
Registrable Securities without registration, and (c) at its expense,
forthwith upon the reasonable request of any Holder, deliver to such Holder a
certificate, signed by the Company's principal financial officer, stating (i)
the Company's name, address and telephone number (including area code), (ii)
the Company's Internal Revenue Service identification number, (iii) the
Company's Commission file number, (iv) the number of shares of each class of
stock outstanding as shown by the most recent report or statement published
by the Company, and (v) whether the Company has filed the reports required to
be filed under the Exchange Act for a period of at least ninety (90) days
prior to the date of such certificate and in addition has filed the most
recent annual report required to be filed thereunder. If at any time the
Company is not required to file reports in compliance with either Section 13
or Section 15(d) of the Exchange Act, the Company at its expense will,
forthwith upon the written request of the Holder of any Registrable
Securities, make available adequate current public information with respect
to the Company within the meaning of paragraph (c)(2) of Rule 144.
Section 9. OTHER RIGHTS.
(a) NO EXISTING AGREEMENTS. The Company represents and
warrants to each other party hereto that immediately after the effectiveness
of this Agreement, there will not be in effect any agreement by the Company
(other than this Agreement) pursuant to which any holders of securities of
the Company have a right to cause the Company to register or qualify such
securities under the Securities Act or any securities or blue sky laws of any
jurisdiction.
(b) FUTURE AGREEMENTS. The Company shall not hereafter
agree with the holders of any securities issued or to be issued by the
Company to register or qualify such securities under the Securities Act or
any securities or blue sky laws of any jurisdiction unless such agreement
specifically provides that (i) such holder of such securities may not
participate in any Demand Registration except as provided in SECTION 2; and
(ii) the holder of such securities may not participate in any Piggyback
Registration except as provided in SECTION 3.
Section 10. SELECTION OF UNDERWRITERS. It is acknowledged and
agreed by the Company and the other parties hereto that the Managing
Underwriter for any registration of Registrable Securities effected pursuant
to this Agreement shall be selected, in the case of a Piggyback Registration,
by the Board, and, in the case of a Demand Registration, by the Holders of a
majority of the Registrable Securities to be sold in such offering after
consultation with, and with the consent of, the Company, which consent shall
not be unreasonably withheld. If a Qualified Independent Underwriter is
required for any registration of Registrable Securities effected pursuant to
this Agreement, such Qualified Independent Underwriter shall be an investment
banking firm, selected by the Managing Underwriter and reasonably
satisfactory to the Company which (i) meets the criteria for a "qualified
independent underwriter" set forth in Section 2(1) of Schedule E to the NASD
By-Laws as the same may be amended from time to time and any other
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applicable rule or regulation of the NASD or otherwise, and (ii) agrees to
act in such capacity for compensation and upon other terms and conditions
substantially consistent with the compensation and other terms and conditions
that could reasonably be expected to be required by similar investment
banking firms acting in such capacity in similar transactions.
Section 11. MISCELLANEOUS.
(a) NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only
if delivered personally, by courier or by facsimile transmission or mailed
(first class postage prepaid) to the parties at the addresses or facsimile
numbers set forth below.
(i) If to the Company, to:
Tunes.com Inc.
640 North LaSalle
Suite 560
Chicago, IL 60610
Attention: Howard A. Tullman
Facsimile: (312) 642-0616
with a copy to:
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, Illinois
Attention: Michael E. Shabat
Facsimile: (312) 360-6575
(ii) if to an Investor, to such Investor at its address set
forth in the stock ledger of the Company, with copies to:
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Attention: Ms. Kaca Enquist
Facsimile: (212) 357-5505
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Dennis V. Osimitz, Esq.
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Facsimile: (312) 853-7036
netWorth Partners I, LLC
One Buckhead Plaza
Suite 780
3060 Peachtree Road
Atlanta, Georgia 30305
Attention: Burton B. Goldstein, Jr.
Facsimile: (404) 264-9305
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: B. Lynn Walsh, Esq.
Facsimile: (404) 881-7777
Clear Channel Communications, Inc.
200 Concord Plaza, Suite 600
San Antonio, Texas 78216
Attention: Chief Financial Officer
Facsimile: (210)
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Attention: Stephan C. Mount
Facsimile: (210) 224-2035
All such notices, requests and other communications will
(x) if delivered personally or by courier to the address provided in this
SECTION 11(a), be deemed given upon delivery, (y) if delivered by facsimile
transmission to the facsimile number provided in this SECTION 11(a), be
deemed given when receipt of transmission has been electronically confirmed
by the sending party if given prior to 5:00 p.m., local time of the
recipient, otherwise on the next Business Day, and (z) if delivered by first
class or registered mail in the manner described above to the address as
provided in this SECTION 11(a), be deemed given three (3) Business Days after
deposit in the United States Mail (in each case regardless of whether such
notice, request or other communication is received by any other Person to
whom a copy of such notice is to be delivered pursuant to this Section). Any
party from time to time may change its address, facsimile number or other
information for the purpose of notices to that party by giving notice
specifying such change to the other parties hereto.
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(b) ENTIRE AGREEMENT. This Agreement amends and restates
the First Amended and Restated Registration Rights Agreement in its entirety
and supersedes all prior discussions and agreements between the parties with
respect to the subject matter hereof and of the First Amended and Restated
Registration Rights Agreement, and contains the sole and entire agreement
between the parties hereto with respect to the subject matter hereof and of
the First Amended and Restated Registration Rights Agreement.
(c) AMENDMENT. This Agreement may be amended, supplemented
or modified only by a written instrument (which may be executed in any number
of counterparts) duly executed by or on behalf of each of the Company and the
Holders of two-thirds (2/3) or more of the Registrable Securities then
outstanding or subject to issuance.
(d) WAIVER. Subject to paragraph (e) of this SECTION 11,
any term or condition of this Agreement may be waived at any time by the
party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on
behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall
be deemed to be or construed as a waiver of the same term or condition of
this Agreement on any future occasion.
(e) CONSENTS AND WAIVERS BY HOLDERS. Any consent of Holders
pursuant to this Agreement, and any waiver by Holders of any provision of
this Agreement, shall be in writing (which may be executed in any number of
counterparts) and may be given or taken by the Holders of two-thirds (2/3) or
more of the Registrable Securities then outstanding or subject to issuance,
and any such consent or waiver so given or taken will be binding on all the
Holders.
(f) NO THIRD PARTY BENEFICIARY. The terms and provisions of
this Agreement are intended solely for the benefit of each party hereto and
their respective successors or permitted assigns, and it is not the intention
of the parties to confer third-party beneficiary rights upon any other Person
other than any Person entitled to indemnification under SECTION 7.
(g) SUCCESSORS OR ASSIGNS. The registration rights
contained in this Agreement shall be transferable by any Holder to any Person
that acquires Registrable Securities from such Holder (excluding any Person
that acquires such Registrable Securities in a transaction pursuant to which
such securities cease to be Registrable Securities).
(h) HEADINGS. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
(i) INVALID PROVISIONS. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any present or future
law, and if the rights or obligations of any party hereto under this
Agreement will not be materially and adversely affected thereby, (i) such
provision will be fully severable, (ii) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement
will remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom and
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(iv) in lieu of such illegal, invalid or unenforceable provision, there will
be added automatically as a part of this Agreement a legal, valid and
enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible.
(j) REMEDIES. Except as otherwise expressly provided for
herein, no remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy, and each and every
remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter if, existing at law or in equity or by
statute or otherwise. The election of any one or more remedies by any party
hereto shall not constitute a waiver by any such party of the right to pursue
any other available remedies.
Damages in the event of breach of this Agreement by any
party hereto or any of their respective successors or permitted assigns would
be difficult, if not impossible, to ascertain, and it is therefore agreed
that each such Person, in addition to and without limiting any other remedy
or right it may have, will have the right to an injunction or other equitable
relief in any court of competent jurisdiction, enjoining any such breach, and
enforcing specifically the terms and provisions hereof and each party hereto,
on its own behalf and on the behalf of its respective successors and
permitted assigns, hereby waives any and all defenses it may have on the
ground of lack of jurisdiction or competence of the court to grant such an
injunction or other equitable relief. The existence of this right will not
preclude any such Person from pursuing any other rights and remedies at law
or in equity which such Person may have.
(k) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois applicable to
a contract executed and performed therein, without giving effect to the
conflicts of laws principles thereof.
(l) COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(m) TERMINATION OF REGISTRATION RIGHTS. All registration
rights granted under Sections 2 and 3 of this Agreement shall terminate and
be of no further force and effect twenty-five (25) years after the date of
the Company's initial Public Offering.
(n) LEGENDS. Each certificate representing Registrable
Securities shall (unless otherwise permitted by the provisions of this
Agreement) bear the following legends:
The securities represented by this certificate were issued in
a transaction exempt from registration under the Securities
Act of 1933 (as then in effect), and in reliance upon the
holder's representation that such securities were being
acquired for investment and not for resale. No transfer of
such securities may be made on the books of the Company unless
accompanied by an opinion of counsel, satisfactory to the
Company, that such transfer may be effected without
registration under the Securities Act of 1933 (as amended) or
that such securities have been so registered under a
registration statement which is in effect at the date of such
transfer.
22
<PAGE>
The sale, assignment, pledge, encumbrance or other transfer of
the securities represented by this certificate is subject to
the provisions of an Amended and Restated Registration Rights
Agreement, dated as of May 4, 1999, among the Company and the
Investors named therein, a copy of which is on file at the
principal executive office of the Company.
(o) EFFECTIVE DATE. This Second Amended and Restated
Registration Rights Agreement shall be effective upon the closing of an
initial Public Offering of the Common Stock pursuant to a registration
statement on Form S-1; provided, however, that if such closing does not occur
on or before August 20, 1999, this Second Amended and Restated Registration
Rights Agreement shall be null and void and without any further effect.
SIGNATURES ON FOLLOWING PAGES
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended
and Restated Registration Rights Agreement as of the day and year first above
written.
THE COMPANY:
TUNES.COM INC.
By: /s/ Howard A. Tullman
-----------------------------------------
Name: Howard A. Tullman
---------------------------------------
Title: CEO
---------------------------------------
INVESTORS:
NETWORTH PARTNERS I, LLC
By: /s/ Burton B. Goldstein, Jr.
-----------------------------------------
Name: Burton B. Goldstein, Jr.
---------------------------------------
Title: Authorized Person
--------------------------------------
GS CAPITAL PARTNERS II, L.P., a Delaware
limited partnership
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general
partner
By: /s/ GS Advisors, Inc.
----------------------------------
Its:
---------------------------------
GS CAPITAL PARTNERS II OFFSHORE, L.P.,
a limited partnership organized under
the laws of the Cayman Islands
By: GS Advisors II (Cayman), L.P., its
general partner
By: GS Advisors II, Inc., its general
partner
By: /s/ GS Advisors II, Inc.
