<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
TUNES.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7375 36-4159052
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
640 NORTH LASALLE STREET
SUITE 560
CHICAGO, ILLINOIS 60610
(312) 642-7560
(Address, including zip code, and telephone number, including area code, of
Registrant's
principal executive offices)
HOWARD A. TULLMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TUNES.COM INC.
640 NORTH LASALLE STREET
SUITE 560
CHICAGO, ILLINOIS 60610
(312) 642-7560
(Name, address, including zip code, and telephone number, including area code,
of
agent for service)
------------------
Copies to:
RICHARD R. DENNERLINE JAMES J. JUNEWICZ
MARK L. HEIMLICH MAYER, BROWN & PLATT
FREEBORN & PETERS 190 SOUTH LASALLE STREET
311 SOUTH WACKER DRIVE CHICAGO, IL 60603
CHICAGO, IL 60606 (312) 782-0600
(312) 360-6000 (312) 701-7711 (FAX)
(312) 360-6575 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock, par value $0.01 per share $46,000,000.00 $12,788
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 14, 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
SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
---------
We are selling shares of our common stock. The underwriters named in
this prospectus may purchase up to 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 $ and $ per share. We
have applied to have the common stock included for quotation on the Nasdaq
National Market under the symbol "TUNZ".
--------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Tunes.com (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
SALOMON SMITH BARNEY
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY
, 1999
<PAGE>
[INSIDE FRONT COVER]:
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.
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 1,000,000 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. MUSIC'S MOST TRUSTED BRANDS
ROLLING STONE'S online alter ego, with daily original content and archived
features, photos, interviews and reviews.
The online voice of THE SOURCE, the "Bible of Hip-Hop," with previews,
reviews, interviews, fashion, videos and games.
The online gig for DOWN BEAT'S jazz and blues music, with news and reviews,
and more than 65 years of archived interviews and photos.
Logos for sidebar on fold-out page:
CONTENT SYNDICATION AND DISTRIBUTION ALLIANCES
AOL
AltaVista
CDnow
Lycos
Microsoft
Netscape
Real Networks
Snap
Yahoo!
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
TUNES.COM HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
TUNES.COM IS NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE
OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY
THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF
THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary........................................................................................ 4
Risk Factors.............................................................................................. 9
Information Regarding Forward-Looking Statements.......................................................... 26
Use of Proceeds........................................................................................... 27
Dividend Policy........................................................................................... 27
Capitalization............................................................................................ 28
Dilution.................................................................................................. 29
Selected Consolidated Financial Data...................................................................... 30
Selected Pro Forma Consolidated Financial Data............................................................ 31
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 32
Business.................................................................................................. 42
Management................................................................................................ 57
Certain Transactions...................................................................................... 65
Principal Stockholders.................................................................................... 69
Description of Capital Stock.............................................................................. 71
Shares Eligible for Future Sale........................................................................... 75
Underwriting.............................................................................................. 77
Legal Matters............................................................................................. 79
Experts................................................................................................... 79
Where You Can Find More Information....................................................................... 79
Index to Financial Statements............................................................................. F-1
</TABLE>
--------------
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY INCLUDES SELECTED FINANCIAL AND OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS BEGINNING ON
PAGE F-1, BEFORE YOU DECIDE WHETHER TO INVEST IN OUR COMMON STOCK. WHEN WE REFER
TO TUNES.COM, WE, US OR OUR COMPANY, WE ARE REFERRING TO TUNES.COM INC. AND ITS
SUBSIDIARIES.
OUR COMPANY
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our hub Web site, TUNES.COM, is a "one-stop-shop" designed to appeal
to a broad spectrum of music fans by covering a wide range of genres, from urban
to rock to classical. The TUNES.COM Web site is supported by and integrated with
our network of genre 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 alliances 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 syndicate our content to a
growing number of affiliates, 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 an 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 recent months. Monthly page views
have increased from 10.7 million during October 1998 to 22.8 million during May
1999. Registered users have increased from 308,000 as of December 31, 1998 to
604,000 as of May 31, 1999.
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 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.
4
<PAGE>
Music is one of the world's leading forms of entertainment. It is also big
business. The Recording Industry Association of America (RIAA) 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 compression technologies.
The convergence of music and the Web has produced numerous music-related Web
sites. Most of these Web sites offer relatively limited content, features and
services or are restricted to a specific genre, artist or record label. As a
result, consumers often must navigate a bewildering array of Web sites without
any assurance of fulfilling their online music needs.
OUR STRATEGY
We intend to create the premier online music network, providing music fans
with extensive and exclusive music content, community features and e-commerce
services. We provide a compelling online music experience, featuring exclusive
content from three of the most trusted 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 user-friendly format with interactive community features
that provide users with an enjoyable music experience. We intend to continue to
expand our traffic and user base to provide advertisers with an attractive
channel designed to reach both broad and targeted demographic groups. Our
strategy is to:
- deliver compelling music content;
- provide user-friendly and feature-rich Web sites;
- grow our music community;
- build the Tunes.com brand and network;
- leverage the brand recognition of ROLLING STONE, THE SOURCE and DOWN BEAT;
- generate advertising and sponsorship revenue; and
- generate e-commerce revenue.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................ shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds............................. Expand sales, advertising and marketing
programs, develop strategic alliances, finance
capital expenditures and fund other general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... "TUNZ"
</TABLE>
--------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING THE
OUTSTANDING SHARE INFORMATION ABOVE:
- GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK INTO 5,719,962 SHARES OF COMMON STOCK WHICH WILL OCCUR UPON
COMPLETION OF THIS OFFERING;
- EXCLUDES 1,477,929 SHARES THAT MAY BE ISSUED UPON EXERCISE OF OUTSTANDING
OPTIONS AS OF MARCH 31, 1999 AT A WEIGHTED AVERAGE EXERCISE PRICE OF $4.95
PER SHARE AND 572,071 SHARES RESERVED FOR FUTURE AWARDS UNDER OUR STOCK
OPTION PLANS;
- EXCLUDES WARRANTS TO PURCHASE 1,216,340 SHARES AT A WEIGHTED AVERAGE
EXERCISE PRICE OF $4.13 PER SHARE;
- GIVES EFFECT TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
ARISING FROM OUR ACQUISITION OF TUNES NETWORK IN JULY 1998. WE HAVE AGREED
TO ISSUE UP TO 100,000 ADDITIONAL SHARES TO FORMER SHAREHOLDERS OF TUNES
NETWORK IF WE MEET CERTAIN 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 DETERMINED OUR EQUITY MARKET CAPITALIZATION BASED
ON AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
-------------------
Initially, we operated as an Illinois limited liability company named
Digital Entertainment Networks, LLC 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.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents our summary financial data. You should read
this financial information 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 January 1, 1998, for statement of operations data,
and as of March 31, 1999, for balance sheet data:
- the issuance of 2,031,826 shares of preferred stock in May 1999, including
shares issued upon conversion of $4.0 million of promissory notes issued
by us in March and April 1999;
- the conversion of all outstanding shares of preferred stock into 5,719,962
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 additional shares of common stock to occur shortly
following this offering; and
- the payment of a $1.5 million license fee to the publisher of ROLLING
STONE magazine that was triggered by our sale of preferred stock in May
1999.
The pro forma as adjusted balance sheet data reflects the sale of shares of
our common stock in this offering, assuming an initial public offering price of
$ per share and the application of the resulting net proceeds after
deducting estimated underwriting discounts and estimated offering expenses.
7
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
JULY 2, 1996 THREE
(INCEPTION) YEAR ENDED THREE MONTHS ENDED PRO FORMA MONTHS
TO DECEMBER 31, MARCH 31, YEAR ENDED ENDED MARCH
DECEMBER 31, -------------------- -------------------- DECEMBER 31, 31,
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 $ 145 $ 620 $ 983 $ 620
Other.......................... -- 281 1,515 309 357 1,742 357
------------- --------- --------- --------- --------- ------------ -----------
Total revenue................ -- 565 2,485 454 977 2,725 977
Cost of revenue.................. -- 1,268 4,045 991 984 4,488 1,038
------------- --------- --------- --------- --------- ------------ -----------
Gross deficit.................... -- (703) (1,560) (537) (7) (1,763) (61)
Operating expenses:
Operations and development..... 32 458 1,880 198 751 2,321 751
Sales and marketing............ 37 1,064 4,034 475 1,284 4,037 1,284
General and administrative..... 153 1,245 2,837 385 855 3,075 855
Depreciation and
amortization................. 2 157 1,778 63 832
Stock compensation............. -- 10 1,375 46 199 1,578 199
------------- --------- --------- --------- --------- ------------ -----------
Total operating expenses..... 224 2,934 11,904 1,167 3,921
------------- --------- --------- --------- --------- ------------ -----------
Loss from operations......... (224) (3,637) (13,464) (1,704) (3,928)
Other income..................... 7 115 428 67 33 351 33
------------- --------- --------- --------- --------- ------------ -----------
Net loss..................... (217) (3,522) (13,036) (1,637) (3,895)
Accretion of redeemable
convertible preferred stock.... -- (363) (1,570) (204) (536)
------------- --------- --------- --------- --------- ------------ -----------
Net loss attributable to
common stockholders........ $ (217) $ (3,885) $ (14,606) $ (1,841) $ (4,431) $ $
------------- --------- --------- --------- --------- ------------ -----------
------------- --------- --------- --------- --------- ------------ -----------
Basic and diluted net loss per
share(1)....................... $ (0.38) $ (3.38) $ (12.35) $ (1.60) $ (3.31) $ $
------------- --------- --------- --------- --------- ------------ -----------
------------- --------- --------- --------- --------- ------------ -----------
Weighted average shares
outstanding used in basic and
diluted per share
calculation(1)................. 563,620 1,150,530 1,182,371 1,150,530 1,340,530
------------- --------- --------- --------- --------- ------------ -----------
------------- --------- --------- --------- --------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 4,053 $ 17,851 $
Working capital........................................................... 4,078 17,876
Total assets.............................................................. 10,773
Long-term debt, less current portion...................................... 3,710 140
Redeemable convertible preferred stock.................................... 22,653 --
Total stockholders' equity (deficit)...................................... (17,620)
</TABLE>
- ------------------------------
(1) See note 3 of notes to our consolidated financial statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
8
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT DECISION. ANY
OF THE RISKS DESCRIBED BELOW COULD SERIOUSLY IMPAIR OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
THAT WE FACE. ADDITIONAL RISKS THAT ARE NOT YET KNOWN TO US OR THAT WE CURRENTLY
THINK ARE IMMATERIAL ALSO COULD SERIOUSLY IMPAIR OUR BUSINESS, OPERATING RESULTS
AND FINANCIAL CONDITION. THE TRADING PRICE OF OUR STOCK COULD DECLINE DUE TO ANY
OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
WE HAVE A LIMITED OPERATING HISTORY SO IT IS DIFFICULT TO EVALUATE OUR BUSINESS
AND PROSPECTS
We began our business in July 1996 and started operating our Web sites in
March 1997 -- JAMTV.COM, March 1998 -- ROLLINGSTONE.COM, July 1998 -- TUNES.COM,
December 1998 -- THESOURCE.COM and February 1999 -- DOWNBEATJAZZ.COM. As a
result, we have only a limited operating history on which you can evaluate our
business and prospects. You should consider our prospects in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
an early stage of development, particularly companies in new and rapidly
evolving Internet-based markets such as online advertising, e-commerce and
provision of online content. To address these risks and uncertainties, we must,
among other things:
- offer compelling music content;
- increase awareness of our brands;
- continue to develop and upgrade our Web sites and related technology,
operating systems and capacity;
- attract a larger audience to our Web sites, lengthen the time they spend
there and build our community of registered users;
- maintain current and develop new strategic relationships with, among
others, content providers, other Web sites, Web portals, record labels,
and advertisers and their agencies;
- increase our advertising revenue and revenue from other sources;
- implement and execute our business and marketing strategy successfully;
- respond to competitive developments; and
- attract, integrate, retain and motivate qualified personnel.
We may not be successful in accomplishing these objectives. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" for more detailed information on our limited operating history.
THE MARKET FOR ONLINE MUSIC CONTENT IS NEW AND UNPROVEN AND IF IT DOES NOT
DEVELOP WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT REVENUE
We seek to attract and retain visitors to our Web sites by offering a
variety of music content. The market for music content on the Internet is new
and rapidly evolving, so there is uncertainty whether demand for our services
will develop, be sustained and generate significant revenue. If the market for
online music content or products fails to develop or develops more slowly than
expected, or if our services do not achieve or sustain market acceptance, we may
not be able to generate significant revenue. We cannot assure you that we will
be able to attract and retain a significant number of visitors to our Web sites.
9
<PAGE>
WE DEPEND ON OUR EXCLUSIVE RELATIONSHIPS WITH THE PUBLISHERS OF ROLLING STONE,
THE SOURCE AND DOWN BEAT MAGAZINES FOR CONTENT AND THEIR BRAND NAME RECOGNITION
AND MAY NOT BE ABLE TO ATTRACT VISITORS TO OUR WEB SITES IF THESE RELATIONSHIPS
TERMINATE
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 partnerships 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 and makes its brand name accessible to our
competitors, we may generate less traffic which would reduce our revenues. In
addition, if Straight Arrow is not able to continue to obtain license rights for
online distribution of its magazine content from third-party contributors, we
would not be able to make this content available on our Web sites which could
reduce the number of visitors to our Web sites. Our agreement with Straight
Arrow will terminate in November 2005 unless we have a market capitalization of
at least $150 million at that time, in which case it will terminate in November
2010. Straight Arrow may terminate the agreement earlier if we fail to maintain
the technical reliability reasonably required to keep our ROLLINGSTONE.COM Web
site available on commercially reasonable terms (other than due to regularly
scheduled maintenance and network and other outages that are not due to our
actions or that are not our fault), including if the Web site is unavailable for
more than a total of 24 hours in any 60-day period or 12 consecutive hours.
Straight Arrow also may terminate the agreement earlier if we fail to comply
with our other obligations under the agreement, including our obligations to pay
annual license fees, royalty payments or other amounts due to Straight Arrow, or
if we are acquired by a competitor of ROLLING STONE or another company that is
unacceptable to Straight Arrow.
Under our agreement with Straight Arrow, we obtained the right to use the
"Rolling Stone," "RollingStone Online," and "RollingStone.com" trademarks and
their derivatives in connection with the Internet and the right to use the
ROLLINGSTONE.COM domain name. If our agreement with Straight Arrow terminates,
we will not be entitled to use these trademarks or the ROLLINGSTONE.COM domain.
In the first quarter of 1999, revenue generated from our ROLLINGSTONE.COM Web
site accounted for approximately 49% of our total revenue and ROLLINGSTONE.COM
generated approximately 68% 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 the agreement, including
our obligations to pay fees, royalty payments or other amounts due. See
"Business -- Strategic Relationships."
WE NEED TO CONTINUE TO DEVELOP COMPELLING CONTENT AND FEATURES TO ATTRACT
VISITORS TO OUR WEB SITES
Our future success depends on our ability to continue to offer compelling
music content and Web site features. If we do not deliver compelling music
content and features, we may be unable to attract and retain significant numbers
of visitors to our Web sites, which would reduce our advertising and e-commerce
revenue. Our ability to deliver compelling music content and features depends
upon the quality of our editorial and design staff and the editorial and design
staffs of our magazine partners,
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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 our
magazine affiliates, 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 for minimal or no
charge 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 agreemens to use content, but we believe our licenses
to use this content are implied by delivery of the content to us by its owners
for promotional use. 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. For example, we do not have written license
agreements for a significant portion of the music videos on our Web sites.
Universal Music Group notified us, as well as other music Web site operators, in
February 1999 that we are no longer authorized to use its music videos on our
Web sites and we have since removed those videos from our Web sites. In
addition, because some of our content providers directly and indirectly compete
with us, these content providers may seek competitive advantage by limiting or
denying our access to their content. For example, Sony Music Entertainment has a
significant interest in Launch Media and EMI Group recently announced making a
significant investment in and entering into an exclusive five-year licensing
arrangement with Musicmaker.com. In addition, BMG Entertainment and Universal
Music Group jointly operate a music-oriented Web site named GETMUSIC.COM and
also recently announced their intent to jointly develop an Internet music
delivery system named Electronic Media Distribution.
WE DO NOT HAVE LICENSES FOR A SUBSTANTIAL AMOUNT OF MUSIC AND ASSOCIATED ARTWORK
AVAILABLE ON OUR WEB SITES, WHICH MAY SUBJECT US TO INFRINGEMENT DAMAGES AND
SIGNIFICANT LICENSE FEES OR LOSS OF ACCESS TO THAT CONTENT
We place CD audio previews, associated album art and music videos on our Web
sites to attract users and to promote the sale of music. We do not have license
agreements to digitally perform, copy or display a substantial portion of that
content. We could, therefore, be required to remove this content from our Web
sites, pay substantial royalties, pay substantial infringement damages and
penalties to the content copyright owners, incur substantial legal fees and
other costs and indemnify our content affiliates 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 RIAA, 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.
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WE WILL BE REQUIRED TO PAY ADDITIONAL STATUTORY ROYALTIES FOR THE BROADCAST OF
MUSIC ON THE WEB WHICH MAY SIGNIFICANTLY INCREASE OUR OPERATING COSTS
We have entered into license agreements with major performing rights
organizations - American Society of Composers, Authors and Publishers (ASCAP)
and Broadcast Music, Inc. (BMI) - for the performance of musical compositions on
the Web and which obligate us to pay royalties. 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 statutory royalties 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 letter widely distributed to webcasters, the RIAA notified us in a June
1998 letter that it intends to form a clearing house for performance licenses
for sound recordings. In addition, the RIAA notified us in this letter of our
need to obtain licenses for digital performances of sound recordings on ROLLING
STONE RADIO. The statutory royalty rates for these compulsory licenses have been
the subject of protracted negotiations between the RIAA and the Digital Media
Association, an organization representing the interests of webcasters, beginning
in December 1998, and, to date, a schedule of statutory royalties has not been
determined. The amount of royalties that we may be required to pay for
compulsory licenses for digital performances of sound recordings may be
substantial and may materially damage our business. We plan to continue to
digitally perform a number of sound recordings on our Web sites without paying
royalties to the record labels until an industry-wide solution has been reached.
WE WILL CONTINUE TO LOSE MONEY UNLESS WE SIGNIFICANTLY INCREASE ADVERTISING
REVENUE FROM OUR WEB SITES
We expect that our revenues and operating results for the foreseeable future
will depend significantly on advertising revenues generated from selling
sponsorships or other advertising on our Web sites. Our advertising revenues
were $970,000 for all of 1998 and $620,000 in the first quarter of 1999. If we
do not significantly increase advertising revenues, our business will continue
to lose money. Increasing advertising revenues will depend on the Internet
becoming an effective advertising medium and many other factors, including:
- 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
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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. If the Internet
advertising market does not develop or develops more slowly than we expect, we
may not generate enough advertising revenue to ever become profitable.
Widespread use of Internet advertising depends upon businesses accepting a new
way of marketing their products. Businesses may find advertising on the Internet
to be undesirable or less effective for promoting their products and services
relative to traditional advertising media.
While commonly accepted standards have been established for measuring the
effectiveness of advertising through traditional media, no recognized standard
has been established to measure the effectiveness of Internet advertising. If a
standard does not develop or develops more slowly than expected, advertising on
the Internet may decrease or increase at a rate less than we currently project
and/or advertisers may not be willing to pay as much to advertise on the
Internet. In addition, the widespread adoption of technologies that permit
Internet users to block advertisements on Web sites could adversely affect the
growth of the Internet as an advertising medium.
THERE IS INTENSE INTERNET ADVERTISING COMPETITION WHICH MAY REDUCE ADVERTISING
RATES AND REVENUE
Reduced rates for Internet advertising could reduce our revenue. There is
intense competition for the sale of advertising on high-traffic Web sites. As a
result, vendors quote a wide range of rates for advertising services. It is
therefore difficult to project levels of Internet advertising that will be
realized generally or by any specific Web site. Competition for advertisers
among present and future Web sites, as well as competition with other
traditional media for advertisers, may result in significant price competition,
which may reduce the advertising rates we charge.
WE NEED TO INCREASE PUBLIC AWARENESS OF OUR BRANDS OR WE MAY NOT BE ABLE TO
ATTRACT A SIGNIFICANT NUMBER OF VISITORS TO OUR WEB SITES
Our ability to attract and retain visitors to our Web sites significantly
depends on our ability to develop a brand identity for Tunes.com and increase
public awareness of the ROLLING STONE, THE SOURCE and DOWN BEAT brands on the
Web. To date, a majority of our user traffic and revenue has been generated by
our ROLLINGSTONE.COM Web site. We need to significantly increase the awareness
of our other Web sites, including the TUNES.COM Web site, to significantly
increase traffic and revenue. The DOWNBEATJAZZ.COM and THESOURCE.COM Web sites
have been only recently launched, and the TUNES.COM Web site was only recently
relaunched as our hub Web site.
To increase brand awareness, traffic and revenue, we intend to substantially
increase advertising and promotional efforts and provide high quality products
and services. However, we cannot assure you that we will be able to achieve
these goals or that our marketing activities will result in increased or
sustainable revenue.
In accordance with our agreement with the owner of the JAM trademark, we
intend to redirect traffic from, and shut down, our JAMTV.COM Web site at the
end of 1999. During May 1999, the JAMTV.COM Web site generated 1.8 million page
views, or 8% of the 22.8 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
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there is no assurance that users of that site will migrate to the other sites in
our network. See "Certain Transactions -- Transactions with our Stockholders,
Executive Officers and Directors."
WE DEPEND UPON OTHER STRATEGIC ALLIANCES TO ATTRACT VISITORS TO OUR WEB SITES
AND THESE ALLIANCES MAY TERMINATE OR MAY NOT PRODUCE SIGNIFICANT ADDITIONAL
VISITORS
We rely upon strategic alliances to attract a significant portion of the
user traffic on our Web sites. We have entered into alliances with various
commercial online services and search engines such as America Online and Yahoo!
and third party Web sites. Our failure to maintain existing strategic
relationships, establish additional strategic relationships or fully capitalize
on such relationships could reduce the number of visitors to our Web sites. In
addition, the failure of our strategic partners 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, viewers,
content providers, CD sales and rights to music events with other music Web
sites and traditional off-line media, including television. Increased
competition could result in a decline in the number of visitors to our Web sites
and reduced advertising and e-commerce revenue. The online content and
entertainment market is new, rapidly evolving and highly competitive. We
anticipate that competition will continue to intensify in the future from both
online competitors and traditional off-line media. Increased competition may
also arise from television networks that offer interactive music content to
their viewers. Barriers to entry are relatively minimal. As a result, current
and new competitors can launch new Web sites at a relatively low cost. In
addition, many of our competitors offer, or could offer, content that is similar
to the content we offer, other than content that we license on an exclusive
basis from our magazine affiliates. 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 (UBL) 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. 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. 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 Internet
radio 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
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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."
A PORTION OF OUR REVENUE IS DERIVED FROM BARTER TRANSACTIONS THAT DO NOT
GENERATE CASH
We generate a portion of our revenue from barter transactions in which we
exchange advertising space on our Web sites for reciprocal advertising space on
other Web sites or other promotional services. Barter transactions do not
generate any cash revenue. Revenue from barter transactions represented
approximately 6% of our revenue in 1998 and 26% of our revenue in the first
quarter of 1999. We expect to continue to enter into barter transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND DEVELOPMENT OF TECHNOLOGIES TO EFFECTIVELY CONDUCT E-COMMERCE
Our business will depend on our users being able to conduct e-commerce with
us without significant delays or aggravation associated with inadequate Internet
capacity or bandwidth. This will depend upon the maintenance of a reliable
network with the necessary speed, data capacity and security, as well as timely
development of complementary products, such as high speed modems, for providing
reliable Internet access and services. Our failure 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 TECHNOLOGICAL CHANGE WHICH COULD RESULT IN
SIGNIFICANT ADDITIONAL COSTS
The Internet is characterized by rapid technological developments. We must
continue to enhance and improve the responsiveness, functionality and features
of our Web sites and develop new features to attract and retain users. Our
success depends upon our ability to respond to technological advances and
emerging industry standards and practices on a timely basis, which could result
in significant additional costs. 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
also may inhibit commercial activity and advertising on the Internet. These
security concerns could reduce e-commerce and the effectiveness of advertising
on the Internet and ultimately reduce our revenue. In particular, a number of
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that new
technologies will satisfactorily address these security concerns. See "--
Internet laws and regulations may change which could adversely affect our
business" and "-- We may be subject to liability for misuse of users' private
information."
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FINANCIAL RISKS
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND ANTICIPATE SIGNIFICANT CONTINUING
LOSSES
To date we have not been profitable. We have incurred losses and negative
operating cash flows since we began operations and incurred a net loss of $13.0
million in 1998 and $3.9 million for the three months ended March 31, 1999. As
of March 31, 1999, we had an accumulated deficit of $23.1 million. We expect to
incur significant losses and negative operating cash flows for the foreseeable
future. We plan to continue to significantly increase our operating expenses to
increase our customer base, enhance our brand image, obtain additional content
and support our growing infrastructure. If we are unable to generate sufficient
traffic, we may never generate significant revenue and we may never earn a
profit. Even if we do achieve profitability in the future, we cannot assure you
that we will be able to sustain or increase profitability in subsequent periods.