----------------------------------
Its:
---------------------------------
S-1
<PAGE>
[SIGNATURE PAGE TO AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT]
GOLDMAN SACHS & CO. VERWALTUNGS GMBH,
a company organized under the laws of
Germany
By: /s/ Goldman Sachs & Co. Verwaltungs GmBH
Its:
-----------------------------------------
By:
------------------------------------------
Its:
-----------------------------------------
STONE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., General
Partner
By: /s/ Stone Street Asset Corp.
----------------------------------
Its:
---------------------------------
BRIDGE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., Managing
General Partner
By: /s/ Stone Street Asset Corp.
----------------------------------
Its:
---------------------------------
S-2
<PAGE>
Schedule 1
to
Second Amended and Restated Registration Rights Agreement
Dated as of August 9, 1999
INVESTORS, AS OF JUNE 2, 1997, UNDER THE ORIGINAL REGISTRATION RIGHTS AGREEMENT:
GS Capital Partners II, L.P.
GS Capital Partners II Offshore, L.P.
Goldman Sachs & Co., Verwaltungs GmbH
Stone Street Fund 1997, L.P.
Bridge Street Fund 1997, L.P.
Deane S. Borgeson
D. Scott Carr
David S. Connelly
Joseph P. Davies
Doerge-Internet, L.P.
Edwin M. Furey II
James G. Gendelman
Greg D. Glyman
Golan Productions, Inc.
Thomas A. Herman
Patrick William Joyce
Matthew S. Kaplan
Thomas J. Kigin
Roland N. Livney
John Meyer
Steven B. Nakovich
Louis Portnoy
Michael D. Searle
Virginia B. Sonnenschein
Craig Stern Revocable Trust
Kelly A. Thomson
Schedule 1
(Page 1 of 1)
<PAGE>
Schedule 2
to
Second Amended and Restated Registration Rights Agreement
Dated as of August 9, 1999
INVESTORS, SUBSEQUENT TO JUNE 2, 1997, UNDER THE ORIGINAL REGISTRATION RIGHTS
AGREEMENT:
Marc F. Adler
James J. Arado
Arthur Pancoe Trust dated 9/14/90
James F. Beedie
Greg T. Buchholz
The Elizabeth L. Carr Trust dated November 25, 1991
Mark E. Carr, IRA R/O
Bernard J. Cass
Don W. Ceglar
Stephen T. Coates
Delbert W. Coleman
Neil S. Coleman
Paul R. Davies
Francis X. Egan
FDP Music, L.L.C.
Suzanne M. Gray
Heartland Internet Music, L.L.C.
James W. Jacobs
JAMtv Venture Partners, L.L.C.
K. A. Steel Chemicals Inc.
John F. Kane
Neil Kane
Kip Kelley
Michael J. Keneipp
Daniel Kigin
Terrence J. Lavin
Donald R. McGarrah
Music Convergence, L.L.C.
Music Funding L.L.C.
Music Infusion, L.L.C.
Marla H. Polk
Renrel V Investments Limited Partnership
Resolute Partners, L.P.
Richard T. Santulli
Richard D. Shivers
Hugo Sonnenshein, IRA R/O
Robert C. Staley
Schedule 2
(Page 1 of 2)
<PAGE>
SCHEDULE 2 (CONT.):
Steven F. Stratton
WNC Corporation
Michael M. Wadden
Harvey M. Walken
An "Investor" under and as defined in this Agreement shall include,
without limitation, each of the following Holders of Series E Convertible
Preferred Stock of the Company and any of the other Holders of Series E
Convertible Preferred Stock of the Company; provided that such Holder has agreed
to be bound by the terms and conditions of this Agreement (by executing an
additional counterpart signature page to the First Amended and Restated
Registration Rights Agreement, a joinder, or such other document evidencing such
Person's agreement to be bound hereby):
netWorth Partners I, LLC
FDP Music II, L.L.C.
Music Infusion II, L.L.C.
Bruce R. Katz
Kevin Power
Lawrence R. Morgenthal
John S. Bank
The Mednick Living Trust
Music Funding II, L.L.C.
An "Investor" under and as defined in this Agreement shall include
Clear Channel Communications, Inc. and musicmaker.com, Inc.
Schedule 2
(Page 2 of 2)
<PAGE>
EXHIBIT 4.17
NEITHER THE WARRANT REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE
SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAW. NO SALE OR OTHER TRANSFER OF THE WARRANT
REPRESENTED BY THIS CERTIFICATE OR OF THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF MAY BE MADE EXCEPT AS PERMITTED BY THE ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
QUALIFICATION THEREUNDER OR EXEMPTION THEREFROM.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK, $.01 PAR VALUE PER SHARE, OF
TUNES.COM INC.
AUGUST ___, 1999
This certifies that, for value received, Clear Channel
Communications, Inc., a Texas corporation (the "Holder"), is entitled to
purchase, subject to the provisions of this Warrant, from Tunes.com Inc., a
Delaware corporation (the "Issuer"), up to __________________________
(_____________) fully paid and nonassessable shares of common stock, $.01 par
value (the "Common Stock"), of the Issuer at an exercise price equal to
____________ Dollars ($_______) per share, subject to adjustment pursuant to
the terms hereunder (the "Exercise Price") (such shares of Common Stock and
other securities issued and issuable upon exercise of this Warrant are
sometimes referred to herein as the "Warrant Shares"). The number of Warrant
Shares and Exercise Price have been calculated after giving effect to the
1.25-for-1 stock split of the Common Stock which shall have occurred
immediately prior to the issuance of this Warrant. This Warrant was
originally issued on the date hereof (the "Issue Date") in connection with
the execution and delivery of a Stock Purchase Agreement, dated as of August
9, 1999, by and between the Issuer and the Holder (the "Purchase Agreement").
Terms used herein and not otherwise defined shall have the meaning ascribed
to them in the Purchase Agreement.
Section 1. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions of this Section 1,
this Warrant may be exercised, in whole or in part (but not as to
fractional shares) at any time during the period beginning on the Issue
Date and ending on the third anniversary of the Issue Date, at which
time it shall automatically expire (the "Expiration Date"). The Warrant
may be exercised by presentation and surrender hereof to the Issuer at
the address which, in accordance with the provisions of Section 8
hereof, is then effective for notices to the Issuer, with the Election
to Purchase Form annexed hereto as SCHEDULE I, duly executed and
accompanied by payment to the Issuer as further set forth below in this
Section 1, for the account of the Issuer, of the Exercise Price for the
number of Warrant Shares
<PAGE>
specified in such form. If this Warrant should be exercised in part
only, the Issuer shall, upon surrender of this Warrant, execute and
deliver a new Warrant evidencing the rights of the Holder hereof to
purchase the balance of the Warrant Shares purchasable hereunder.
The Issuer shall maintain at its principal place of business a
register for the registration of this Warrant and registration of
transfer of this Warrant. The Exercise Price for the number of
Warrant Shares specified in the Election to Purchase Form shall be
payable in United States Dollars by (i) cash, (ii) a certified check
payable to the order of the Issuer, (iii) written direction to an
authorized broker to sell the Warrant Shares purchased pursuant to
such exercise immediately for the account of the Holder and pay an
appropriate portion of the proceeds thereof to the Issuer, or (iv)
any combination of such methods of payment which together amount to
the full exercise price of the Warrant Shares purchased pursuant to
the exercise of the Warrant plus the amount, if any, of any
applicable taxes which the Issuer is required to withhold.
(b) Each certificate representing shares initially issued upon
exercise of this Warrant (and subsequently issued if appropriate),
unless at the time of exercise such shares have been sold pursuant to
an effective registration statement under the Securities Act, shall
bear the following legend (and any additional legend required by
applicable securities laws or any securities exchange or the NASDAQ
Stock Market at the time of such exercise) on the face thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT
PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT AND UNDER ANY
APPLICABLE STATE SECURITIES LAWS UNLESS, IN THE OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND STATE
SECURITIES LAWS IS AVAILABLE."
Any certificate issued at any time upon transfer of, or in exchange for
or replacement of, any certificate bearing such legend (except a new
certificate issued upon completion of a public distribution of the
securities represented thereby pursuant to a registration under the
Securities Act) shall also bear such legend unless, in the opinion of
counsel for the registered holder thereof reasonably acceptable to the
Issuer, the shares represented thereby need no longer be subject to the
restrictions in this Section 1(b). The provisions of this Section 1(b)
shall be binding upon all subsequent holders of certificates bearing
the above legend, and shall also be applicable to all subsequent
holders of this Warrant. The Warrant and the Warrant Shares may be
transferred by the Holder (and its transferees), in whole or in part,
subject to compliance with all applicable federal and state securities
laws.
2
<PAGE>
(c) The Holder (and its transferees) shall not effect any
public sale or distribution of Warrant Shares issued upon exercise of
this Warrant (including any sale under Rule 144 promulgated under the
Securities Act) during the 14 days before and the 180 days after the
effective date of a registration statement filed by the Issuer under
the Securities Act in connection with an underwritten offering of
Common Stock, except as may be permitted as part of such underwritten
registration.
Section 2. RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF
HOLDER. The Issuer hereby agrees to reserve for issuance and/or delivery upon
exercise of this Warrant such number of Warrant Shares as shall be required
for issuance or delivery upon exercise of this Warrant in full. The Issuer
represents, warrants and covenants that all Warrant Shares issued upon
exercise of this Warrant will be, upon issuance in accordance with the terms
hereof, fully paid and non-assessable. The Warrant surrendered upon exercise
shall be canceled by the Issuer. After the Expiration Date, no shares of
Common Stock shall be subject to reservation in respect of this Warrant. The
Issuer further agrees that it will not, by amendment of its Certificate of
Incorporation or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid the
observation or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Issuer.
Section 3. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. Any
attempted transfer of this Warrant, the Warrant Shares or any new Warrant not
in accordance with this Agreement shall be null and void, and the Issuer
shall not in any way be required to give effect to such transfer. No transfer
of this Warrant shall be effective for any purpose hereunder until (i)
written notice of such transfer and of the name and address of the transferee
has been received by the Issuer, (ii) the transferee shall first agree in a
writing delivered to the Issuer to be bound by all the provisions of this
Warrant, and (iii) an opinion of counsel (reasonably satisfactory to the
Issuer) is provided to the Issuer that states that the transfer is exempt
from registration under the Securities Act. Upon surrender of this Warrant to
the Issuer by any transferee authorized under the provisions of this Section
3, the Issuer shall, without charge, execute and deliver a new Warrant
registered in the name of such transferee at the address specified by such
transferee, and this Warrant shall promptly be canceled. The Issuer may deem
and treat the registered holder of any Warrant as the absolute owner thereof
for all purposes, and the Issuer shall not be affected by any notice to the
contrary. Any Warrant, if presented by an authorized transferee, may be
exercised by such transferee without prior delivery of a new Warrant issued
in the name of the transferee.