See "-- We will continue to lose money unless we significantly increase
advertising revenue from our Web sites" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE WHICH MAY RESULT IN VOLATILITY IN
OUR STOCK PRICE AND MAY MAKE IT DIFFICULT TO FORECAST OUR FUTURE PERFORMANCE
Our revenue and expenses may significantly fluctuate from quarter to
quarter, which could result in our failure to meet expectations of securities
analysts and investors and cause the trading price of our common stock to
decline. Fluctuations in quarterly results also make it difficult to predict
future performance. Our future revenue, expenses and operating results are
likely to change significantly from quarter-to-quarter due to a number of
factors, many of which are outside of our control. These factors include:
- our ability to attract and retain visitors to our Web sites;
- demand for advertising on our Web sites and on the Internet in general;
- seasonal declines in advertising sales, which typically occur in the first
calendar quarter;
- timing and mix of online advertisements sold;
- the short-term nature of advertising contracts;
- impact of agreements with third parties regarding revenue sharing;
- new Web sites, services or products introduced by us or by our
competitors;
- amount and timing of certain fixed or contingent expenses, license fees,
royalties and other payments;
- technical difficulties or system downtime affecting the Internet generally
or the operation of our Web sites;
- amount and timing of capital expenditures and other costs relating to the
expansion of our operations;
- timing and cost of business acquisitions and strategic alliances;
- changes in strategic relationships;
- legal developments, including new legislation or regulations and the
outcome of legal claims or litigation relating to our music content or
other matters, including infringement; and
- general economic conditions, as well as economic conditions specific to
digital media and the music industry.
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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 ONE CUSTOMER FOR 33% OF OUR TOTAL REVENUE DURING 1998 AND
23% OF OUR REVENUE DURING THE FIRST QUARTER OF 1999
During 1998, CDnow accounted for $826,000, or 33%, of our total revenue.
During the first quarter of 1999, CDnow accounted for $221,000, or 23%, of our
total revenue. During the remainder of 1999, we expect these amounts to
significantly decline, which could have a material adverse effect on our revenue
if not offset by increased revenue from other sources. See "Business --
Strategic Relationships."
BECAUSE SPENDING ON MUSIC IS DEPENDENT ON DISCRETIONARY CONSUMER SPENDING, WE
ARE SUSCEPTIBLE TO FLUCTUATIONS IN GENERAL ECONOMIC CONDITIONS
Revenue from music sales and paraphernalia and related advertising
historically has been dependent on discretionary consumer spending. Our revenue
will therefore be subject to fluctuations based upon the general economic
conditions of the United States and foreign countries in which we or our
advertisers do business. If there is a general economic downturn or recession in
the United States or in such foreign countries, general consumer spending in
these markets likely would decline. Our advertising revenue and other online
commercial activity may decrease as a result.
WE MAY BE UNABLE TO MEET FUTURE CAPITAL REQUIREMENTS OR MAY ISSUE ADDITIONAL
COMMON STOCK OR SECURITIES WITH RIGHTS THAT ARE SENIOR TO OUR COMMON STOCK
We anticipate that the net proceeds of this offering, together with current
available funds, will be sufficient to satisfy our anticipated needs for working
capital, capital expenditures and business expansion for at least the next 12
months. We may need additional cash at that time or even prior to that time if
we change our operating plan, our actual operations do not meet our operating
plan or if we make acquisitions. Alternatively, we may need to raise additional
funds sooner in order to fund more rapid expansion, develop new or enhanced
services or respond to competitive pressures. If we raise additional funds or
finance acquisitions by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced. Furthermore, any new
securities could have rights, preferences and privileges senior to those of the
common stock.
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."
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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 May 31, 1999, we grew from five to approximately 87
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 may seek to grow in part through acquisitions. We likely will need to
integrate our internal systems, policies and procedures with those of any
company we may acquire. These systems may include accounting methods and
employment and human resource programs. There can be no assurances that our
systems, policies or procedures will be implemented successfully into any
company we acquire. There also may be delays, complications and expenses
relating to such implementation and integration. Any acquisition we may make
generally will be accompanied by risks, including:
- the assimilation of the operations and personnel of the acquired
companies;
- the potential disruption of our ongoing business;
- the inability of our management to successfully incorporate acquired
technology and rights into our services and products;
- additional expense associated with amortization of acquired intangible
assets;
- the difficulty of maintaining uniform standards, controls, procedures and
policies; and
- the potential impairment of relationships with employees, customers and
strategic partners.
WE MAY HAVE CAPACITY CONSTRAINTS AND 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. System interruptions that result in the
unavailability or slower response times of our Web sites would reduce the number
of advertisements delivered, the quality of our users' experience and the
attractiveness of our Web sites to users and advertisers.
In addition, a significant increase in the number of users of our Web sites
could require us to expand and adapt our network infrastructure. If we are
unable to expand and adapt our infrastructure quickly enough to accommodate that
increase, slower response times or system failures could result. Slower response
times or increase in system interruptions resulting from these factors could
have a material adverse effect on our revenue and financial condition. In
addition, if we overestimate any changes in volume, we may incur additional
expenses which do not generate additional revenue.
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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. Exodus provides us with
physical security for our servers, fire suppression and earthquake bracing
systems and redundant power, Internet connections and systems. However, our
network systems remain vulnerable to fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events which could damage and
interrupt our services. Exodus is generally not liable to us for any damage or
loss they may cause to our business.
Since launching our first Web site in March 1997, we have experienced
periodic system interruptions and believe that such 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. Any interruptions or other
problems with our services that we encounter would adversely affect our revenue
and, if they were prolonged, would seriously harm our business and reputation.
In addition, interruptions or problems with 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."
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 affiliates 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 webcasts, which could adversely affect our
performance and business. We rely on third party services to provide us with
access to the Internet. In addition, we depend upon Web browsers and Internet
service providers and online service providers to provide Internet users with
access to our Web sites. See "Business -- Infrastructure, Operations and
Technology."
OUR INFRASTRUCTURE IS VULNERABLE TO UNAUTHORIZED ACCESS WHICH MAY RESULT IN
MISAPPROPRIATION OF PROPRIETARY INFORMATION AND CAUSE DISRUPTIONS IN OUR
SERVICES
Our infrastructure is vulnerable to unauthorized access, physical or
electronic computer break-ins, computer viruses and other disruptive problems.
Internet service providers have experienced, and may continue to experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees and others. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. Security breaches relating to our
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage our reputation and our
relationships with our strategic partners and advertisers. We also could be
liable to our strategic affiliates, advertisers and other parties for the
damages caused by such breaches. 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 do not maintain "key man" life insurance for any of
our executives or employees. We entered into a three-
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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 or
retaining and motivating our current personnel, our business could be adversely
affected. Competition for such personnel, especially creative and technical
talent, is intense. We have in the past experienced, and we expect to continue
to experience, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications.
YEAR 2000 PROBLEMS FOR US, OUR SUPPLIERS OR OUR CUSTOMERS COULD INCREASE OUR
LIABILITIES OR EXPENSES AND IMPACT OUR PROFITABILITY
The Year 2000 problem could harm our business and financial results. We may
discover Year 2000 problems in our systems that may require us to upgrade
systems at a substantial cost. In addition, software and hardware from third
parties that have been integrated into our systems may need to be updated or
replaced, which may be time-consuming and expensive. In addition, we rely on
third parties such as Exodus to support and operate our systems. Failures or
interruptions of our systems or those of third-parties because of Year 2000
problems could seriously damage our business and our relationships with our
content providers, strategic affiliates, advertisers and users. For example, if
our ROLLINGSTONE.COM Web site is unavailable for more than 12 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 affiliates, including the publishers
of ROLLING STONE, and our other content licensors to protect rights in their
content, 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.
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We have applied for federal trademark registration of "TUNES.COM," "MYTUNES"
and the Tunes.com logo as trademarks in connection with online entertainment
services. We cannot be assured that registrations will be granted for those
trademarks. Unless our trademarks become registered, we must rely upon common
law protection of our brand names. We are aware of a number of uses by third
parties of the word "tunes" in connection with music and Internet services.
Because of prior use of the word "tunes" and the possible descriptive nature of
that word of music-related services, we may have limited ability to prevent
others from using "tunes," "tunes.com" or similar derivatives to identify goods
or services related to music or otherwise. Use of our brand name or derivatives
by others could dilute our brand identity and divert users from our products and
services.
Effective copyright and trademark protection may be unenforceable or limited
in foreign countries. Given the global nature of the Internet, we cannot control
the ultimate destination of our services. In addition, other than pending
applications for registration of the "Tunes.com" brand and the Tunes.com logo in
Canada, we have not applied for registration of our trademarks, copyrights or
other proprietary rights in foreign countries and we may not be able to use our
proprietary brands in those foreign countries. As a result, any competitive
advantage we may establish domestically through our goodwill and brand image
would be eroded and could diminish our ability to compete in foreign markets.
Some of our proprietary software and technology was developed by third-party
consultants. In some cases, we have not obtained assignments of ownership rights
for consultant-developed software and technology. As a result, there may be
consultants who have or may claim ownership interests in our proprietary
technology. This could result in our being forced to stop using certain
technology or pay royalties 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 from our magazine affiliates: ROLLINGSTONE.COM, THESOURCE.COM and
DOWNBEATJAZZ.COM. Domain names generally have been regulated by the Commerce
Department through contract with Network Solutions, Inc., a company that has
exclusively administered the so-called top-level domain names ending in ".com,"
".net" and ".org.". We expect that the regulation of domain names in the United
States and in foreign countries will continue to evolve and change. For example,
the Commerce Department recently appointed the nonprofit Internet Corporation
for Assigned Names and Numbers (ICANN) 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. ICANN recently has appointed five new domain name registrars who will
sell and administer domain names and the effect this will have on the regulation
of domain names is uncertain. Internet regulatory bodies also could establish
additional top-level domains or modify the rights of current holders of domain
names. As a result, the value of the ".com" domain could be diluted and decrease
the number of visitors to our Web sites, and we may not acquire or maintain the
"TUNES.COM" domain name in all of the countries in which we intend to conduct
business. In addition, we may not be able to continue licensing
ROLLINGSTONE.COM, THESOURCE.COM and DOWNBEATJAZZ.COM in the future or these
names may not be available for our use in other countries into which we may
expand. See "Business -- Strategic Relationships" and "-- Intellectual
Property."
INTERNET LAWS AND REGULATIONS MAY CHANGE WHICH COULD ADVERSELY AFFECT OUR
BUSINESS
We are subject to various laws and regulations relating to our business,
although there are few laws or regulations that apply directly to Internet-based
services. Due to the increasing popularity and use of the Internet, laws and
regulations may be adopted with respect to the Internet that could decrease the
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<PAGE>
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 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, however, 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.
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 certain state and local authorities have been investigating
certain 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 certain 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. Certain 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
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<PAGE>
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.
WE MAY BE SUED FOR CONTENT OR INFORMATION AVAILABLE OR POSTED ON OUR WEB SITES
OR PRODUCTS SOLD THROUGH OUR WEB SITES
Because material may be downloaded from our Web sites and from Web sites
where our syndicated content appears and may be distributed to others, we might
be sued for defamation, negligence, copyright or trademark infringement or other
claims. Those types of claims have been brought, sometimes successfully, against
Web site operators in the past. We also may be liable for content or information
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 strategic and content partners for claims
made against them.
In addition, we could be exposed to liability with respect to the material
that may be accessed through our Web sites or other Web sites linked to our Web
sites. For example, claims could be made against us if content we distribute is
deemed obscene or defamatory or if obscene, pornographic or other material
deemed inappropriate could be accessed though our Web sites. We may need to
implement measures to reduce exposure to such liability. Such measures may
require significant resources. We may also be sued for product liability claims
relating to products sold through our Web sites or Web sites where our
syndicated content appears. Although we carry general liability insurance, our
insurance may not cover claims of this type or may not be adequate to cover all
costs incurred in defense of such claims or in 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. Limitations and restrictions on our ability to
offer contests and sweepstakes could reduce our audience and, in turn, our
revenues. We seek to design our contest and sweepstakes rules to fall within
exemptions from such laws. Generally, we restrict participation to individuals
over 18 years of age who reside within the United States and in states where we
believe contests and sweepstakes are lawful. We cannot be certain, however, that
our contests and sweepstakes will continue to be exempt from such laws.
WE MAY BE LIABLE FOR SALES AND OTHER TAXES
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
and Illinois. 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 revenues 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 % 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 % 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 March 31, 1999,
we had granted options to purchase 1,477,929 shares of our common stock. See
"Management -- Stock Option 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 certain 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 Option 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;
- 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;
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- additions or departures of key personnel;
- future sales of our common stock; and
- general stock market price and volume fluctuations.
The market price 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 $ per share,
we will have outstanding shares of common stock. All the shares sold in
this offering will be freely tradable. Of the remaining shares of
common stock outstanding after this offering, shares will be eligible
for sale in the public market beginning 181 days after the date of this
prospectus. The remaining 2,031,826 shares will become eligible for resale at
various times thereafter. 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 2,050,000 shares reserved for issuance under
our stock option plans shortly after this offering. As of March 31, 1999,
options to purchase 1,477,929 shares were outstanding, 1,392,199 of which will
be exercisable upon completion of this offering.
ANTI-TAKEOVER PROVISIONS OF OUR CHARTER, BYLAWS AND DELAWARE LAW COULD MAKE A
THIRD-PARTY ACQUISITION OF US MORE DIFFICULT
Our certificate of incorporation and bylaws and Delaware corporate law
contain provisions that could delay, defer or prevent a change in control of our
company or a change in our management. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. As a result, these provisions
could limit the price that investors are willing to pay in the future for shares
of our common stock. These provisions:
- authorize our board of directors to issue preferred stock, without prior
stockholder approval, with voting or other rights senior to those of our
common stock;
- provide for a staggered board of directors, so it will take two successive
annual meetings to replace a majority of our directors;
- 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.
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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 revenues 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 $ per share in the net tangible book value of
the common stock based on an assumed initial public offering price of $ 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 $____ 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 alliances, anticipated growth, future prospects of
advertising and commercial activity on the Internet and our use and rate of use
of proceeds from this offering. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from our
future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. These factors include, among other
things, those items discussed under "Risk Factors" and elsewhere in this
prospectus.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" or "continue" or
other forms of or the negative of those terms or other comparable terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
do not have a duty to update any of the forward-looking statements after the
date of this prospectus.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of shares of our common
stock will be approximately $ million, assuming an initial public offering
price of $ per share and after deducting estimated underwriting discounts and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, we estimate that the net proceeds will be approximately $
million.
We have no current specific plans for the net proceeds of this offering. We
currently intend to use the net proceeds to expand our sales and advertising
campaigns, brand-name promotions and other marketing efforts, to develop
strategic alliances, to finance capital expenditures and to fund other general
corporate purposes. We may also use a portion of the net proceeds to acquire or
invest in businesses, technologies, content, products or services, although no
specific acquisitions are currently planned and no portion of the net proceeds
has been allocated for any such acquisition or for the other listed purposes.
The amount of funds that we actually use for these purposes may vary
significantly based upon many factors, especially changes to our business plans
and material variances in projected revenue and expenses. Accordingly, our
management will have broad discretion in the application of the net proceeds.
Pending such uses, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities. See "Risk Factors --
Our management has broad discretion over use of proceeds and may fail to use
them effectively to grow our business."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect:
(1) the issuance of 2,031,826 shares of preferred stock in May 1999,
including shares issued upon conversion of $4.0 million of
convertible promissory notes issued by us in March and April 1999;
(2) the conversion of all outstanding shares of preferred stock into
5,719,962 shares of common stock which will occur upon completion of
this offering;
(3) the acquisition of Tunes Network in July 1998 and the related
issuance of an assumed additional shares of common stock to
occur shortly following this offering; and
(4) the payment of a $1.5 million license fee to the publisher of ROLLING
STONE magazine that was triggered by our sale of preferred stock in
May 1999; and
- on a pro forma basis as adjusted to reflect the receipt by us of the
estimated net proceeds from the sale of the shares of common stock in
this offering, assuming an initial public offering price of $ 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:
- 1,477,929 shares of common stock that may be issued upon the exercise of
outstanding options as of March 31, 1999 at a weighted average exercise
price of $4.95 per share and 572,071 shares reserved for future awards
under our stock option plans; and
- warrants to purchase 1,216,340 shares at a weighted average exercise price
of $4.13 per share.
See "Management -- Stock Option Plans" and "Description of Capital Stock --
Warrants" and notes 6 and 7 of notes to our consolidated financial statements.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents.................................................... $ 4,053 $ 17,851 $
--------- ----------- -----------
--------- ----------- -----------
Current maturities of long-term debt......................................... $ 94 $ 94 $
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current portion......................................... $ 3,710 $ 140 $
Redeemable convertible preferred stock, Series A through E, $0.01 par value,
7,000,000 shares authorized; actual -- 3,688,136 shares issued and
outstanding; pro forma and pro forma as adjusted -- no shares issued and
outstanding................................................................ 22,653 --
Stockholders' equity:
Common stock, $0.01 par value, 11,500,000 shares authorized; actual --
1,340,530 shares issued and outstanding; pro forma -- shares
issued and outstanding; and pro forma as adjusted -- shares
issued and outstanding................................................... 13
Additional paid-in capital................................................. 4,451
Common stock to be issued.................................................. 1,055 1,055
Accumulated deficit........................................................ (23,139) (23,199)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (17,620)
--------- ----------- -----------
Total capitalization....................................................... $ 8,743 $ $
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
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DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$20.4 million, or $ per share. Our pro forma net tangible book value (pro
forma total tangible assets less total liabilities) divided by our pro forma
number of outstanding shares of common stock equals "pro forma net tangible book
value per share" after giving effect to:
- the issuance of 2,031,826 shares of preferred stock in May 1999, including
shares issued upon conversion of $4.0 million of convertible promissory
notes issued by us in March and April 1999;
- the conversion of all outstanding shares of preferred stock into 5,719,962
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 additional shares of common stock to occur shortly
following this offering; and
- the payment of a $1.5 million license fee to the publisher of ROLLING
STONE magazine that was triggered by our sale of preferred stock in May
1999.
Assuming the sale of shares of our common stock in this offering at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and estimated offering expenses, our pro forma
adjusted net tangible book value as of March 31, 1999 would have been
approximately $ , or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing stockholders and
an immediate dilution of $ per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution to you:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share......................... $
Pro forma net tangible book value per share as of March 31, 1999...... $
Increase in pro forma net tangible book value per share attributable
to new investors.................................................... __________
Pro forma net tangible book value per share, as adjusted for this
offering..............................................................
------------------
Dilution per share to new investors..................................... $
------------------
------------------
</TABLE>
The following table summarizes as of March 31, 1999, on the pro forma as
adjusted basis described above, the number of shares of common stock purchased
from us, the total consideration paid to us for such shares, and the average
price per share paid by existing stockholders and by investors purchasing shares
of common stock in this offering, before deducting estimated underwriting
discounts and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................% $ 44,489,620% $
New investors................................
---------- --------- ------------- ---------
Total.................................... 100.0% $ 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants. As of March 31, 1999, there were outstanding options
to purchase a total of 1,477,929 shares of common stock with a weighted average
exercise price of $4.95 per share, and, currently, there are outstanding
warrants to purchase 1,216,340 shares of common stock with a weighted average
exercise price of $4.13 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 Option Plans," "Description of Capital
Stock -- Warrants" and notes 6 and 7 of notes to our consolidated financial
statements.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from July 2, 1996, our inception, to December 31, 1996 and the years
ended December 31, 1997 and 1998 and the balance sheet data as of December 31,
1997 and 1998, are derived from our audited financial statements, which are
included elsewhere in this prospectus. The balance sheet data as of December 31,
1996 are derived from our audited financial statements which are not included in
this prospectus. The statement of operations data for the three-month periods
ended March 31, 1998 and 1999 and the balance sheet data as of March 31, 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) THREE MONTHS ENDED MARCH
TO YEAR ENDED DECEMBER 31, 31,
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 $ 145 $ 620
Other.......................................... -- 281 1,515 309 357
------------- ----------- ----------- ----------- -----------
Total revenue................................ -- 565 2,485 454 977
Cost of revenue.................................. -- 1,268 4,045 991 984
------------- ----------- ----------- ----------- -----------
Gross deficit.................................... -- (703) (1,560) (537) (7)
Operating expenses:
Operations and development..................... 32 458 1,880 198 751
Sales and marketing............................ 37 1,064 4,034 475 1,284
General and administrative..................... 153 1,245 2,837 385 855
Depreciation and amortization.................. 2 157 1,778 63 832
Stock compensation............................. -- 10 1,375 46 199
------------- ----------- ----------- ----------- -----------
Total operating expenses..................... 224 2,934 11,904 1,167 3,921
------------- ----------- ----------- ----------- -----------
Loss from operations......................... (224) (3,637) (13,464) (1,704) (3,928)
Other income..................................... 7 115 428 67 33
------------- ----------- ----------- ----------- -----------
Net loss..................................... $ (217) $ (3,522) $ (13,036) $ (1,637) $ (3,895)
Accretion of redeemable convertible preferred
stock........................................... -- (363) (1,570) (204) (536)
------------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders............................... $ 217 $ (3,885) $ (14,606) $ (1,841) $ (4,431)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share(1).......... $ (0.38) $ (3.38) $ (12.35) $ (1.60) $ (3.31)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Weighted average shares outstanding used in basic
and diluted per share calculation(1)............ 563,620 1,150,530 1,182,371 1,150,530 1,340,530
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- MARCH 31,
1996 1997 1998 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 561 $ 2,674 $ 4,251 $ 4,053
Working capital.................................................. 478 3,379 3,240 4,078
Total assets..................................................... 634 5,602 11,413 10,773
Long-term debt, less current portion............................. -- -- 161 3,710
Redeemable convertible preferred stock........................... -- -- 22,116 22,653
Total stockholders' equity (deficit)............................. 533 (3,342) (13,618) (17,620)
</TABLE>
- --------------------------
(1) See note 3 of notes to our consolidated financial statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
30
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected pro forma consolidated statement of operations data set forth
below is presented for informational purposes only and may not be indicative of
the operating results that would have been achieved had the transactions
described below been in effect as of the beginning of the periods presented and
should not be considered as being representative of future operating results.
The selected pro forma consolidated financial data is derived from the unaudited
pro forma combined financial information included elsewhere in this prospectus
and gives effect to the following as of January 1, 1998, for statement of
operations data, and as of March 31, 1999, for balance sheet data:
- the issuance of 2,031,826 shares of preferred stock in May 1999, including
shares issued upon conversion of $4.0 million of convertible promissory
notes issued by us in March and April 1999;
- the conversion of all outstanding shares of preferred stock into 5,719,962
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 additional shares of common stock to occur shortly
following this offering; and
- the payment of a $1.5 million license fee to the publisher of ROLLING
STONE magazine that was triggered by our sale of preferred stock in May
1999.
The pro forma as adjusted balance sheet data as of March 31, 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 $ per share and after deducting estimated underwriting discounts and
estimated offering expenses.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 1998 31, 1999
----------------- --------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Advertising................................................................. $ 983 $ 620
Other....................................................................... 1,742 357
-------- --------------
Total revenue............................................................. 2,725 977
Cost of revenue............................................................... 4,488 1,038
-------- --------------
Gross deficit................................................................. (1,763) (61)
Operating expenses:
Operations and development.................................................. 2,321 751
Sales and marketing......................................................... 4,037 1,284
General and administrative.................................................. 3,075 855
Depreciation and amortization...............................................
Stock compensation.......................................................... 1,578 199
-------- --------------
Total operating expenses..................................................
-------- --------------
Loss from operations......................................................
Other income.................................................................. 351 33
-------- --------------
Net loss.................................................................. $ $
-------- --------------
-------- --------------
Pro forma basic and diluted net loss per share(1)............................. $ $
-------- --------------
-------- --------------
Weighted average shares outstanding used in pro forma basic and diluted per
share calculation(1).........................................................
-------- --------------
-------- --------------
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
MARCH 31, 1999 MARCH 31, 1999
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 17,851 $
Working capital............................................................. 17,876
Total assets................................................................
Long-term debt, less current portion........................................ 140
Redeemable convertible preferred stock...................................... --
Total stockholders' equity (deficit)........................................
</TABLE>
- ------------------------------
(1) See note 3 of notes to our financial statements for an explanation of the
method used to determine the number of shares used to compute per share
amounts.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto of Tunes.com and the other financial
information included elsewhere in this prospectus. In addition to historical
information, the following discussion and other parts of this prospectus contain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by this forward-looking
information due to the factors discussed in "Risk Factors," "Business" and
elsewhere in this prospectus.
OVERVIEW
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our hub Web site, TUNES.COM, is a "one-stop-shop" designed to appeal
to a broad spectrum of music fans by covering a wide range of genres, from urban
to rock to classical. The TUNES.COM Web site is supported by and integrated with
our network of genre 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 alliances 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, sponsorship promotions, 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 of affiliates under content syndication
agreements. Advertising revenue also includes barter revenue, which represents
an exchange of advertising space on our network of sites for reciprocal
advertising space on third parties' Web sites. 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 26% of total revenue during the quarter ended
March 31, 1999. During the second half of 1999, we expect barter revenue to
decline as a percentage of total revenue compared to the level of barter revenue
recognized during the quarter ended March 31, 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 basis (CPM), a cost per click-through
basis (CPC) or a cost per action basis (CPA). 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.
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
32
<PAGE>
sites, is recognized over the period of the license agreement with the third
party. We expect revenue from content licensing to increase in absolute dollars
but 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 alliances 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 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, promotion
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,
promotion 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.