Upon receipt by the Issuer of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Warrant, if
mutilated, the Issuer will execute and deliver a new Warrant of like tenor
and date.
3
<PAGE>
Section 4. RIGHTS OF HOLDER. Neither a Holder nor his transferee
by devise or the laws of descent and distribution or otherwise shall be, or
have any rights or privileges of, a stockholder of the Issuer with respect to
any Warrant Shares, unless and until the Issuer shall have received payment
in full for such Warrant Shares in accordance with the provisions of Section
1(a) hereof. For purposes of determining the record date on which a Holder
shall be deemed to be entitled to exercise the rights of a stockholder of the
Issuer, the record date of ownership of shares of Common Stock issued to a
Holder upon exercise of this Warrant shall be the date on which the Election
to Purchase Form shall have been delivered to the Issuer accompanied by
payment to the Issuer in accordance with the provisions of Section 1(a) of
this Warrant.
Section 5. CLOSING OF BOOKS. The Issuer 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.
Section 6. ADJUSTMENTS IN EXERCISE PRICE AND WARRANT SHARES.
(a) The Exercise Price and Warrant Shares shall be subject to
adjustment from time to time as provided in this Section 6(a).
(i) If the Issuer is recapitalized through the
subdivision or combination of its outstanding shares of Common Stock
into a larger or smaller number of shares, the number of shares of
Common Stock for which this Warrant may be exercised shall be increased
or decreased, as of the record date for such recapitalization, in the
same proportion as the increase or decrease in the number of
outstanding shares of Common Stock, and the Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all
Warrant Shares issuable hereunder immediately after the record date for
such recapitalization shall equal the aggregate amount so payable
immediately before such record date.
(ii) If the Issuer declares a dividend on Common
Stock, or makes a distribution to holders of Common Stock, and such
dividend or distribution is payable or made in Common Stock or
securities convertible into or exchangeable for Common Stock, or rights
to purchase Common Stock or securities convertible into or exchangeable
for Common Stock, the number of shares of Common Stock for which this
Warrant may be exercised shall be increased, as of the record date for
determining which holders of Common Stock shall be entitled to receive
such dividend or distribution, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of
Common Stock as a result of such dividend or distribution, and the
Exercise Price shall be adjusted so that the aggregate amount payable
for the purchase of all the Warrant Shares issuable hereunder
immediately after the record date for such dividend or distribution
shall equal the aggregate amount so payable immediately before such
record date.
4
<PAGE>
(iii) In the event that the Issuer shall make any
distribution of its assets upon or with respect to its Common Stock, as
a liquidating or partial liquidating dividend, or other than as a
dividend payable out of earnings or any surplus legally available for
dividends under the laws of the state of incorporation of the Issuer,
the Holder shall be entitled to receive upon exercise of this Warrant
the amount of such assets (or, at the option of the Issuer, an amount
equal to the value thereof at the time of distribution, as determined
in good faith by the Issuer's Board of Directors) which would have been
distributed to such Holder if it had exercised its right to exercise
immediately prior to the record date for such distribution or, in the
absence of a record date, immediately prior to the date of such
distribution.
(iv) In case the Issuer after the date hereof (1)
shall consolidate with or merge into any other Person (as defined
below) and shall not be the continuing or surviving corporation of such
consolidation or merger, or (2) shall permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the
continuing or surviving Person but, in connection with such
consolidation or merger, the Common Stock or Other Securities (as
defined below) of the Issuer shall be changed into or exchanged for
stock or other securities of any other Person or cash or any other
property, or (3) shall transfer all or substantially all of its
properties or assets to any other Person, then, and in the case of each
such transaction, provisions satisfactory to the Holder shall be made
such that, upon the basis and the terms and in the manner provided in
this Warrant, the Holder, upon the exercise thereof at any time after
the consummation of such transaction, shall be entitled to receive (at
the aggregate Exercise Price in effect at the time of such consummation
for all Common Stock or Other Securities issuable upon such exercise
immediately prior to such consummation), in lieu of the Common Stock or
Other Securities issuable upon such exercise prior to such consummation
the amount of stock and other securities, cash and other property to
which the Holder would have been entitled upon such consummation if the
Holder had exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such corporate
action) as nearly equivalent as possible to the adjustments provided
for in this Section 6.
PROVIDED that, without the Holder's consent, the Issuer shall
not enter into any of the transactions described in clauses (1) through
(3) above, unless, immediately after the date of the consummation of
such transaction, the Acquiring Person or the Parent of the Acquiring
Person is required to file reports with the Securities and Exchange
Commission pursuant to section 13 or section 15(d) of the Exchange Act.
Notwithstanding the foregoing, if a purchase, tender or
exchange offer shall have been made to and accepted by the holders of
more than 50% of the outstanding shares of Common Stock, and if the
Holder designates in a notice given to the Issuer on or before the date
immediately preceding the date of the consummation of such transaction,
the
5
<PAGE>
Holder shall upon exercise of this Warrant be entitled to receive
the highest amount of securities, cash or other property to which
the Holder would actually have been entitled as a shareholder if the
Holder had exercised this Warrant prior to the expiration of such
purchase, tender or exchange offer and accepted such offer, subject
to adjustments (from and after the consummation of such purchase,
tender or exchange offer) as nearly equivalent as possible to the
adjustments provided for in this Section 6.
The above provisions of this paragraph (iv) shall similarly
apply to successive consolidations, mergers, exchanges, sales or other
transfers covered hereby.
As used herein, "Acquiring Person" shall mean the continuing
or surviving corporation of a consolidation or merger with the Issuer
(if other than the Issuer), the transferee of substantially all of the
properties of the Issuer, the corporation consolidating with or merging
into the Issuer in a consolidation or merger in connection with which
the Common Stock as changed into or exchanged for stock or other
securities of any other person or cash or any other property.
As used herein, the term "Other Securities" shall mean any
stock (other than Common Stock) and other securities of the issuer or
any other Person (corporate or otherwise) which the Holders of this
Warrant at any time shall be entitled to receive, or shall have
received, upon the exercise of this Warrant, in lieu of or in addition
to Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 6 or otherwise.
As used herein, "Parent" shall mean any corporation which (a)
controls the Acquiring person directly or indirectly through one or
more intermediaries, (b) is required to include the Acquiring Person in
the consolidated financial statement contained in such Parent's Annual
Report on Form 10-K and (c) is not itself included in the consolidated
financial statements of any other person (other than its consolidated
subsidiaries).
As used herein, the term "Person" shall mean a corporation, an
association, a partnership, an organization, a business, an individual,
a government or political subdivision thereof or a governmental agency.
(v) If the Issuer shall issue or sell, at any time
before the expiration of this Warrant, additional shares of Common
Stock without consideration or for a consideration per share less than
the Exercise Price in effect immediately prior to such issue or sale,
then, and in each such case, the Exercise Price shall be reduced to an
amount determined by dividing:
the sum of (1) the product derived by multiplying
(A) the Exercise Price in effect immediately prior to such
issuance or sale times (B) the number of shares of
6
<PAGE>
Common Stock outstanding immediately prior to such issuance or
sale, calculated on a fully-diluted basis, plus (2) the total
amount of consideration, if any, received by the Issuer upon
such issuance or sale;
by
the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale,
calculated on a fully diluted basis, plus (2) the number of
shares of Common Stock issued in such sale.
(vi) If the Issuer shall, at any time before the
expiration of this Warrant, dissolve, liquidate or wind up its affairs,
the Holder shall, upon exercise of this Warrant have the right to
receive, in lieu of the shares of Common Stock of the Issuer that the
Holder otherwise would have been entitled to receive, the same kind and
amount of assets as would have been issued, distributed or paid to the
Holder upon any such dissolution, liquidation or winding up with
respect to such shares of Common Stock of the Issuer had the Holder
been the holder of record of such shares of Common Stock receivable
upon exercise of this Warrant on the date for determining those
entitled to receive any such distribution. If any such dissolution,
liquidation or winding up results in any cash distribution in excess of
the Exercise Price provided by this Warrant for the shares of Common
Stock receivable upon exercise of this Warrant, the Holder may, at the
Holder's option, exercise this Warrant without making payment of the
Exercise Price and, in such case, the Issuer shall, upon distribution
to the Holder, consider the Exercise Price to have been paid in full
and, in making settlement to the Holder, shall obtain receipt of the
Exercise Price by deducting an amount equal to the Exercise Price for
the shares of Common Stock receivable upon exercise of this Warrant
from the amount payable to the Holder. For purposes of this paragraph,
the sale of all or substantially all of the assets of the Issuer and
distribution of the proceeds thereof to the Issuer's stockholders shall
be deemed a liquidation.
(b) The term "Common Stock" shall mean the Common Stock, $.01
par value, of the Issuer as the same exists at the Closing Date (as
defined in the Purchase Agreement) or as such stock may be constituted
from time to time, except that for the purpose of this Section 5, the
term "Common Stock" shall include any stock of any class of the Issuer
which has no preference in respect of dividends or of amounts payable
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Issuer and which is not subject to redemption by
the Issuer.
(c) Whenever the number of Warrant Shares or the Exercise
Price shall be adjusted as required by the provisions of this Section
5, the Issuer forthwith shall file in the custody of its secretary or
an assistant secretary, at its principal office, and furnish to the
Holder hereof, a certificate setting forth in reasonable detail the
circumstances requiring the adjustments.
7
<PAGE>
(d) Notwithstanding any other provision, this Warrant shall be
binding upon and inure to the benefit of any successors and assigns of
the Issuer.
(e) No adjustment in the Exercise Price in accordance with the
provisions of this Section 5 need be made if such adjustment would
amount to a change in such Exercise Price of less than $.01; PROVIDED
HOWEVER, that the amount by which any adjustment is not made by reason
of the provisions of this paragraph 5(e) shall be carried forward and
taken into account at the time of any subsequent adjustment in the
Exercise Price.
(f) If an adjustment is made under this Section 5 and the
event to which the adjustment relates does not occur, then any
adjustments in accordance with this Section 5 shall be readjusted to
the Exercise Price and the number of Warrant Shares which would be in
effect had the earlier adjustment not been made.
(g) If an event occurs which is similar in nature to the
events described in this Section 5, but is not expressly covered
hereby, the Board of Directors of the Issuer shall make or arrange for
an equitable adjustment to the number of Warrant Shares and the
Exercise Price.
Section 7. TAXES ON ISSUE OR TRANSFER OF COMMON STOCK AND WARRANT.