Since our inception, we have incurred significant losses and negative cash
flows. As of March 31, 1999, Tunes.com had an accumulated deficit of $23.1
million, including the accretion of redeemable convertible preferred stock of
$2.5 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
to invest heavily in marketing and brand promotion, technological resources,
sales, content development and strategic relationships. We anticipate that we
will incur significant losses
33
<PAGE>
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
indications 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 23% for
the three months ended March 31, 1999. We expect that revenue from CDnow will
decline and will account for a smaller percentage of our total revenue in the
future.
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUE
For the three months ended March 31, 1998 and 1999, total revenue increased
$523,000 from $454,000 to $977,000.
ADVERTISING REVENUE. For the three months ended March 31, 1998 and 1999,
advertising revenue increased by $475,000, from $145,000 to $620,000, and
accounted for approximately 32% and 64% of total revenue, respectively. For the
three months ended March 31, 1998 and 1999, we generated advertising revenue
from barter transactions of $38,000 and $256,000, 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
to new and existing advertisers. For the three months ended March 31, 1998 and
1999, total ad impressions were 9.6 million and 67.7 million, respectively. On
March 1, 1999 we launched the redesigned TUNES.COM hub site. As a result, we
generated an increased level of bartered advertising primarily to promote the
TUNES.COM hub site. In addition, we expanded our sales force in the fourth
quarter of 1998 from one to five employees. We plan to continue increasing the
number of salespeople throughout 1999, and as of May 31, 1999, we employed eight
salespeople. During the three months ended March 31, 1999, no one advertiser
accounted for more than 11% of total advertising revenue.
OTHER REVENUE. For the three months ended March 31, 1998 and 1999, other
revenue increased by $48,000, from $309,000 to $357,000, and accounted for
approximately 68% and 36% of total revenue, respectively. The increase in other
revenue was the result of $125,000 in content licensing revenue and $87,000 in
e-commerce revenue in 1999. Prior to our April 1998 agreement with CDnow, we did
not generate any content licensing revenue. Prior to our July 1998 acquisition
of Tunes Network, we generated nominal e-commerce revenue. These increases were
partially offset by a $163,000 decrease in product development revenue due to
our recent emphasis on generating increased advertising and e-commerce revenue.
Although we expect to continue generating product development revenue and
content license revenue in future periods, we expect to experience a continued
decrease in product development revenue and content license revenue as a
percentage of total revenue due to our emphasis on generating increased
advertising and e-commerce revenue.
34
<PAGE>
COST OF REVENUE
For the three months ended March 31, 1998 and 1999, cost of revenue
decreased by $7,000, from $991,000 to $984,000. The decrease in cost of revenue
is primarily the result of decreased product development costs and outside
production costs associated with the production of fewer interactive CD
products. This decrease was 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, and increased editorial and operations
staff necessary for the production of music-related information and programming
on our Web sites.
OPERATING EXPENSES
OPERATIONS AND DEVELOPMENT EXPENSE. For the three months ended March 31,
1998 and 1999, operations and development expense increased by $553,000, from
$198,000 to $751,000. The increase was primarily due to wages and costs arising
from our employment of an additional 16 technology employees, for the
development of additional Web sites in late 1998 and the first quarter of 1999.
SALES AND MARKETING EXPENSE. For the three months ended March 31, 1998 and
1999, sales and marketing expense increased by $809,000, from $475,000 to $1.3
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 March 31, 1999, we
increased our sales and marketing departments from two to 13 employees.
GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended March 31,
1998 and 1999, general and administrative expense increased by $470,000, from
$385,000 to $855,000. The increase was primarily attributable to salary and
related expenses for additional personnel and increased professional fees. From
March 31, 1998 to March 31, 1999, we expanded our combined finance and
accounting, legal, human resources and administrative departments, from four to
10 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 three months ended March 31, 1998 and
1999, depreciation and amortization expense increased by $769,000, from $63,000
to $832,000. Depreciation expense increased due to purchases of property and
equipment, and amortization increased due to the amortization of goodwill and
certain 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. We expect the amount to 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 affiliates, 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. For the three months ended March 31, 1998 and 1999, warrant
compensation expense increased by $144,000, from $46,000 to $190,000. Also
included in stock compensation expense for the three months ended March 31, 1999
was $9,000 related to stock options held by non-employees. 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 Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
We expect stock compensation expense to increase significantly in the second
quarter of 1999 as a result of our sale of preferred stock in May 1999, which
triggered the vesting of certain outstanding warrants issued to Straight Arrow
and Source Enterprises. We estimate
35
<PAGE>
that this expense will be approximately $3.6 million. We also expect stock
compensation expense to increase in the period of the closing of this offering
as a result of the accelerated vesting of stock options held by non-employees
upon the closing of this offering. See "Management -- Stock Option Plans."
OTHER INCOME
Other 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 three months ended March 31, 1998 and 1999, other
income decreased by $34,000 from $67,000 to $33,000, due to lower balances in
cash and cash equivalents.
INCOME TAXES
We have incurred net operating losses from our inception through March 31,
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 recognize the benefit of these assets in future years. 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.
INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUE
For the years ended December 31, 1997 and 1998, revenue increased by $1.9
million from $565,000 to $2.5 million. We did not generate any revenue from July
2, 1996, our inception, to December 31, 1996 (the Inception Period) and first
generated revenue in April 1997.
ADVERTISING REVENUE. For the years ended December 31, 1997 and 1998,
advertising revenue increased by $686,000 from $284,000 to $970,000 and
accounted for 50% and 39% of total revenue, respectively. The increase in
advertising revenue was due primarily to the launch of the ROLLINGSTONE.COM Web
site in March 1998 and a higher number of ad impressions and sponsorships sold.
During 1997 and 1998, total ad impressions were 4.8 million and 90.9 million,
respectively. During 1997 and 1998, we generated advertising revenue from barter
transactions of $174,000 and $157,000, respectively. During 1998, no one
advertiser accounted for more than 18% of total advertising revenue.
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.
36
<PAGE>
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 three to 10 employees.
DEPRECIATION AND AMORTIZATION EXPENSE. For the years ended December 31,
1997 and 1998, depreciation and amortization expense increased by $1.6 million
from $157,000 to $1.8 million. Depreciation and amortization expense was $2,000
for the Inception Period. The increases in depreciation and amortization expense
were primarily attributable to the amortization of goodwill and certain
intangible assets resulting from our acquisition of Tunes Network in July 1998.
STOCK COMPENSATION EXPENSE. For the years ended December 31, 1997 and 1998,
stock compensation expense increased by $1.4 million from $10,000 to $1.4
million. The increase was due to a charge of $913,000 in 1998 for the
accelerated vesting of stock options held by former employees as well as the
inclusion of 12 months of warrant compensation expense in 1998 compared to one
month in 1997. We did not recognize any stock compensation expense during the
Inception Period.
OTHER INCOME
For the years ended December 31, 1997 and 1998, interest income increased by
$313,000 from $115,000 to $428,000. Other income was $7,000 for the Inception
Period. The increases in other 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
37
<PAGE>
our quarterly license fee under our agreement with Straight Arrow. See "--
Liquidity and Capital Resources."
SELECTED QUARTERLY OPERATING RESULTS
The table below sets forth certain unaudited quarterly statements of
operations data for Tunes.com for the five 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
------------------------------------------------------------------------------
MAR. 31, 1998 JUNE 30, 1998 SEPT. 30, 1998 DEC. 31, 1998 MAR. 31, 1999
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising..................... $ 145 $ 126 $ 232 $ 468 $ 620
Other........................... 309 551 352 301 357
-------------- -------------- -------------- -------------- --------------
Total revenue................. 454 677 584 769 977
Cost of revenue................... 991 1,048 824 1,181 984
-------------- -------------- -------------- -------------- --------------
Gross deficit..................... (537) (371) (240) (412) (7)
Operating expenses................ 1,167 1,739 3,626 5,372 3,921
-------------- -------------- -------------- -------------- --------------
Loss from operations............ $ (1,704) $ (2,110) $ (3,866) $ (5,784) $ (3,928)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception in July 1996, we have financed our operations primarily
through private sales of convertible preferred stock and convertible promissory
notes. Net proceeds from these sales in 1997 and 1998 totaled $19.7 million. At
March 31, 1999, our primary source of liquidity consisted of $4.1 million of
cash and cash equivalents, which included $3.8 million from the issuance of
convertible promissory notes in March 1999. In May 1999, we issued 1,626,300
shares of Series E preferred stock which generated net cash proceeds of
approximately $15.3 million. In May 1999, we also issued 76,165 shares of Series
A-IV and 329,361 shares of Series E preferred stock upon the conversion of the
convertible promissory notes that were issued in March and April 1999.
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 three-month period ended March 31, 1999, net cash
used in operating activities was $3.7 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 deferred revenue, accounts payable
and noncash charges.
Net cash used for investing activities was $93,000, $2.7 million and $58,000
for the years ended December 31, 1998 and 1997 and the Inception Period,
respectively. For the three-month period ended March 31, 1999, net cash used for
investing activities was $233,000. The principal uses of cash for
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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.
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 three month period ended March 31, 1999, net cash
provided by financing activities was $3.8 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.
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 five months
ended May 31, 1999, we incurred costs in connection with the issuance of equity
securities of $238,000, $100,000 and $1.2 million, respectively.
We currently have no material commitments for capital expenditures. However,
we anticipate a substantial increase in our capital expenditures and lease
commitments consistent with projected growth in operations, infrastructure and
personnel. 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 certain increases. We were also required to pay
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. In addition,
we have entered into various agreements that provide for us to make payments for
fees relating to Web tenancy agreements of at least $1.2 million during 1999. We
expect to make Web tenancy fee payments in similar or greater amounts during
years subsequent to 1999. Additionally, we expect, from time-to-time, to
evaluate possible acquisitions of or investments in businesses, services and
technologies that are complementary to those of Tunes.com.
We believe that existing cash balances, cash equivalents and cash generated
from operations, together with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, 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
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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 members to access
the Internet.
We have formed an internal Year 2000 evaluation committee and are currently
engaged in an evaluation and the testing of our software and hardware for Year
2000 readiness. We have completed our initial assessment of Year 2000 readiness
for both our information and non-information technology. Based on our initial
assessment, we believe all non-information technology, including phone systems,
upon which we are materially dependent, is Year 2000 ready. We intend to resolve
any Year 2000 readiness issues relating to material information technology that
we use internally primarily through normal upgrades or, when necessary, through
replacement of existing software with Year 2000 ready products. If our
production and operational systems that support our Web sites are not Year 2000
ready 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, replacement
or correction of our non-ready technologies and the testing of any replacement
or corrected technologies by October 1999.
We rely to a large extent on third parties for the maintenance and
operations of our hardware and software systems. Even if our internal systems
are Year 2000 ready, the failure of Exodus or our other key vendors to be Year
2000 ready could substantially disrupt and damage our operations. As a result,
we recently began to survey third-party entities with which we transact
business, including critical vendors and financial institutions, for Year 2000
readiness. We expect to complete this survey by July 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
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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 certain
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 revenues 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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BUSINESS
OVERVIEW
Tunes.com is a leading online music network, providing music fans with
extensive and exclusive music content, community features and e-commerce
services. Our 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 alliances 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 syndicate our content to a
growing number of affiliates, 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 an 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 recent months. Monthly page views
have increased from 10.7 million during October 1998 to 22.8 million during May
1999. Registered users have increased from 308,000 as of December 31, 1998 to
604,000 as of May 31, 1999. We intend to continue to increase our Web sites'
traffic and user base by leveraging the brand recognition of our magazine
affiliates to promote our Web sites and the Tunes.com brand, expanding our music
content and community features and selectively pursuing e-commerce
opportunities.
INDUSTRY BACKGROUND
THE WEB AS A NEW MEDIUM FOR ADVERTISING AND COMMERCE
The Web is becoming an essential medium for advertisers because it offers a
level of targetability, interactivity and measurability not available in
traditional media. Through the Web, advertisers can efficiently reach specific
population groups and selected individuals with highly targeted interactive
advertisements and promotions. In addition, advertisers can measure the reach of
an advertisement by tracking the number of times an advertisement has been
viewed as well as the responses to the advertisement. Forrester Research
estimates that online advertising in North America will increase from $1.3
billion in 1998 to $10.7 billion in 2003.
The Web is also emerging as a medium for global commerce. A growing number
of consumers are transacting business over the Web, including purchasing CDs,
paying bills, booking airline tickets, trading securities and purchasing other
consumer goods. Online transactions can be faster, less
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expensive and more convenient than traditional commerce. Forrester Research
estimates that the total value of retail goods and services, other than
automobiles and travel, purchased on the Web in the United States will increase
from $4.8 billion in 1998 to $78.6 billion in 2003.
THE MUSIC INDUSTRY
Music is one of the world's leading forms of entertainment. It is also big
business. According to the RIAA, 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.