The Issuer shall pay any and all documentary, stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of shares of
Common Stock or other securities on the exercise of this Warrant. Except as
set forth in the preceding sentence, the Issuer shall not be required to pay
any tax which may be payable in respect of any transfer of this Warrant or in
respect of any transfers involved in the issue or delivery of shares or the
exercise of this Warrant in a name other than that of the Holder and the
person requesting such transfer, issue or delivery shall be responsible for
the payment of any such tax (and the Issuer shall not be required to issue or
deliver said shares until such tax has been paid or reasonable evidence for
the provision of such payment has been provided to the Issuer). The Issuer
shall withhold any amounts (whether in cash, securities or otherwise)
relating to any applicable taxes which the Issuer is required to withhold or
as otherwise required by law relating to the issuance of this Warrant or the
Warrant Shares or the transfers thereof.
Section 8. NOTICE OF ADJUSTMENT. So long as this Warrant shall be
outstanding, (a) if the Issuer shall propose to pay any dividends or make any
distribution upon the Common Stock, or (b) if the Issuer shall offer
generally to the holders of Common Stock the right to subscribe to or
purchase any shares of any class of Common Stock or securities convertible
into Common Stock or any other similar rights, or (c) if there shall be any
proposed capital reorganization of the Issuer in which the Issuer is not the
surviving entity, recapitalization of the capital stock of the Issuer,
consolidation or merger of the Issuer with or into another corporation, sale,
lease or other transfer of all or substantially all of the property and
assets of the Issuer, or voluntary or
8
<PAGE>
involuntary dissolution, liquidation or winding up of the Issuer, or (d) if
the Issuer shall give to its stockholders any notice, report or other
communication respecting any significant or special action or event, then in
such event, the Issuer shall give to the Holder, at least ten days prior to
the relevant date described below, a notice containing a description of the
proposed action or event and stating the date or expected date on which a
record of the Issuer's stockholders is to be taken for any of the foregoing
purposes, and the date or expected date on which any such dividend,
distribution, subscription, reclassification, reorganization, consolidation,
combination, merger, conveyance, sale, lease or transfer, dissolution,
liquidation or winding up is to take place and the date or expected date, if
any is to be fixed, as of which the holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such event.
Section 9. NOTICES. Any notice, demand, request, consent,
approval, declaration, delivery or communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or
made if in writing and either delivered in person with receipt acknowledged
or sent by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) if to any Holder of this Warrant or holder of Warrant Shares
issued upon the exercise hereof, at its last known address
appearing on the books of the Company maintained for such
purpose, which shall be initially:
Clear Channel Communications, Inc.
200 Concord Plaza, Suite 600
San Antonio, Texas 78216
Attention: Randall Mays
(b) if to the Company, to:
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Attention: Chief Executive Officer
or at such other address as may be substituted by not less than ten days'
advance notice given to the other party as herein provided. The giving of any
notice required hereunder may be waived in writing by the party entitled to
receive such notice. Every notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder shall be deemed to
have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or three Business Days (as defined below) after
the same shall have been deposited in the United States mail. "Business Day"
shall mean any day that is not Saturday or Sunday or a day on which banks are
required or permitted to be closed in the State of Illinois.
9
<PAGE>
Section 10. GOVERNING LAW. THE ISSUER AND THE HOLDER AGREE THAT
THIS WARRANT AND THE LEGAL RELATIONS BETWEEN THE ISSUER AND THE HOLDER, AND
ALL RIGHTS AND OBLIGATIONS HEREUNDER, INCLUDING MATTERS OF CONSTRUCTION,
VALIDITY, AND PERFORMANCE, SHALL BE GOVERNED BY AND INTERPRETED, CONSTRUED,
APPLIED, AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE
WITHOUT REFERENCE TO THE LAW OF ANOTHER JURISDICTION.
Section 11. AMENDMENT. This Warrant may be amended only with the
consent of the Company and the Holders representing a majority of the then
outstanding Warrants.
Dated: August ___, 1999
TUNES.COM INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
ATTEST:
- ------------------------------
(Assistant) Secretary
10
<PAGE>
SCHEDULE I
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant and
to purchase ______ shares of Tunes.com Inc. Common Stock issuable upon the
exercise of this Warrant, and requests that certificates for such shares be
issued in the name of:
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Address)
- -------------------------------------------------------------------------------
(United States Social Security or other taxpayer
identifying number, if applicable)
and, if different from above, be delivered to:
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Address)
and, if the number of Warrant Shares so purchased are not all of the Warrant
Shares issuable upon exercise of this Warrant, that a Warrant to purchase the
balance of such Warrant Shares be registered in the name of, and delivered to,
the undersigned at the address stated below.
Date: _______________________, _____
Name of Registered Owner:
------------------------------------------------------
- -------------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
Signature:
---------------------------------------------------------------------
11
<PAGE>
Exhibit 5.1
August 12, 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 will 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,
/s/ Freeborn & Peters
- -----------------------------
FREEBORN & PETERS
<PAGE>
EXHIBIT 10.15
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
MUSICMAKER.COM
1831 Wiehle Avenue, Suite 128
Reston, VA 20190
Phone: (703) 904-4110 Fax: (703) 904-4117
July 25, 1999
Tunes.com Inc.
640 LaSalle Street
Suite 560
Chicago, IL 60610
Attn: Howard A. Tullman
Re: TUNES.COM INC./ MUSICMAKER.COM. INC.
STOCK EXCHANGE AND MARKETING AGREEMENT
Ladies and Gentlemen:
This letter agreement (the "Agreement") between musicmaker.com,
Inc., a Delaware corporation ("Musicmaker") and Tunes.com Inc., a Delaware
corporation ("Tunes") sets forth certain agreements that the parties hereto
have reached and outlines the terms that are expected to be provided in
certain definitive agreements that the parties hereto intend to enter into
with respect to the transactions described below. Subject to the (i) approval
by the board of directors of each of Musicmaker and Tunes and (ii)
Musicmaker's receipt of a consent to the issuance of the "Musicmaker Shares,"
as defined below, from Ferris, Baker Watts, Incorporated pursuant to Section
5(vi) of that certain Underwriting Agreement dated as of July 6, 1999, this
Agreement and the transactions contemplated herein will represent binding
legal obligations of the parties requiring the parties to negotiate in good
faith to execute and deliver definitive agreements on the terms outlined
herein. This agreement is being signed by senior executive officers of each
of the parties hereto, and each of the obligations of the parties hereto is
expressly subject to the satisfaction of the conditions subsequent to this
Agreement raised in (i) and (ii) above. Each of the parties will with all
reasonable speed seek the completion of the conditions raised in (i) and (ii)
and will notify the other party when such conditions have been reasonably
satisfied. The transactions contemplated herein are collectively referred to
herein as the "Transactions."
Musicmaker and Tunes hereby propose and agree to the following Transactions:
I. STOCK EXCHANGE AGREEMENT. Musicmaker and Tunes shall enter into an
agreement embodying the terms detailed below (the "Stock Exchange Agreement").
A. ISSUANCE OF THE TUNES SHARES. As consideration of or and in
exchange for the "Musicmaker Shares" (defined below), Tunes shall:
<PAGE>
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
(i) issue to Musicmaker 357,143 shares of Tunes.com Inc. common
stock, par value $.01 per share, calculated on a post-stock-split basis, in
an amount equivalent in value to approximately $5,000,000, each such share
priced at $14 per share, the midpoint of the pricing range contained in
Tunes' July 20, 1999 filing of a registration statement with the Securities
and Exchange Commission on Form S-1 (the "Tunes Shares"). The tunes Shares
shall be issued to Musicmaker upon the consummation of the Stock Exchange
Agreement. Issuance of the Tunes Shares shall not be contingent upon the
completion of the IPO. In the event that the IPO is delayed or postponed,
Tunes shall notify Musicmaker immediately in writing and shall issue the
Tunes shares not later than 15 days following such notification; and
(ii) execute and deliver the "Marketing Agreement" described below.
B. ISSUANCE OF THE MUSICMAKER SHARES. As consideration for and in
exchange for the Tunes Shares, Musicmaker shall:
(i) issue to Tunes shares of Musicmaker.com, Inc. common stock,
par value $.01 per share, valued at $5,000,000 (the "Musicmaker Shares"),
such Musicmaker Shares to be valued at a price per share equal to the average
closing price of Musicmaker's common stock listed on the Nasdaq National
Market under the symbol "HITS" for the period beginning on July 7, 1999,
through the date of this binding Agreement. The Musicmaker Shares shall be
issued to Tunes upon the consummation of the Stock Exchange Agreement; and
(ii) execute and deliver the "Marketing Agreement" described below.
C. REGISTRATION RIGHTS. Subject to the terms of that certain
Registration Rights Agreement dated as of June 8, 1999, by and among
Musicmaker and various holders of registrable securities, Musicmaker shall
grant to Tunes "piggyback" registration rights with respect to the Music
Shares to be issued under the terms of the Stock Exchange Agreement. Subject
to the terms of that certain Amended and Restated Registration Rights
Agreement dated as of May 4, 1999, by and among Tunes and various holders of
registrable securities, Tunes shall grant to Musicmaker equivalent
"piggyback" registration rights with respect to the Tunes Shares to be issued
under the terms of the Stock Exchange Agreement.
D. TUNES REGISTRATION STATEMENT DISCLOSURE. Upon the execution of this
Agreement, tunes shall take such action to ensure that the Transaction
proposed herein and the issuance of the Tunes Shares of Musicmaker are each
accurately disclosed in Tunes' final prospectus to the extent required to be
described therein under applicable law.
E. REPRESENTATIONS AND WARRANTIES. Each of Musicmaker and Tunes shall
make standard and customary representations and warranties with respect to
the issuance of the Tunes Shares and the Musicmaker Shares. Each party shall
agree to indemnify the other for any and all breaches of such representations
and warranties.
II. MARKETING AGREEMENT. Musicmaker and Tunes shall enter into an
agreement embodying the terms and conditions detailed below (the "Marketing
Agreement").
<PAGE>
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
A. ADVERTISING PAYMENTS. For a period of five years following the
closing of the transactions contemplated herein (the "Term") or until the
earlier termination by the parties as discussed below, Musicmaker shall make
annual payments of $1,000,000, payable in advance on a quarterly basis (the
"Advertising Payments"), for advertising and promotion of Musicmaker and its
products and related services on the Tunes.com website and Tunes'
genre-specific related websites, including but not limited to
rollingstone.com, thesource.com and downbeatjazz.com (the "Tunes Websites"),
such advertising and promotional services to be provided to Musicmaker by
Tunes at competitive market rates during the Term. Tunes shall use its best
efforts at all times during the Term to encourage and direct artists, bands
and independent labels seeking to sell music content on the Tunes Websites to
work with and through Musicmaker as a sale and technology partner.