As a result of consumers' acceptance of downloading digital music, numerous
compression technologies have been developed by companies such as a2b Music,
Liquid Audio, Microsoft, Nullsoft and Real Networks, 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 alliances 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 Real
Networks, have formed the Secure Digital Music Initiative (SDMI) with the
objective of developing a standard for digital music security. Other initiatives
similar to SDMI have formed. However, no single standard has emerged for the
digital distribution of music.
The convergence of music and the Web has produced numerous music-related Web
sites. Most of these Web sites 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
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music experience, featuring exclusive content from three of the most trusted
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 user-friendly
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. 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, 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 USER-FRIENDLY AND FEATURE-RICH WEB SITES. We deliver music content
in a user-friendly manner by continuing to develop our Web site features
and utilizing the latest in consumer accepted technologies. We compile and
organize content 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 leverage the latest in consumer
accepted technologies, such as digital downloading, broadband and
streaming video and audio, so that we may offer more enhanced and
interactive content. As part of this strategy, we have joined with
technology companies, such as Microsoft and Real Networks, to develop
specific applications. For example, through our alliance with Real
Networks, we launched ROLLING STONE RADIO.
- 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 digital music created and uploaded by independent artists.
User-generated content is a dynamic source of music information and
encourages regular and active participation in the community. We believe
that the more time a user invests to develop content and interact with
others on our sites, the more likely it is that such a user will continue
to return to our sites for music content.
- BUILD THE TUNES.COM BRAND AND NETWORK. We plan to significantly increase
our general marketing and promotional activities through traditional and
new media to increase user traffic and to increase recognition of the
Tunes.com brand. We intend to further leverage 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.
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- 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. In
addition, within the next year, we intend to begin selling downloadable
digital music.
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
leveraging 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 have positioned
ROLLINGSTONE.COM to become the leading rock and pop Web site by leveraging
ROLLING STONE's brand, offline marketing and promotion, long-standing
label and artist relationships and exclusive new and archived content. The
ROLLINGSTONE.COM Web site was launched in March 1998 and generally
attracts users 15 to 35 years of age.
- THESOURCE.COM -- We developed the THESOURCE.COM Web site in conjunction
with THE SOURCE magazine, the leading urban and hip-hop music and
lifestyle magazine and one of the fastest growing music publications. We
have positioned THESOURCE.COM to become the premier urban and hip-hop Web
site by leveraging 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."
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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 affiliates provide
us with a continuing source of new and fresh content such as news, photos,
interviews, feature stories and album and concert reviews. Our magazine
affiliates also provide us with 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, including BMG, EMI,
Sony Music, Universal, Warner Music, Beggars Banquet, CMC International,
Epitaph, Mute, No Limit/Priority, Platinum, Sub-Pop and TVT Records.
Through these relationships we have been able to offer a variety of music
content on our Web sites, including interviews, webcasts, music videos and
in-studio performances. We have featured video interviews and performances from
a variety of new and established artists and events, including:
WEBCASTS
- Dave Matthews Band
- Farm Aid
- Garbage
- KISS
- Lilith Fair
- Metallica
- The Rolling Stones
- Sheryl Crow
- The Smashing Pumpkins
INTERVIEWS
- Beck
- Ben Folds Five
- Bush
- Jonny Lang
- Julian Lennon
- Kid Rock
- Luscious Jackson
- Motley Crue
- Van Halen
VIDEOS
- Backstreet Boys
- Britney Spears
- Green Day
- Liz Phair
- Mariah Carey
- Master P
- Snoop Dogg
- TLC
- Usher
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COMMUNITY
We encourage visitors to our Web sites to become active participants in our
user community. Membership is free and only requires that a visitor provide his
or her email address, zip code, age and gender, and choose a member name and
password to be used throughout the site. Once registered on the TUNES.COM Web
site, members may use a variety of features and personalization tools which are
designed to facilitate active membership participation and loyalty.
We believe that music fans' tastes are an important part of their personal
identity and a powerful magnet for forming online communities. Our
personalization tools facilitate community development by enabling members to
actively express and share their music interests with each other. Upon
registering with TUNES.COM, our site automatically creates a member profile page
called MyTunes which offers users a range of personalization tools. Through
MyTunes, a member may:
- create a personal profile which includes a personal portrait, a virtual CD
collection catalogue and a selection of favorite artists;
- receive artist and album recommendations based upon usage history,
personal selection and demographic profile;
- customize the look and feel as well as the type of content displayed on
their TUNES.COM home page;
- display a teaser profile of their MyTunes page to users with similar music
interests; and
- browse other MyTunes profiles to discover favorite albums and artists of
other members and to read their album reviews.
Many of our community activities and features encourage user interaction and
the creation of user-generated content. Through our community-building
activities and features, members may:
- access email features, chat rooms or message boards;
- write and post album reviews; and
- upload original music for other members to download and enjoy.
These activities provide an additional source of music discovery and encourage
regular, active participation in our community. We believe that the more time a
user invests to develop content and interact with others on our sites, the more
likely it is that such user will continue to return to our sites for music
content.
COMMERCE
As part of our strategy to provide users with a comprehensive music
experience, we currently sell music CDs to consumers directly through our
TUNES.COM Web site. In addition, CDs are sold on our genre 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 alliances 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 most trusted editorial voices in the music
industry.
Later this year, we expect to launch an online merchandise and memorabilia
store that will be integrated with our Web sites. We initially expect to sell
licensed apparel such as t-shirts, jerseys and
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hats, jewelry, limited edition lithographs and prints and memorabilia such as
clothing and instruments. We are also pursuing e-commerce opportunities through
strategic and marketing relationships with retailers and service providers
focused on Web distribution. We believe that having broad based but targetable
audiences on our sites provides us with excellent opportunities to build
strategic e-commerce relationships with clothing retailers, consumer electronic
suppliers, music and booksellers and others.
ADVERTISING SALES AND PROMOTION
We generate a substantial portion of our revenue by selling advertising and
promotions prominently displayed on our Web sites. 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 (for example, Farm Aid and Lilith Fair) and special
features of our Web sites (for example, BIG VIDEO and DAILY VIDEO NEWS).
Sponsorships are generally in the form of special promotions or contests and
are offered through fixed positions within our Web sites. We typically sell
sponsorships for a fixed monthly fee over the life of the contract and may
include other advertising components such as general rotation or targeted
banner advertisements or emails.
RICH MEDIA. We offer advertisers the ability to place their messages in
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 CPM than our traditional banner ads.
TARGETED PROMOTIONS. Targeted promotions are designed to communicate to
users a "call to action" such as directly purchasing a product or service,
registering as a member with the advertiser or entering a particular
contest. We are typically paid for targeted promotions through a combination
of a flat fee and a per action basis.
We target traditional music advertisers for advertising on our Web sites,
including consumer product and service companies, record labels, entertainment
companies, technology companies, consumer electronics manufacturers, motion
picture studios, home video distributors, book publishers
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and automobile companies. Since April 1997, we have had over 100 advertisers.
Selected advertisers during 1999 include:
<TABLE>
<S> <C> <C>
- -3Com -Columbia House -Microsoft
- -a2b Music (AT&T) -Crutchfield -Musicfile.com
- -America Online -Encyclopaedia Britannica -Nike
- -Art.com -Gibson Instruments -Oldsmobile
- -Ashford.com -IBM -Sony
- -Billboard -Jack Daniels -Talk City
- -CDnow -Levi's -Universal Pictures
</TABLE>
Prior to October 1998, we primarily used a third-party to sell advertising
on our sites. Between December 31, 1998 and May 31, 1999 we increased our
internal sales staff from three 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, MSN (Microsoft Network) and Yahoo!, as well as popular
consumer sites like Wired's SUCK.COM and the Worldwide Wrestling Federation's
WWF.COM. We maintain an aggressive public relations program generating online,
print and broadcast press coverage, as well as speaking opportunities for
Tunes.com executives. Our direct marketing programs include email and
traditional mail. We create from five to ten sweepstakes and contests each month
designed to generate traffic on our Web sites and to promote user registrations.
We also have an active grassroots program that includes employees who interact
directly with fan sites and message boards, providing site news and promotions.
In addition, we distribute promotional materials at selected music and
technology industry events and on college campuses. We are involved in a variety
of promotions where links to our Web sites are bundled into software products
distributed online or through other retail channels. We utilize
cross-promotional arrangements to secure advertising, promotional considerations
and increase traffic.
We have planned a major print and radio advertising campaign for the third
quarter of 1999 designed to drive traffic to and build awareness of the
TUNES.COM Web site and our genre-specific Web sites. The advertising is
primarily targeted to reach younger consumers in the 16-24 age group in order to
drive them to register for a major online sweepstakes during July and August of
this year.
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STRATEGIC RELATIONSHIPS
CONTENT PROVIDERS
We believe that our strategic relationships with the publishers of ROLLING
STONE, THE SOURCE and DOWN BEAT magazines differentiate us as the premier
destination for music content on the Web.
ROLLING STONE. In November 1997, we entered into an agreement with Straight
Arrow Publishers, the publisher and owner of ROLLING STONE magazine, which makes
us the exclusive licensee on the Internet of selected content of all domestic
editions of ROLLING STONE, including covers, photos, feature stories, reviews,
editorials and access to the archives of ROLLING STONE. We also sublicense this
content to third parties in conjunction with Straight Arrow. Our agreement with
Straight Arrow remains in effect until November 2005, and, at that time, will be
renewed automatically until November 2010 if our market capitalization is
greater than $150 million at the time of renewal. Straight Arrow may terminate
this agreement earlier if we do not fulfill our contractual obligations. See
"Risk Factors -- We depend on our exclusive relationships with the publishers of
ROLLING STONE, THE SOURCE and DOWN BEAT magazines for content and their brand
name recognition and may not be able to attract visitors to our Web sites if
these relationships terminate." We pay Straight Arrow an annual license fee of
$1.0 million, which increases to $1.25 million in 2001 and $1.5 million in 2006.
In June, we also will make 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 are required to purchase at least $1.1
million of annual advertising in ROLLING STONE. In return, we receive recurring
editorial coverage in ROLLING STONE and the right to include in selected issues
of the magazine our "Connected CDs," which contain music, interviews, and video
material as well as additional web-enabled and encrypted multimedia content. We
generally pay Straight Arrow 10% of advertising revenue from ROLLINGSTONE.COM.
For sublicensing of ROLLING STONE content and e-commerce, the party responsible
for originating the business receives 15% of the revenue, and we split the
remaining 85% with Straight Arrow evenly. In connection with the agreement, we
also granted Straight Arrow a warrant to purchase 10% of our common stock
outstanding immediately prior to this offering, assuming the exercise and
conversion of all options, warrants, including the Straight Arrow warrant, and
convertible securities. Straight Arrow also has the right to appoint one member
of our board of directors during the term of the agreement.
THE SOURCE. In January 1999, we entered into an agreement with Source
Enterprises, the owner and publisher of THE SOURCE, a leading hip-hop music
magazine. Our agreement with Source Enterprises makes us the exclusive licensee
on the Internet of selected content of THE SOURCE, including covers, photos,
feature stories, reviews, editorials and access to the archives of THE SOURCE.
We also sublicense this content to third parties in conjunction with Source
Enterprises. Under the agreement, we also obtained the right to use
THESOURCE.COM domain name and the right to use the "The Source" and
"TheSource.com" trademarks and their derivatives in connection with the
Internet. Our agreement with Source Enterprises remains in effect until December
2003. Our annual license fee payments to Source Enterprises are capped at
$144,000 per year. Source Enterprises is required to promote THESOURCE.COM in
THE SOURCE magazine. The agreement requires us to pay Source Enterprises
approximately two-thirds of the advertising and merchandise revenue generated at
THESOURCE.COM Web site or on the Internet through the sublicensing of THE SOURCE
content or the sale of related merchandise. In connection with the agreement,
Source Enterprises also was granted a warrant to purchase 75,000 shares of our
common stock.
DOWN BEAT. In February 1999, we entered into an agreement with Maher
Publications, the owner and publisher of DOWN BEAT, one of the world's leading
and longest standing magazines featuring jazz and blues. Our agreement with
Maher Publications makes us the exclusive licensee on the Internet of selected
content of DOWN BEAT, including covers, photos, feature stories, reviews,
editorials and access to the archives of DOWN BEAT. We also sublicense this
content to third parties in conjunction with Maher Publications. Under this
agreement, we also obtained the right to use DOWNBEATJAZZ.COM domain
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name and the right to use the "DownBeat" and "DownBeat.com" trademarks and their
derivatives in connection with the Internet. Our agreement with Maher
Publications remains in effect until February 2001. Maher Publications is
required to promote DOWNBEATJAZZ.COM in DOWN BEAT magazine. We are not required
to pay any fixed licensing fees to Maher Publications. Rather, the agreement
provides for our payment of 50% percent commissions to Maher Publications with
respect to advertising revenue generated at DOWNBEATJAZZ.COM Web site or on the
Internet through the sublicensing of DOWN BEAT content or the sale of related
merchandise.