B. EXCLUSIVITY FOR SALES OF CUSTOM CDS. For the Term, Tunes agrees that
Musicmaker shall be the exclusive online provider of customized compact disc
compilations ("Custom CDs") on the Tunes Websites. During the Term, Tunes
will not authorize any other supplier of Custom CDs to offer, sell or
distribute Custom CDs through the Tunes Websites except for:
(i) the sales through the Tunes Websites of prerecorded CDs,
collections, and/or pre-existing compilations, which are not customized
online by visitors and/or registrants to the Tunes Websites, sold by
tunes or any of its online store partners; and
(ii) the sale of Custom CDs directly by or through an
affiliated entity of *** or through any alliance or partner entity,
of music content not available for inclusion in custom CDs through
Musicmaker ("Additional Major Content") and to which Musicmaker is
unable to obtain sufficient rights to include such Additional major
Content in its Custom CDs within 120 days of notification of the
availability of Additional Major Content by Tunes.
The exclusivity provision in Section II(B) shall in no way restrict
musicmaker.com from entering into similar marketing agreements with other
Internet portals and music marketing companies.
C. NON-EXCLUSIVE BASIS FOR SALES OF DIGITAL DOWNLOADS. For the Term,
Tunes agrees that Musicmaker shall be a provider, on a non-exclusive basis,
of digitally downloaded music content, available in formats including, but
not limited to, Microsoft MS-Audio, Liquid Audio and Secure-MP3 ("Digital
Downloads") on the Tunes Websites. Musicmaker shall also have on a
non-exclusive basis the right to provide Digital Downloads of songs which are
sold by Tunes on the Tunes Websites and which are or have been created from
songs delivered to Tunes for promotion, distribution and/or sale on its tunes
Websites by unsigned artists or bands. Musicmaker shall provide Tunes,
subject to any licensing restrictions, with regular access to the Musicmaker
Digital Downloads, for the purposes of creating samples, promotional offers,
etc.
D. CALCULATION OF THE SALES COMMISSION FOR SALES OF CUSTOM CDS AND
DIGITAL DOWNLOADS THROUGH THE TUNES WEBSITES. A sales commission on each
online sale of a Musicmaker Custom CD or digital Download, originated by or
through the tunes Websites, equaling **** of the "Net Profits" (as defined
below) shall be paid by Musicmaker to Tunes.
<PAGE>
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
The sales commission shall be paid to Tunes in connection with direct sales
of Custom CDs and Digital Downloads through the Tunes Websites as well as
through special offers, promotions, marketing campaigns directed through the
Tunes Websites to Tunes users/visitors. Payment of sales commissions shall be
made by Musicmaker on a quarterly basis.
E. CALCULATION OF NET PROFITS. Net Profits shall mean all revenues
derived by Musicmaker in connection with the sale of a Musicmaker Custom CD
or Digital Download from sales to users/visitors, originating by or through
the Tunes Websites, less the following amounts.
(i) costs associated with royalty and license payments made by
Musicmaker required in connection with the distribution of Custom CDs and
Digital Downloads, payable to licensors of music content and owners of
copyrights for the sound recordings contained in such Custom CDs and Digital
Downloads.
(ii) actual expenses incurred directly by Musicmaker in performing
the following functions:
(a) manufacturing the Custom CDs to be sold including the
cost of the compact disc, jewel case, packaging; and
(b) processing orders for Custom CDs and Digital
Downloads including but not limited to credit car authorization processing,
fulfillment, billing, collection of payments, tracking, transaction security,
delivery to purchasers and customer service functions;
(iii) mutually agreed-upon promotional and advertising costs
associated with driving users/visitors from Tunes.com to the musicmaker
website exclusive of the Advertising payments described herein; and
(iv) delivery costs associated with mailing Custom CDs as charged
to the customer.
F. CUSTOMER DATA. Musicmaker and Tunes shall jointly own all
user/customer data gathered in connection with any sales of Custom CDs or
Digital Downloads originated by or through the Tunes Websites. All use of
this data would be subject to any limitations placed on such data by third
parties providing such information. Tunes agrees not to use any of the data
on Musicmaker customers for the purposes of selling Digital Downloads or
Custom CDs competitive in any respect with any Musicmaker's product offerings
during the term of the Marketing Agreement.
G. CO-BRANDING OF DIGITAL DOWNLOAD AND CUSTOM CD SALES AREA. Musicmaker
and Tunes shall work together to quickly develop co-branded pages which will
live within an area dedicated to sales of Custom CDs and Digital Downloads on
the Tunes Websites, to be hosted on Tunes' servers with specific asset links
to Musicmaker digital content for sale and downloading purposes. Individual
streamed samples of all Digital Downloads for sale would be made available to
visitors to the co-branded Digital Download area and, from time to time, on a
mutually agreeable basis entire songs would be made available for
users/visitors to the tunes Websites to download for free either for a
limited time, subsequent to automatic expiration
<PAGE>
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
protections or on some other acceptable basis, all of the above subject to
musicmaker.com's licensing restrictions.
H. CROSS MARKETING. For the purpose of joint marketing efforts,
including sales promotion activities, Musicmaker and Tunes agree to use their
best efforts to provide (i) each user/visit to Tunes the opportunity to
subscribe to Musicmaker.com's Custom CD and Downloading programs including
free promotional and club member campaigns and (ii) each user/visitor to
Musicmaker the opportunity to subscribe to various Tunes newsletters and to
receive other notification of Tunes' contests, promotion, etc.
I. TERMINATION. The Marketing Agreement described above shall expire
upon completion of the Term and shall be automatically renewable on a yearly
basis, unless otherwise agreed to by both parties. During the Term and upon a
change in control of Tunes, not including the proposed tunes IPO, Music shall
have the right to terminate the Marketing Agreement on thirty (30) days
written notice. During the Term and upon a change in control of Music, Tunes
shall have the right to terminate the marketing Agreement on thirty (30) days
written notice. Both parties agree that for a reasonable period following
notice of termination by any party, both parties shall continue to provide
reasonable assistance in carrying out the sales transactions for Custom CDs
and Digital Downloads received prior to termination.
3. MISCELLANEOUS.
A. CONFIDENTIALITY. It is acknowledged and agreed by each party that
any confidential information divulged in connection with this Agreement or
the Transactions by one party to the other is in all respects of a
confidential and proprietary nature, and that any disclosure or use of such
information by the recipient, except in connection with the transactions, can
and will involve serious harm or damage to the businesses of the parties.
Therefore, each party covenants that it will not, either directly or
indirectly through any agent, employee or otherwise, disclose any such
information (except any information required by law to be disclosed or
generally available to the public other than as a result of a disclosure in
violation of this Agreement) either in whole or in part to any third party.
Without limiting the generality of the foregoing, each party covenants that
it will disclose such information only to those of its officers, directors,
employees, agents, accountants, attorneys, consultants or any other advisors
who need to know such information in connection with such parties' analysis
of the Transactions.
B. PUBLICITY. Except as required by law or regulation, including in
connection with Tunes' IPO, either of the parties shall, and each shall cause
their respective affiliates, agents, representatives and advisors not to,
make any public announcement or issue any press release with respect to the
Transactions contemplated herein without the prior consent of the other. It
is contemplated that a joint press release be issued immediately following
the consummation of this Letter Agreement.
C. EXPENSES. Each party shall bear its own fees and expenses in
connection with the Transactions contemplated in this Agreement and the
implementation of this Agreement.
<PAGE>
THIS EXHIBIT IS SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE
COMMISSION. INFORMATION SUBJECT TO THIS REQUEST HAS BEEN REPLACED WITH ***.
D. AMENDMENTS. This Agreement shall not be amended except by written
instrument executed by the parties hereto.
E. COUNTERPARTS. This Agreement may be executed in counterparts.
It is understood that, subject to the satisfaction of the conditions
subsequent to this Agreement set forth in the first paragraph of page one
above, this Agreement sets forth a binding statement of the intentions with
respect to the transactions contemplated herein requiring the parties hereto
to negotiate in good faith in order to execute and deliver definitive
documents embodying the transactions above.
Please confirm your agreement with the foregoing by executing this Agreement
and returning it to Musicmaker.
All of us at Musicmaker are enthusiastic about the transactions
detailed above. We look forward to proceeding as expeditiously as possible
toward their consummation.
Sincerely yours,
musicmaker.com, Inc.
By: /s/ Robert P. Bernardi
--------------------------------------
Robert P. Bernardi
Chairman and Co-CEO
Agreed as of this 25th day of July 1999:
TUNES.COM INC.
By: /s/ Howard A. Tullman
-------------------------------
Howard A. Tullman
Chairman and CEO
<PAGE>
EXHIBIT 10.16
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of August 9, 1999, is entered
into by and between CLEAR CHANNEL COMMUNICATIONS, INC., a Texas corporation
("Buyer"), and TUNES.COM INC., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Buyer and the Company
have approved the purchase by Buyer (the "Acquisition") of shares of the common
stock, par value $0.01 per share of the Company (the "Company Common Stock")
upon the terms and subject to the conditions set forth in this Stock Purchase
Agreement (this "Agreement"); certain capitalized terms used in this Agreement
are defined in Section 8.3 hereof;
WHEREAS, Buyer and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Acquisition and also
to prescribe certain conditions to the Acquisition.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Buyer and the Company hereby agree as follows:
ARTICLE I.
THE ACQUISITION
SECTION 1.1. THE ACQUISITION. Upon the terms and subject to the
conditions set forth in this Agreement and applicable law, the Company shall
issue to Buyer, and Buyer shall purchase from the Company, the Purchased Shares.
SECTION 1.2 PURCHASE PRICE; PURCHASED SHARES. The following
calculations have been determined after giving effect to the 1.25-for-1 stock
split of the Company Common Stock which shall occur immediately prior to the
Company's IPO.
(a) The purchase price per share for the Purchased Shares (the
"Per Share Purchase Price") shall be equal to the lower of $14.00 or the initial
offering price per share of the Company Common Stock as offered to the public
(without giving effect to any underwriters' discount) in connection with the
Company's IPO.
(b) The number of shares of Company Common Stock to be
purchased by Buyer hereunder (the "Purchased Shares") shall be equal to the
number obtained by dividing (i) $14,999,999 by (ii) the Per Share Purchase Price
(rounding any fractional share to the next lowest whole number.
<PAGE>
SECTION 1.3. CLOSING. The closing of the Acquisition shall take place
simultaneously with the closing of the Company's IPO (the "Closing Date") at
such place as the parties may mutually agree.
SECTION 1.4 CLOSING OBLIGATIONS. At the Closing:
(a) The Company will deliver to Buyer:
(i) a stock certificate representing the
Purchased Shares, duly executed and issued in the name of Buyer;
(ii) the Warrant;
(iii) the Registration Rights Agreement;
(iv) the officer's certificate described in
Section 6.2 hereof; and
(v) the opinion of Company's counsel as
described in Section 6.2 hereof;
(b) Buyer will deliver to the Company:
(i) The Purchase Price, by wire transfer or such
other form of same day funds as the Company shall have designated in
writing to Buyer at least 24 hours prior to the Closing Date;
(ii) the Registration Rights Agreement; and
(iii) the officer's certificate described in
Section 6.3 hereof.
ARTICLE II.
REPRESENTATIONS AND WARRANTS OF THE COMPANY
The Company hereby represents and warrants to Buyer that, except as set
forth in the disclosure letter delivered by the Company to Buyer on the date
hereof (the "Company Disclosure Letter"):
SECTION 2.1. ORGANIZATION, QUALIFICATION, ETC. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the corporate power and authority to own its
properties and assets and to carry on its business as it is now being conducted
and in which it presently proposes to engage and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its properties or the conduct of its business requires such qualification. The
copies of the Company's charter and by-laws which have been made available to
Buyer are complete and correct and in full force and effect. Each of the
Company's Subsidiaries is a corporation duly organized, validly existing and in
good
2
<PAGE>
standing under the laws of its jurisdiction of incorporation or
organization, has the corporate power and authority to own its properties and to
carry on its business as it is now being conducted and in which it presently
proposes to engage, and is duly qualified to do business and is in good standing
in each jurisdiction in which the ownership of its property or the conduct of
its business requires such qualification. All the outstanding shares of capital
stock of, or other ownership interests in, the Company's Subsidiaries are
validly issued, fully paid and non-assessable and are owned by the Company,
directly or indirectly, free and clear of all liens, claims, charges or
encumbrances.
SECTION 2.2. CAPITAL STOCK. As of the Closing Date, the authorized
capital stock of the Company will consist of 50,000,000 shares of the Company
Common Stock and 5,000,000 shares of the Company's preferred stock, par value
$0.01 per share (the "Company Preferred Stock"). As of the Closing Date, and
assuming that none of the options, warrants or similar rights identified below
are exercised between the date hereof and the Closing Date, there will be issued
and outstanding 13,438,096 shares of the Company Common Stock and no shares of
the Company Preferred Stock. All of the outstanding shares of the Company Common
Stock have been duly authorized, validly issued and are, and will be as of the
Closing Date, fully paid and non-assessable. The Purchased Shares, when issued
at the Closing, will be duly authorized, validly issued, fully-paid and
non-assessable; and no preemptive rights of stockholders exist with respect to
any of the Purchased Shares or the issue and sale thereof. As of the Closing
Date, no outstanding subscriptions, options, warrants, rights or other
arrangements or commitments obligating the Company to issue any shares of its
stock will be outstanding, other than options and other rights to receive or
acquire an aggregate of 3,946,527 shares of the Company Common Stock pursuant
to:
(a) Company's 1997 Stock Option Plan;
(b) Company's 1999 Stock Option Plan;
(c) Company Warrant expiring on the Closing Date;
(d) Company Warrant expiring June, 2004;
(e) Company Warrant expiring November, 2007; and
(f) Company Warrant expiring no later than
December 31, 2008;
plus options and warrants which may be issued by the Company between the date
hereof and the Closing Date for up to an additional 475,000 shares of Company
Common Stock.
SECTION 2.3. CORPORATE AUTHORITY RELATIVE TO THIS AGREEMENT; NO
VIOLATION. The Company has the corporate power and authority to enter into this
Agreement, the Warrant, and the Registration Rights Agreement; collectively, the
Agreement, the Warrant and the Registration Rights Agreement are referred to as
the "Transaction Documents") and to carry out its obligations hereunder and
thereunder. The execution
3
<PAGE>
and delivery of the Transaction Documents, and the consummation of the
transactions contemplated thereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the part
of the Company are necessary to authorize the Transaction Documents and the
transactions contemplated thereby. This Agreement has been duly and validly
executed and delivered by the Company and, assuming this Agreement has been duly
and validly executed and delivered by the other parties hereto, constitutes the
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms (except insofar as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, or by principles governing the
availability of equitable remedies). Upon the receipt by the Company of the
Purchase Price, and the execution and delivery of the Warrant and the
Registration Rights Agreement, each of the Warrant and the Registration Rights
Agreement will constitute valid and binding agreements of the Company,
enforceable against the Company in accordance with its terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies.
Other than in connection with or in compliance with the provisions of the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
securities or blue sky laws of the various states (collectively, the "Company
Approvals"), to the extent such laws require, no authorization, consent or
approval of, or filing with, any governmental body or authority is necessary for
the consummation by the Company of the transactions contemplated by this
Agreement; provided that the Company makes no representation with respect to
such of the foregoing as are required by reason of the regulatory status of
Buyer or any of its Subsidiaries or facts specifically pertaining to any of
them. Except for the Company Approvals (to the extent required), the Company is
not subject to or obligated under any charter, bylaw or contract provision or
any governmental licenses, franchise or permit, or subject to any order or
decree, which would be breached or violated by its executing or carrying out the
Transaction Documents.
SECTION 2.4. REPORTS AND FINANCIAL STATEMENTS. The Company has made
available to Buyer true and complete copies of the Company's Registration
Statement on Form S-1, as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission (the "SEC") in connection with the initial
public offering of shares of the Common Stock (the "IPO"). The Registration
Statement, as of the date thereof, (i) complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations promulgated thereunder and (ii) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
that the foregoing clause (ii) shall not apply to the financial statements
included in the Registration Statement (which are covered by the following
sentence). The audited consolidated financial statements and unaudited
consolidated interim financial statements included in the Registration Statement
(including any related notes and schedules) fairly
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present in all material respects the financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and their results of
operations and cash flows for the periods or as of the dates then ended
(subject, where appropriate, to normal year-end adjustments), in each case in
accordance with past practice and generally accepted accounting principles in
the United States ("GAAP") consistently applied during the periods involved
(except as otherwise disclosed in the notes thereto and except that the
unaudited financial statements therein do not contain all of the footnote
disclosures required by GAAP).
SECTION 2.5. NO UNDISCLOSED LIABILITIES. Neither the Company nor any of
its Subsidiaries has any liabilities or obligations of any nature, whether or
not accrued, contingent or otherwise, of a type required by GAAP to be reflected
on a consolidated balance sheet except liabilities or obligations reflected in
the Registration Statement and, to the Knowledge of the Company, there is no
basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against them giving rise to
any such liability or obligation.
SECTION 2.6. NO VIOLATION OF LAW. The businesses of the Company and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any governmental body or authority except as described in the
Registration Statement, and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
any of them alleging any failure to comply with any such law, ordinance or
regulation. The Company and its Subsidiaries have all permits, licenses and
governmental authorizations material to ownership or occupancy of their
respective properties and assets and the carrying on of their respective
businesses.
SECTION 2.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Other than as
disclosed in the Registration Statement, since June 30, 1999, the businesses of
the Company and its Subsidiaries have been conducted in all material respects in
the ordinary course and there has not been any event, occurrence, development or
state of circumstances or facts that has had a Material Adverse Effect on the
Company. Since June 30, 1999, no dividends or distributions have been declared
or paid on or made with respect to the shares of capital stock or other equity
interests of the Company or its Subsidiaries nor have any such shares been
repurchased or redeemed, other than dividends or distributions paid to the
Company or a Subsidiary.
SECTION 2.8. INVESTIGATIONS; LITIGATION. Except as described in the
Registration Statement:
(a) to the Knowledge of the Company, no investigation or
review by any governmental body or authority with respect to the Company or any
of its Subsidiaries which would in the aggregate have a Material Adverse Effect
on the Company is pending nor has any governmental body or authority notified
the Company of an intention to conduct the same; and
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(b) there are no actions, suits or proceedings pending or, to
the Company's Knowledge, threatened against or affecting the Company or its
Subsidiaries, or any of their respective properties or before any federal,
state, local or foreign governmental body or authority, which, in the aggregate,
are reasonably likely to have a Material Adverse Effect on the Company.
SECTION 2.9. TAX MATTERS. All federal, state, local and foreign Tax
Returns required to be filed by or on behalf of the Company, each of its
Subsidiaries, and each affiliated, combined, consolidated or unitary group of
which the Company or any of its Subsidiaries is a member (a "Company Group")
have been timely filed or requests for extensions to file such returns or
reports have been timely filed and granted and have not expired, and all returns
filed are complete and accurate in all material respects. All Taxes due and
owing by the Company, any Subsidiary of the Company or any Company Group have
been paid, or adequately reserved for. There is no audit examination,
deficiency, refund litigation, proposed adjustment or matter in controversy with
respect to any Taxes due and owing by the Company, any Subsidiary of the Company
or any Company Group nor has the Company or any Subsidiary filed any waiver of
the statute of limitations applicable to the assessment or collection of any
Tax, in each case, which would, individually or in the aggregate, have a
Material Adverse Effect on the Company. All assessments for Taxes due and owing
by the Company, any Subsidiary of the Company or any Company Group with respect
to completed and settled examinations or concluded litigation have been paid.
Neither the Company nor any Subsidiary is a party to any tax indemnity
agreement, tax sharing agreement or other agreement under which the Company or
any Subsidiary could become liable to another person as a result of the
imposition of a Tax upon any person, or the assessment or collection of a Tax.
The Company and each of its Subsidiaries has complied in all material respects
with all rules and regulations relating to the withholding of Taxes.
SECTION 2.10. MATERIAL CONTRACTS. Each "material contract" (as such
term is defined in item 601(b)(10) of Regulation S-K under the Securities Act)
to which the Company or any of its Subsidiaries is a party is (i) legal, valid,
binding, enforceable, and in full force and effect; and (ii) will continue to be
legal, valid, binding, enforceable, and in full force and effect on
substantially identical terms following the consummation of the transactions
contemplated hereby. To the Company's knowledge, no party to any material
contract to which the Company or any of its Subsidiaries is a party is in breach
or default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration under any such contract and no party has repudiated any provision
of any material contract.
SECTION 2.11. ACCOUNTING CONTROLS. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with
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existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
SECTION 2.12. INSURANCE. The Company and each of its Subsidiaries
carry, or are covered by, insurance, including self insurance, in such amounts
and covering such risks as are adequate for the conduct of their respective
businesses and the value of their respective properties and as are customary for
companies engaged in similar industries.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company that except as set
forth in the Buyer Disclosure Letter delivered to the Company on the date
hereof:
SECTION 3.1. ORGANIZATION, QUALIFICATION, ETC. Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas .
SECTION 3.2. CORPORATE AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has
the corporate power and authority to enter into this Agreement and the
Registration Rights Agreement and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Registration
Rights Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by the Board of Directors of
Buyer and no other corporate or stockholder proceedings on the part of Buyer are
necessary to authorize this Agreement and the other transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by Buyer
and, assuming this Agreement has been duly and validly executed and delivered by
the other parties hereto, this Agreement constitutes the valid and binding
agreement of Buyer, enforceable against it in accordance with its terms (except
insofar as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
Other than in connection with or in compliance with the provisions of the
Securities Act, the Exchange Act, the HSR Act, and the securities or blue sky
laws of the various states (collectively, the "Buyer Approvals"), to the extent
such laws require, no authorization, consent or approval of, or filing with, any
governmental body or authority is necessary for the consummation by Buyer of the
transactions contemplated by this Agreement or the Registration Rights
Agreement, except for such authorizations, consents, approvals or filings, the
failure to obtain or make which would not, in the aggregate, have a Material
Adverse Effect on Buyer; provided that Buyer makes no representation with
respect to such of the foregoing as are required by reason of the regulatory
status of the Company or any of its Subsidiaries or facts specifically
pertaining to any of them.