ALL-MUSIC GUIDE (AMG). In addition to licensing exclusive content, we
license other data for our Web sites. Pursuant to an agreement with AEC One Stop
Group, Inc., we license the All-Music Guide Database which includes numerous
artist biographies and extensive album and track information. This agreement
expires in July 2001.
CDDB. To enhance our support of the Microsoft Deluxe CD Player, we license
data from CDDB, Inc., which includes table of contents and track title
information for CDs. This agreement expires in October 2001.
POLLSTAR. In June 1999, we entered into a six-month agreement with
Pollstar, Inc., extending our license of Pollstar's database of live music event
information. 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.
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. We have
established a number of strategic alliances, some of which link third party Web
sites to our Web sites, to increase traffic to our sites. Our key distribution
relationships include:
AMERICA ONLINE. In October 1998, we entered into an agreement with America
Online pursuant to which the ROLLINGSTONE.COM Web site became an anchor tenant
on America Online's Music Channel. We also have been assigned specific keywords
within the America Online service. America Online has guaranteed us a minimum
number of impressions generated from the America Online Music Channel. In
exchange, we pay America Online a web tenancy fee. Our agreement with America
Online expires in November 1999.
LYCOS. In April 1999, we entered into an agreement with Lycos to be a
featured music content provider to the LYCOS.COM Web site. Under the terms of
the agreement, we will develop with Lycos a co-branded music content site that
will be linked to various areas within the LYCOS.COM Web site. Users will be
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 ad revenue generated from the sale of advertising on
the co-branded pages with us. The agreement has a one-year term, although it can
be terminated upon 90 days prior written notice by Lycos. We expect to launch
this co-branded site in June 1999.
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 certain 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. In addition,
as further consideration for entering into the agreement, we are
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required to provide Netscape with certain advertising space on ROLLINGSTONE.com
and in ROLLING STONE magazine during the term of the agreement. The agreement
has a one-year term.
ONE ZERO MEDIA/ALTA VISTA. 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
certain news headlines and introductory content from ROLLINGSTONE.COM in the
music section of ALTAVISTA.COM with links to the ROLLINGSTONE.COM Web site to
obtain full access to our content. We pay One Zero a fee for each visitor who
visits ROLLINGSTONE.COM from the ALTAVISTA.COM Web site. 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. The agreement has an initial
six-month term 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 certain 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 upon notice by either party.
TECHNOLOGY AND E-COMMERCE ALLIANCES
We plan to continue to deliver rich and interactive music content by using
the latest consumer accepted technologies. We have established alliances with
certain technology vendors to develop interactive media applications based upon
existing technologies and applications. We believe that by leveraging our
technology providers' expertise and capital investments, we will be able to
concentrate our resources on generating and delivering music-based content. In
addition, we have established alliances with certain e-commerce companies to
provide our users with access to music-related products. Certain of our
technology and e-commerce alliances 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 will pay us fees
and provide us with software and support services relating to the development of
the broadband area. In addition, the agreement provides for Microsoft to pay
certain costs relating to the expenses associated with hosting and streaming the
broadband content. The agreement has a one-year term. We also provide support
for the Microsoft Deluxe CD Player, which is capable of identifying the music
CDs inserted in a user's PC CD-ROM drive. Once a CD is played on the Player, the
TUNES.COM Web site is accessed by the Player and queried for detailed
information about the CD and the artist, as well as related artists, music and
promotions. Simultaneously, the Player communicates, with the user's permission,
with the TUNES.COM Web site and provides us with information about the inserted
CD.
REALNETWORKS. In February 1998, we entered into an agreement with Real
Networks 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
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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 certain
circumstances.
CDNOW. In April 1998, we entered into a multi-year agreement with CDnow,
Inc., a leading online retailer of recorded music. 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 license 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 23% for the three months ended March 31, 1999. We expect
that revenue from CDnow will decline and will account for a smaller percentage
of our total revenue in the future.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
We have developed an operating infrastructure based upon an architecture
designed to be reliable, secure and scalable. We maintain ten active Web
application servers, four database servers and six application servers. Our
servers use a variety of Microsoft products, including the Microsoft Windows NT
4.0 operating system. We try to maximize the performance of our servers by
directing traffic to the least busy server. We also use third-party Web-based
applications to transmit content to, and provide services on, our Web sites.
Our primary Web servers are maintained at Exodus Communications, Inc. in
Jersey City, New Jersey. Exodus provides fire suppression systems,
earthquake-bracing systems, physical security, 24 hours a day, seven days a week
on-site systems monitoring and administration, and multi-level redundant power,
connectivity and backup systems. We depend upon Exodus's ability to protect our
systems against damage from fire, hurricanes, power loss, telecommunications
failure, break-ins, vandalism and other events. See "Risk Factors -- We may have
capacity constraints and may be subject to system disruptions, which could
reduce our revenue."
Our operations are also dependent upon timely installations of lines and
feeds and computer downloads from our webcast venues and content providers. See
"Risk Factors -- We depend upon timely installations of lines, feeds and
downloads, and their failures may result in disruptions in our services." We
also depend upon Web browsers, Internet service providers and online service
providers to provide users access to our Web sites. Any substantial increase in
the volume of traffic on our Web 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 secure channels. 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
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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, UBL and Launch;
- general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to music and
entertainment-related content and services;
- Web search and retrieval services and other online services such as
Excite, Infoseek, Lycos and Yahoo!;
- online music retailers such as CDnow and Amazon.com;
- Internet radio services such as Spinner Networks and NetRadio;
- traditional music companies, including BMG Entertainment, EMI Group, Sony
Music Entertainment, Time Warner and Universal Music Group;
- companies offering digital music compression formats, such as those of
IBM, Liquid Audio, Microsoft and RealNetworks;
- companies focused on digitally distributed music, including MP3.com,
eMusic (formerly Good Noise) and various private companies; and
- online services or Web sites targeted to enthusiasts of particular artists
or bands, including Web sites maintained by their labels.
We anticipate that the number of direct and indirect competitors will
increase in the future. This could result in greater and intensified competition
for users, price reductions for our advertising, reduced margins, greater
operating losses or loss of market share, any of which would materially
adversely affect our business, results of operations and financial condition.
We believe our programming and content compete favorably with our
competitors, as some of them lack brand recognition, depth and breadth of
content and quality entertainment experience. However, many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical and marketing resources, significantly greater name
recognition and 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
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portion of the song included. In certain 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 affiliates, we
license from ROLLING STONE, THE SOURCE and DOWN BEAT their names, trademarks and
certain content. These agreements could terminate in certain circumstances and
involve a number of other risks. See "-- Strategic Relationships -- Content
Providers" and "Risk Factors -- We depend on our exclusive relationships with
the publishers of ROLLING STONE, THE SOURCE and DOWN BEAT magazines for content
and their brand name recognition and may not be able to attract visitors to our
Web sites if these relationships terminate."
Copyrighted material that we develop internally, as well as trademarks and
domain names relating to the Tunes.com brands and the brands of our magazine
affiliates 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 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. 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 and using data from users in European Union
member
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countries. Historically, we estimate that approximately 4% to 6% of the visitors
to our Web sites have been from countries in the European Union. Other countries
have adopted or may adopt similar legislation. 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."
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 affiliates 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 this 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 May 31, 1999, we had 87 full-time employees, including 55 in
operations and development, 16 in sales and marketing and 16 in general and
administrative, as well as 11 part-time employees. We also hire independent
contractors and other temporary employees in our editorial, operations and
administrative functions. We have never had a work stoppage and none of our
personnel are represented under collective bargaining agreements. We consider
our employee relations to be good.
PROPERTIES
Our principal administrative, marketing and development facilities are
located in approximately 12,055 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.
56
<PAGE>
MANAGEMENT
The following table sets forth the name and age as of June 10, 1999 of our
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Howard A. Tullman.............................. 53 Chairman of the Board and Chief Executive Officer
Todd S. Anderman............................... 31 Vice President -- Sales
Stuart B. Frankel.............................. 33 Chief Financial Officer, Treasurer and Secretary
Andy V. Jonusaitis............................. 38 Vice President -- General Counsel
Howard J. Katz................................. 31 Vice President -- Operations
Scott P. Mitchell.............................. 28 Vice President -- Chief Information Officer
Jo Ann Sager................................... 42 Vice President -- Marketing
Robert R. Gheewalla............................ 32 Director
Joseph H. Gleberman(1)......................... 41 Director
Burton B. Goldstein, Jr.(1).................... 51 Director
Matthew S. Kaplan(1)(2)........................ 42 Director
John M. Lagana................................. 47 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee.
(2) Will become a member of audit committee upon the completion of the offering.
HOWARD A. TULLMAN has served as our Chairman since February 1999 and as our
Chief Executive Officer and a director since our June 1997 reorganization from
an Illinois limited liability company to a Delaware corporation. He also served
as a manager of the limited liability company from September 1996 to June 1997.
Mr. Tullman also serves as a director of UBID, Inc. and serves as the Chairman
of the board of directors of The Cobalt Group, Inc. From June 1993 to January
1998, Mr. Tullman served as Chief Executive Officer of Imagination Pilots, Inc.,
a developer and producer of interactive CD-ROM 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 (Ohio) 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.
57
<PAGE>
HOWARD J. KATZ has served as our Vice President -- Operations since June
1998 and as our Vice
President -- Business Development from September 1996 to June 1998. From
September 1994 to August 1996, Mr. Katz attended the graduate school of business
of Northwestern University. From September 1990 to December 1995, Mr. Katz
served as Vice President of Business Development for Neurocorp, Inc., a publicly
traded medical technology company specializing in database profiling and
telephonic medicine. Mr. Katz holds a B.A. from the University of Michigan and
an M.B.A. from Northwestern University.
SCOTT P. MITCHELL has served as our Vice President -- Chief Information
Officer since September 1998. From February 1996 to September 1998, Mr. Mitchell
served as Senior Manager of Systems Engineering at Arthur Andersen LLP. From May
1994 to January 1996, Mr. Mitchell served as a software engineer for Sunstone
Imports, Inc. Mr. Mitchell holds a B.S. and a B.A. from Illinois State
University and an M.S. in Management and Organizational Behavior, an M.B.A. and
a M.S. in Management Information Systems from Benedictine University.
JO ANN SAGER has served as our Vice President -- Marketing since August
1998. From October 1996 to February 1998, Ms. Sager served as Director of
Corporate Strategy for BackWeb Technologies Ltd. From May 1994 to August 1996,
Ms. Sager worked in marketing at IBM Corporation, first as Public Relations
Director for IBM's Personal Software Products division and, then, as the first
Communications Director for IBM's Software Group. Prior to 1994, Ms. Sager
worked for 12 years in technology marketing and was an analyst at the Central
Intelligence Agency. She holds a B.A. from Wake Forest University.
ROBERT R. GHEEWALLA has served as a director since August 1998. Mr.
Gheewalla serves as a Vice President of Goldman, Sachs & Co. where he has worked
since June 1994. Mr. Gheewalla currently serves on the board of directors of
Recovery Engineering, Inc. Mr. Gheewalla holds a B.A. from Tufts University, an
M.S. from the London School of Economics and an M.B.A. from Harvard University.
JOSEPH H. GLEBERMAN has served as a director since August 1998. Since 1982,
Mr. Gleberman has served in various investment banking capacities for Goldman,
Sachs & Co. Mr. Gleberman became a partner of Goldman Sachs in 1990 and, since
1996, he has served as Managing Director. Mr. Gleberman currently serves on the
board of directors of Applied Analytical Industries, Inc., BackWeb Technologies
Ltd., Dade Behring Holdings, Inc. and Ticketmaster Online -- CitySearch, Inc. He
holds a B.A. and M.A. from Yale University and an M.B.A. from the Stanford
University Graduate School of Business.
BURTON B. GOLDSTEIN, JR. has served as a director since May 1999. Since
January 1999, Mr. Goldstein has served as President of netWorth Partners, L.P.,
an Internet investment fund advised by Mellon Ventures. In 1981, Mr. Goldstein
co-founded Information America, a provider of on-line information regarding
corporations, people and assets and related products and services, and served as
its Chairman and President until September 1998. Mr. Goldstein holds a B.A. and
J.D. from the University of North Carolina at Chapel Hill.
MATTHEW S. KAPLAN has served as a director since June 1997. For the past 20
years Mr. Kaplan held several senior management positions at Stone Container
Corporation before resigning his most recent position in March 1999 to pursue
other interests. From November 1998 until March 1999, Mr. Kaplan served as Vice
President and General Manager of Smurfit-Stone Container Corporation's
Corrugated Container Division. From April 1997 to November 1998, Mr. Kaplan
served as Senior Vice President for North American Operations of Stone Container
Corporation and from June 1993 until March 1997, he served as Senior Vice
President and General Manager of Stone's Corrugated Container Division. Mr.
Kaplan holds a B.S. from the Wharton School, University of Pennsylvania and an
M.B.A. from the University of Chicago.
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<PAGE>
JOHN M. LAGANA has served as a director since June 1999. Since 1988, Mr.