SECTION 3.3. INVESTMENT INTENT. Buyer is purchasing the Purchased
Shares and the Warrant for its own account, solely for the purpose of investment
and not with a view to the distribution or sale thereof in violation of the
securities laws.
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SECTION 3.4 NO REGISTRATION. Buyer understands that the offering and
sale to Buyer of the Purchased Shares and the Warrant is intended to be exempt
from registration under the Securities Act pursuant to Section 4(2) of the
Securities Act. Buyer is an accredited investor within the meaning of Regulation
D under the Securities Act.
SECTION 3.5 INVESTOR QUALIFICATIONS. Buyer (a) has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of an investment in the Purchased Shares, (b) is able to
bear the complete loss of its investment in the Purchased Shares, and (c) has
had the opportunity to ask questions of, and receive satisfactory answers from,
the Company and its management concerning the terms and conditions of the
offering of the Purchased Shares and to obtain additional information. Buyer is
not relying upon any statements or instruments made or issued by any Person
other than the Company and its officers in making its decision to invest in the
Purchased Shares.
SECTION 3.6 RELIANCE. Buyer acknowledges that the Company is relying
upon the representations and warranties contained herein in determining to make
the sale of the Purchased Shares and the Warrant, and Buyer consents to such
reliance.
ARTICLE IV.
COVENANTS
SECTION 4.1. CONDUCT OF BUSINESS. Except as contemplated by this
Agreement and in the Company Disclosure Letter or the Buyer Disclosure Letter,
or as necessary or appropriate to satisfy the obligations hereunder, prior to
the Closing Date or the date, if any, on which this Agreement is earlier
terminated pursuant to Section 6.1, and except as may be agreed to by the other
parties hereto or as may be permitted pursuant to this Agreement:
(a) The Company:
(i) shall, and shall cause each of its
Subsidiaries to, conduct its operations according to their ordinary and usual
course of business; provided, however, that nothing contained in this proviso
shall limit the Company's ability to authorize or propose, or enter into, an
agreement with respect to any acquisitions or to issue any debt or equity
securities;
(ii) shall use its reasonable efforts, and cause
each of its Subsidiaries to use its reasonable efforts, consistent with prudent
business practice to (A) preserve intact its business organizations and goodwill
in all material respects, (B) keep available the services of its officers and
employees as a group, subject to changes in the ordinary course, and (C)
maintain satisfactory relationships with suppliers, distributors, customers and
others having business relationships with them, in each case as a group;
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(iii) shall notify Buyer of any emergency or other
change in the normal course of its or its Subsidiaries' respective businesses or
in the operation of its or its Subsidiaries' respective properties and of any
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) of any governmental body or authority if such
emergency, change, complaint, investigation or hearing could have a Material
Adverse Effect on the Company; and
(v) shall not take any action which would make
any representation or warranty in Article II hereof untrue or incorrect.
(b) Buyer shall not take any action which would make any
representation or warranty in Article III hereof untrue or incorrect.
SECTION 4.2. CONFIDENTIALITY. It is acknowledged and agreed by each
party that any confidential information divulged in connection with this
Agreement or the transactions contemplated hereby by one party to the other is
in all respects of a confidential and proprietary nature, and that any
disclosure or use of such information by the recipient, except in connection
with the transactions contemplated hereby, can and will involve serious harm or
damage to the businesses of the parties. Therefore, each party covenants that it
will not, either directly or indirectly through any agent, employee or
otherwise, disclose any such information (except any information required by law
to be disclosed or generally available to the public other than as a result of a
disclosure in violation of this Agreement) either in whole or in part to any
third party. Without limiting the generality of the foregoing, each party
covenants that it will disclose such information only to those of its officers,
directors, employees, agents, accountants, attorneys, consultants and other
advisors who need to know such information in connection with the consummation
of the transactions contemplated herein.
SECTION 4.3. FILINGS. Subject to the terms and conditions herein
provided, the Company and Buyer shall use reasonable efforts to cooperate with
one another in (i) determining whether any filings are required to be made with,
or consents, permits, authorizations or approvals are required to be obtained
from, any third party, the United States government or any agencies, departments
or instrumentalities thereof or other governmental or regulatory bodies or
authorities of federal, state, local and foreign jurisdictions in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and (ii) timely making all such filings and
timely seeking all such consents, permits, authorizations or approvals,
including as may be required under state blue sky or securities laws.
SECTION 4.4. FURTHER ASSURANCES. In case at any time after the Closing
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers of the Company and Buyer shall take all such
necessary action.
SECTION 4.5. ADDITIONAL REPORTS. The Company shall furnish to Buyer
copies of any reports of the type referred to in Section 2.4 which it files with
the SEC on or after the date hereof, and the Company represents and warrants
that as of the respective dates
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thereof, such reports will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statement therein, in light of the circumstances under which they were
made, not misleading; provided, that the foregoing shall not apply to the
financial statements contained therein (which are covered by the following
sentence). Any consolidated financial statements included in such reports
(including any related notes and schedules) will fairly present, in all material
respects, the financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and their results of operations and changes
in financial position or other information included therein for the periods or
as of the date then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with GAAP consistently applied during
the periods involved (except as otherwise disclosed in the notes thereto and
except that such financial statements will not include all of the notes required
by GAAP).
SECTION 4.6. NOTICE OF DEVELOPMENT. The Company will give prompt
written notice to the Buyer of any development that would have a Material
Adverse Effect on the Company or that would result in a breach of any of the
representations and warranties in Article II hereof. No disclosure by the
Company pursuant to this Section 4.6, however, shall be deemed to amend or
supplement the Company Disclosure Letter or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
SECTION 4.7. PUBLIC ANNOUNCEMENTS. Unless otherwise required by
applicable law or the requirements of any listing agreement with any applicable
stock exchange, Buyer and the Company shall each use their reasonable efforts to
consult with each other before issuing any press release or otherwise making any
public statements with respect to this Agreement or any transaction contemplated
by this Agreement and shall not issue any such press release or make any such
public statement prior to such consultation.
SECTION 4.8 RESTRICTED NATURE OF SHARES. Buyer acknowledges that the
Purchased Shares will be restricted securities under the Securities Act which
may not be sold or offered for sale in the absence of an effective registration
statement as to such Purchased Shares under the Securities Act or an opinion of
counsel satisfactory to the Company that such registration is not required.
Buyer agrees it will not transfer, by way of gift or otherwise, or sell the
Purchased Shares or any part thereof, unless such Purchased Shares have been
registered under the Securities Act and any applicable state securities laws or
it first obtains, at its own expense, if requested by the Company, an opinion of
counsel reasonably satisfactory to the Company that the transfer of such Common
Shares may be effected without registration under the Securities Act and any
applicable state securities laws. Buyer acknowledges that the certificates
evidencing the Purchased Shares will contain a legend to such effect.
SECTION 4.9 STRATEGIC MARKETING ARRANGEMENT. Promptly following the
Closing, Buyer and the Company will in good faith seek to establish a mutually
beneficial strategic cross sales and marketing agreement and, to that end, will
consider: (i) the Company providing (subject to any third party licensing
restrictions) selected portions of its content on Buyer radio Web sites; (ii)
data sharing (subject to any user privacy
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restrictions) between the Company Web sites and Buyer radio Web sites; and/or
(iii) joint sales efforts.
SECTION 4.10 REIMBURSEMENT OF BUYER'S EXPENSES. If the sale of the
Purchased Shares provided for herein is not consummated because any condition to
the obligations of the Buyer set forth in Section 5.1 or Section 5.2 hereof is
not satisfied, because of any termination pursuant to Section 6.1(b) or Section
6.1(e) 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 the Buyer, the Company will reimburse the
Buyer on demand for all reasonable out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by it in
connection with the proposed purchase and sale of the Purchased Shares,
provided, however, that such reimbursement shall not exceed $20,000.00.
ARTICLE V.
CONDITIONS TO CLOSING
SECTION 5.1. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The
obligations of the Company and Buyer to consummate the Acquisition are subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions.
(a) The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceeding for
that purpose shall have been initiated by the SEC.
(b) No statute, rule, regulation, executive order, decree,
preliminary or permanent injunction or restraining order shall have been
enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits the consummation of the transactions contemplated hereby. No action or
proceeding by any Governmental Entity shall have been commenced (and be
pending), or, to the knowledge of the parties hereto, threatened, against the
Company or Buyer or any of their respective affiliates, partners, associates,
officers or directors, or any officers or directors of such partners, seeking to
prevent or delay the transactions contemplated hereby or challenging any of the
terms of provisions of this Agreement or seeking material damages in connection
therewith.
SECTION 5.2. CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations of
Buyer to consummate the Acquisition are subject to the satisfaction or waiver by
Buyer on or prior to the Closing Date of the following further conditions:
(a) The representations and warranties of the Company
contained herein shall be true and correct in all material respects as of the
Closing Date with the same effect as though made as of the Closing Date except
that the accuracy of representations and warranties that by their terms speak as
of the date of this Agreement or some other date will be determined as of such
date.
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(b) The Company shall have performed in all material respects
all material obligations and complied in all material respects with all material
agreements and covenants required by this Agreement to be performed or complied
with by it prior to the Closing Date.
(c) The Company shall have delivered to Buyer a certificate,
dated the Closing Date and signed by its Chief Executive Officer, Chief
Financial Officer or any Senior Vice President or Vice President, certifying to
both Section 5.2(b) and 5.2(c).
(d) The Company shall have furnished to the Buyer the opinion
of Freeborn & Peters, counsel for the Company, dated the Closing Date, to the
effect that:
(i) The Company is validly existing as a corporation
in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties
and conduct its business as it is now being conducted and the
outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are
fully paid and non-assessable and, to the best of such
counsel's knowledge, are owned by the Company or a Subsidiary,
except (A) as reflected in the Company's financial statements,
(B) as described in the Registration Statement or (C) as set
forth in the Company Disclosure Letter; and, to such counsel's
knowledge, except as otherwise disclosed, the outstanding
shares of capital stock of each of the Subsidiaries are owned
free and clear of all liens, encumbrances and security
interests and no options, warrants or other rights to
purchase, agreements or other obligations to issue, or other
rights to convert any obligations into any shares of capital
stock or of ownership interests in the Subsidiaries are
outstanding.
(ii) The Company has authorized and outstanding
capital stock as set forth under Section 2.2 of this
Agreement, the authorized shares of its Common Stock have been
duly authorized; the outstanding shares of its Common Stock
have been duly authorized and validly issued and are fully
paid and non-assessable; the Purchased Shares, including the
shares of Common Stock issuable upon exercise of the Warrant,
if any, have been duly authorized and will be validly issued,
fully paid and non-assessable when issued and paid for as
contemplated by this Agreement or the Warrant, as applicable;
and, to the knowledge of such counsel, no preemptive rights of
stockholders exist with respect to any of the Purchased Shares
or the shares of Common Stock issuance upon exercise of the
Warrant or the issue and sale thereof.
(iii) Except as described in the Company Disclosure
Letter, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or
effectively waived, to cause the Company
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to sell or otherwise issue to them any of the Purchased Shares
or the shares of Common Stock issuable upon exercise of the
Warrant.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such
counsel, no stop order proceedings with respect thereto have
been instituted or are pending or threatened under the Act.
(v) To such counsel's knowledge, there are no
contracts or documents required to be filed as exhibits to the
Registration Statement or described in the Registration
Statement which are not so filed or described as required, and
such contracts and documents as are summarized in the
Registration Statement are fairly summarized in all material
respects.
(vi) To such counsel's knowledge there are no
material legal proceedings pending or threatened against the
Company or any of the Subsidiaries which is of a character
required to be disclosed in the Registration Statement and
which has not been properly disclosed therein.
(vii) The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
do not and will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default under,
the charter, as amended, or by-laws, as amended, of the
Company, or to such counsel's knowledge, any agreement or
instrument to which the Company or any of the Subsidiaries is
a party or by which the Company or any of the Subsidiaries may
be bound, except a conflict, breach or default which would not
have a Material Adverse Effect on the Company.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
(ix) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body having jurisdiction
over the Company is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be
required by state securities and blue sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
In rendering such opinion, such counsel may rely (A) as to matters governed by
the laws of states other than Delaware or Federal laws on local counsel in such
jurisdictions, provided that in each case such counsel shall state that they
believe that they and the Buyer are justified in relying on such other counsel
and (B) as to matters of fact, on certificates of responsible officers of the
Company and certificates or other written
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statements of officers or departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company and
any Subsidiary. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, as of
the time it became effective under the Act as of the Closing Date, contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading
(except that such counsel need express no view as to matters pertaining to
statistical information contained in the Registration Statement or financial
statements, schedules and other financial information contained or incorporated
by reference in the Registration Statement).
(e) The Registration Rights Agreement shall have been
authorized, approved and adopted by the requisite vote of the stockholders and
directors of the Company.
SECTION 5.3. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate the Merger are subject to the
satisfaction or waiver by the Company on or prior to the Closing Date of the
following further conditions:
(a) The representations and warranties of Buyer contained
herein shall be true and correct in all material respects as of the Closing Date
with the same effect as though made as of the Closing Date except that the
accuracy of representations and warranties that by their terms speak as of the
date of this Agreement or some other date will be determined as of such date.
(b) Buyer shall have performed in all material respects all
material obligations and complied in all material respects with all material
agreements and covenants required by this Agreement to be performed or complied
with by it prior to the Closing Date.
(c) Buyer shall have delivered to the Company a certificate,
dated the Closing Date and signed by its Chief Executive Officer, Chief
Financial Officer or a Senior Vice President, certifying to both such effects.
ARTICLE VI.
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1. TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual written consent of Buyer and the Company;
(b) by Buyer (provided that Buyer is not then in material
breach of any representation, warranty, covenant or other agreement contained
herein), upon a breach of any representation, warranty, covenant or agreement on
the part of the Company set
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forth in this Agreement, or if any representation or warranty of the Company
shall have become untrue, in either case continuing five (5) days following
notice to the Company of such breach or untruth or of a nature such that the
conditions set forth in Section 5.2(a) or Section 5.2(b), as the case may be,
would be incapable of being satisfied by the date of the closing of the IPO;
provided that, in any case, a willful breach shall be deemed to cause such
conditions to be incapable of being satisfied for purposes of this Section
6.1(b);
(c) by the Company (provided that the Company is not then in
material breach of any representation, warranty, covenant or other agreement
contained herein), upon a breach of any representation, warranty, covenant or
agreement on the part of Buyer set forth in this Agreement, or if any
representation or warranty of Buyer shall have become untrue, in either case
continuing five (5) days following notice to Buyer of such breach or untruth or
of a nature such that the conditions set forth in Section 5.3(a) or Section
5.3(b), as the case may be, would be incapable of being satisfied by the date of
the closing of the IPO; provided that, in any case a willful breach shall be
deemed to cause such conditions to be incapable of being satisfied for purposes
of this Section 6.1(c);
(d) by either Buyer or the Company (provided that the party
seeking to so terminate this Agreement is not then in material breach of Section
4.3) if any Governmental Entity shall have issued an order, decree or ruling or
taken any other action permanently enjoining, restraining or otherwise
prohibiting the consummation of the Acquisition and such order, decree or filing
or other action shall have become final and nonappealable; or
(e) by either Buyer or the Company, if the IPO shall not have
closed by August 27, 1999.
SECTION 6.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Buyer as provided in Section 6.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Buyer or the Company or their respective officers
or directors, except as set forth in Section 4.2 which shall survive termination
and except to the extent that such termination results from the breach by a
party of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
SECTION 6.3. AMENDMENT. This Agreement may be amended by the parties at
any time. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
SECTION 6.4. EXTENSION; WAIVER. At any time prior to the Closing Date,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) waive compliance with any
of the agreements or conditions contained in this
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Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing, signed on behalf
of such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of those
rights.
SECTION 6.6. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER.
A termination of this Agreement or other action attributed to the Board of
Directors pursuant to Section 6.1, an amendment of this Agreement pursuant to
Section 6.3 or an extension or waiver pursuant to Section 6.4 shall, in order to
be effective, require in the case of Buyer, or the Company, action by its Board
of Directors, acting by the affirmative vote of a majority of the members of the
entire Board of Directors.
ARTICLE VII.
GENERAL PROVISIONS
SECTION 7.1. SURVIVAL OF REPRESENTATIONS. All of the representations
and warranties of the parties contained in this Agreement shall survive the
Closing hereunder and continue in full force and effect forever thereafter
(subject to any applicable statutes of limitations).
SECTION 7.2. NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by facsimile transmission or overnight
courier (providing proof of delivery) to the parties at the following addresses
(or at such address for a party as shall be specified by like notice):
(a) if to the Company, to:
Tunes.com Inc.
640 N. LaSalle
Suite 560
Chicago, IL 60614
Attention: Howard A. Tullman
Facsimile No.: (312) 654-1099
with a copy to:
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, IL 60606
Attention: Michael E. Shabat
Facsimile No.: (312) 360- 6575
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(b) if to Buyer, to:
Clear Channel Communications, Inc.
200 Concord Plaza
Suite 600
San Antonio, Texas 78216
Attention: Randall Mays
Facsimile No.: (210) 822-2299
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street
Suite 1500
San Antonio, Texas 78205
Attention: Stephen C. Mount, Esq.
Facsimile No.: (210) 224-2035
SECTION 7.3. DEFINITIONS. For purposes of this Agreement:
"Governmental Entity" means any government or any agency,
bureau, board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state or
local, domestic or foreign.
"IPO" is defined in Section 3.4.
"Knowledge" or "Know" means, with respect to the matter in
question, if any of the executive officers of the Company or Buyer, listed on
SCHEDULE 8.3(g) hereof, as the case may be, has actual knowledge of such matter.
"Material Adverse Effect" means, any adverse change in the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise), or business prospects of the Company or
Buyer, as the case may be, or its respective Subsidiaries that is material to
the Company or Buyer, as the case may be, and its respective Subsidiaries taken
as a whole.
"Person" means any natural person, firm, individual, business
trust, trust, association, corporation, partnership, joint venture, company,
unincorporated entity or Governmental Entity.
"Registration Rights Agreement" means the Second Amended and
Restated Registration Rights Agreement, in the form attached as EXHIBIT A, to be
executed and delivered by the parties at the Closing.
"Registration Statement" is defined in Section 3.4.
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"Subsidiary" or "Subsidiaries" of any Person means another
Person, an amount of the voting securities, other voting ownership or voting
partnership interests of which is sufficient to elect at least a majority of its
board of directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly or
indirectly by such first Person.
"Taxes" means any and all federal, state, local, foreign or
other taxes of any kind (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any taxing authority, including, without limitation, taxes or other charges on
or with respect to income, franchises, windfall or other profits, gross
receipts, property, sales, use, transfer, capital stock, payroll, employment,
social security, workers' compensation, unemployment compensation, or net worth,
and taxes or other charges in the nature of excise, withholding, ad valorem or
value added.
"Tax Return" means any return, report or similar statement
(including the attached schedules) required to be filed with respect to any Tax,
including, without limitation, any information return, claim for refund, amended
return or declaration of estimated Tax.
"Warrant" means the Warrant to Purchase Shares of Common
Stock, in the form attached hereto as EXHIBIT B, to be issued by the Company to
Buyer at the Closing. The number of shares of Company Common Stock to be
purchased under the Warrant shall be equal to one and one-half times the number
of shares of Company Common Stock actually purchased by the Buyer under this
Agreement, and the exercise price shall be equal to the Per Share Purchase
Price.
SECTION 7.4. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 7.5. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This
Agreement constitutes the entire agreement, and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and is not intended to confer upon any person
other than the parties any rights or remedies hereunder.
SECTION 7.6. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
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SECTION 7.7. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard
to any applicable conflicts of law.
SECTION 7.8. ENFORCEMENT. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court and (c) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a federal or state court sitting in the
State of Delaware.
SECTION 7.9. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
SECTION 7.10. INTERPRETATION. Headings of the Articles and Sections of
this Agreement are for convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever. The disclosure of any matter in
any section of a Disclosure Letter hereto shall not be deemed to constitute an
admission by any party or to otherwise imply that any such matter is material or
may have a Material Adverse Effect for purposes of this Agreement.
SECTION 7.11. FINDERS OR BROKERS. Except as provided on SCHEDULE 7.11,
neither the Company nor Buyer nor any of their respective Subsidiaries has
employed any investment banker, broker, finder or intermediary in connection
with the transactions contemplated hereby who might be entitled to any fee or
any commission in connection with or upon consummation of the Acquisition.
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IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
CLEAR CHANNEL COMMUNICATIONS, INC.
By: /s/ Clear Channel Communications, Inc.
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
TUNES.COM INC.
By: /s/ Howard A. Tullman
---------------------------------------
Howard A. Tullman, Chief Executive
Officer
[Signature page to Stock Purchase Agreement]
<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. 4 of the Registration Statement (Form
S-1) and related Prospectus of Tunes.com Inc.
/s/ Ernst & Young LLP
Chicago, Illinois
August 11, 1999