Lagana has served as Vice President and Chief Financial Officer of Wenner Media
Incorporated, the general partner of Straight Arrow, which is the publisher of
ROLLING STONE. Prior to joining Wenner Media, Mr. Lagana served as Controller of
Forbes, Inc. Prior to Forbes, Inc., Mr. Lagana was employed by the predecessor
of Ernst & Young. Mr. Lagana holds a B.S. in Accounting from Florida Atlantic
University and is a Certified Public Accountant.
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. and
will be Class I directors with a term expiring at our annual
stockholders' meeting in 2000; Messrs. and will be Class II
directors with a term expiring at our annual stockholders' meeting in 2001; and
Messrs. and will be Class III with a term expiring at our annual
stockholders' meeting in 2002. Our bylaws will provide that the authorized
number of directors may be changed only by resolution of the board of directors.
Any additional directorships resulting form an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
This classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Tunes.com. See "Risk Factors --
Anti-takeover provisions in our charter, bylaws and Delaware law could make
third-party acquisition of us more difficult." We intend to add an additional
independent director to the board after the completion of this offering. This
person will serve as a Class director with a term expiring at our annual
stockholders meeting in 20 .
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 and Lagana
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. Lagana 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. We expect
that the audit committee will consist of Mr. Kaplan and the additional
independent director who we plan to add to our board after the completion of
this offering.
COMPENSATION OF DIRECTORS
Directors who are also employees are not separately compensated for serving
on our board of directors. However, they are eligible to receive options to
purchase common stock under our 1997 and
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<PAGE>
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 5,000 shares of common stock at an exercise price of $5.00 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 "Certain 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 (the "Named Executive
Officers").
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 60,000 $ --
Chairman of the Board of Directors and Chief Executive
Officer
Stuart B. Frankel,........................................... 82,250 37,500 75,000 --
Chief Financial Officer, Treasurer and Secretary
Howard J. Katz,.............................................. 93,125 25,000 12,500 --
Vice President -- Operations
Jerry Mickelson,............................................. 120,000 25,000 60,000(1) 115,000(2)
former Chairman
Patrick J. Blake,............................................ 120,000 25,000 60,000 166,249(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
"Certain 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 "Certain
Transactions -- Transactions with our Stockholders, Executive Officers and
Directors -- Severance Agreements."
(3) Pursuant to a severance agreement with Tunes.com, Mr. Blake's employment
terminated on December 31, 1998. In accordance with this severance
agreement, Tunes.com paid $166,249 to
60
<PAGE>
Mr. Blake. See "-- Employment Agreements" and "Certain Transactions --
Transactions with our Stockholders, Executive Officers and Directors --
Severance Agreements."
OPTION GRANTS DURING 1998
The following table sets forth certain information concerning grants of
stock options during 1998 to the Named Executive Officers. 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 Option 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
---------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO 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....................... 50,000 10.7% $ 5.00 01/01/08 $ 157,224 $ 398,436
10,000 2.1 7.50 03/10/08 47,167 119,531
Stuart B. Frankel....................... 60,000 12.8 7.50 04/17/08 283,003 717,184
15,000 3.2 7.50 04/01/08 70,751 179,296
Howard J. Katz.......................... 12,500 2.7 7.50 03/01/08 58,959 149,413
Jerry Mickelson(3)...................... 50,000 10.7 5.00 01/01/08 157,224 398,436
10,000 2.1 7.50 03/10/08 47,167 119,531
Patrick J. Blake........................ 50,000 10.7 5.00 01/01/08 157,224 398,436
10,000 2.1 7.50 03/10/08 47,167 119,531
</TABLE>
- --------------------------
(1) Based on an aggregate of 467,770 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 "Certain
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 Named Executive Officers
exercised stock options during 1998. The value of unexercised in-the-money
options at December 31, 1998 is based on the difference between $10.00, 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).............................. 326,430 -- $ 2,195,050 $ --
Stuart B. Frankel................................. 45,000 30,000 112,500 75,000
Howard J. Katz.................................... 22,820 16,250 200,380 50,000
Jerry Mickelson(1)................................ 223,250 45,730 1,472,790 320,110
Patrick J. Blake(1)............................... 177,520 -- 1,152,680 --
</TABLE>
- ------------------------
(1) Pursuant to agreements with Tunes.com, the vesting of 105,730 stock options
held by each of Mr. Tullman and Mr. Mickelson and 60,000 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 $140,000. 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 $125,000. 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
60,000 shares of common stock at an exercise price of $7.50 per share, 30,000 of
which vested on December 31, 1998 and the remaining 30,000 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 severance agreement effective January 15, 1999,
Mr. Mickelson's employment with us terminated on
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<PAGE>
that date, and we paid him $115,000. This severance agreement restricts Mr.
Mickelson from competing with us and prohibits Mr. Mickelson from soliciting our
clients and employees until June 30, 1999. See "Certain 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 "Certain
Transactions -- Transactions with our Stockholders, Executive Officers and
Directors -- Severance Agreements."
STOCK OPTION PLANS
1997 STOCK OPTION PLAN. Tunes.com's 1997 stock option plan authorizes the
grant of options to purchase up to 1,550,000 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 85,730 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 March 31, 1999, options to purchase a total of 1,477,929 shares of
common stock at a weighted average exercise price of $4.95 per share were
outstanding. Of these options, options to purchase 1,392,199 shares of common
stock will be fully vested and exercisable upon the completion of this offering.
In addition, options to purchase up to 45,730 shares of common stock may vest
upon completion of this offering if certain market capitalization targets are
met. As of March 31, 1999, we had 72,071 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 500,000 shares. Most of the material terms of the 1999
stock option plan are similar to those of the 1997 stock option plan. As of
March 31, 1999, there were no options outstanding under the 1999 stock option
plan.
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<PAGE>
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our certificate of incorporation requires 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, the Company maintains a
directors and officers liability insurance policy which provides for
indemnification of our directors, officers and certain employees for certain
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>
CERTAIN TRANSACTIONS
FOUNDERS' TRANSACTIONS
In connection with the organization of our predecessor, Digital
Entertainment Networks, LLC (Digital Entertainment), Howard A. Tullman received
a 5% equity interest of Digital Entertainment, and Jam Enterprises Corp. (JEC),
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. (Red 5), 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, JEC and Red 5 served as managers of Digital
Entertainment until Digital Entertainment 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 certain holders of our
warrants. See "Description of Capital Stock -- Registration Rights Agreement."
STOCKHOLDERS' AGREEMENT. In June 1997, we entered into a stockholders'
agreement with our then current stockholders. All other purchasers of our common
stock and preferred stock have also entered into this agreement. This agreement
will automatically terminate immediately prior to the completion of this
offering. This agreement provides as follows:
- The holders of the Series A preferred stock have the right to appoint the
number of directors based upon their percentage ownership of our capital
stock and the holders of the Series E preferred stock have the right to
appoint one director;
- At least one director appointed by the holders of the Series A preferred
stock and the director appointed by the holders of the Series E preferred
stock must be present at a board of directors meeting in order to
constitute a quorum; and
- At least one director appointed by the holders of the Series A preferred
stock and the director appointed by the holders of the Series E preferred
stock must approve certain material actions including the following:
-- amending our certificate of incorporation or bylaws;
-- issuing any shares of capital stock except in certain 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
200,000 shares of our capital stock unless the holder first offers the shares,
on the same terms and conditions, to Tunes.com and, then, to our other
stockholders.
ROLLING STONE AGREEMENT. Under our agreement with Straight Arrow, we are
required to pay an annual license fee of $1.0 million for the initial term and
purchase at least $1.1 million of advertising annually in ROLLING STONE magazine
in order to use certain trademarks, domain names and exclusive content of
ROLLING STONE. In addition, we issued Straight Arrow a warrant, exercisable at
$3.00 per share, to purchase the number of shares of our common stock which
would provide Straight Arrow with a 10% equity interest in Tunes.com. The
warrant expires in November 2007. As of June 1, 1999, the number of shares
issuable under this warrant was 1,020,075. See "Business -- Strategic
Relationships: Content Providers."
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EMPLOYMENT AGREEMENTS. We have entered into employment agreements with
certain executive officers as described under "Management -- Employment
Agreements."
OPTIONS. We have granted options to purchase shares of common stock to
certain executive officers and directors. See "Management -- Employment
Agreements," " -- Compensation of Directors" and "-- Executive Compensation."
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
105,730 shares of common stock held by Mr. Mickelson and JEC to January 15,
1999. The severance agreement also provided for the immediate acceleration of
vesting of stock options to purchase 105,730 shares of common stock held by Mr.
Tullman. JEC 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 60,000 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, Digital Entertainment
entered into a trademark license agreement with Jam Productions, Ltd., of which
Jerry Mickelson, our former Chairman, is an executive officer and director. The
Jam Productions license agreement provides us with an exclusive license to use
the jamtv.com domain name and an exclusive license to use JAMTV, JAMTV.COM and
related trademarks in connection with the Internet. In addition, as of March 31,
1997, we entered into a multimedia content agreement with Jam Productions where
it agreed to first offer to us opportunities to acquire or license multimedia
content from third parties. The license and rights under the multimedia content
agreement were granted to us in consideration for the goodwill accruing to Jam
Productions through our use of the domain name and the related JAMtv trademarks.
In connection with Mr. Mickelson's severance agreement with us, the multimedia
content agreement was terminated and the trademark license agreement was amended
to provide for its termination on the earlier of December 31, 1999 and 180 days
after we cease using the trademarks. However, our license to use the JAMTV.COM
domain will in no event terminate before December 31, 1999. Prior to the first
anniversary of the termination of the trademark license agreement, we may
request that Jam Productions transfer to us all of the existing or pending
registrations and applications for registration for the above-named trademarks
if we comply with the requests of Jam Productions to pay the applicable filing,
maintenance and attorneys' fees for the marks so transferred.
MANAGEMENT FEES. During 1997, we paid JEC an aggregate of $56,250 for
managerial services provided to us during 1996 and 1997. Mr. Mickelson, our
former Chairman, is a principal shareholder, executive officer and director of
JEC.
JAM PRODUCTIONS OPERATING EXPENSES. We reimbursed Jam Productions $130,000
in 1998 and $90,000 in 1997 for certain 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. (IPI) certain 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 IPI, and served as chief executive
officer and director of IPI until IPI began winding up its business in January
1998.
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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. (IPEI) for aggregate cash payments of
$60,000. Mr. Tullman is a principal shareholder of IPEI and has served as chief
executive officer and director of IPEI since September 1997.
IPEI SERVICES. In 1996 and 1997, we paid IPEI approximately $75,000 and
$95,000, respectively, for various services, including rent of office
facilities, use of personnel and other operating activities. Howard A. Tullman,
our Chairman and Chief Executive Officer, is a principal shareholder of IPEI 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 (LaSalle), provides us with 12,055 square
feet of office space at 640 North LaSalle Street in Chicago, Illinois for a five
year term. The term expires in May 2002. Howard A. Tullman, our Chairman and
Chief Executive Officer is a limited partner of LaSalle. Currently, our monthly
lease payments are approximately $18,000 and increase approximately 3% per year.
In June 1997, we subleased 20% of our office space to IPI in exchange for IPI's
agreement to pay its proportionate share of the rental payments. Mr. Tullman was
a principal shareholder and served as Chief Executive Officer of IPI. The
sublease terminated in May 1998, after IPI wound up its business.
ISSUANCE OF SECURITIES
ISSUANCE OF NOTES. Digital Entertainment 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 sold the notes for an aggregate of $500,000 of
cash to members of Digital Entertainment.
REORGANIZATION. On June 2, 1997, our predecessor, Digital Entertainment,
was reorganized into our Company. In conjunction with the reorganization, each
member's percentage ownership interest in Digital Entertainment was exchanged
for the same percentage ownership interest in the 1,150,530 shares of common
stock issued by us. Howard A. Tullman received 57,530 shares of common stock,
JEC received 160,710 shares of common stock and Red 5 received 26,790 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. ("GS Group") for $4.5
million of cash. All shares of the Series A-I preferred stock were sold at $3.00
per share and 166,666 shares of Series A-I preferred stock to the holders of
Digital Entertainment'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 GS Group for a cash payment of $1.0 million.
Between October 31, 1997 and February 3, 1998, we issued an aggregate of
472,000 shares of Series B preferred stock for $2.3 million of cash and $20,000
of professional fees. Doerge-Internet, L.P., which owned approximately 10.8% of
our outstanding capital stock as of the date of this prospectus, purchased
200,000 shares of Series B preferred stock for a cash payment of $1.0 million.
The purchase price for the Series B preferred stock was $5.00 per share.
During February and March 1998, we issued an aggregate of 533,334 shares of
Series C preferred stock for $4.0 million of cash. Doerge-Internet purchased
66,667 shares of Series C preferred stock for a cash payment of $500,000. The
purchase price for the Series C preferred stock was $7.50 per share.
During May and June 1998, we issued 150,000 shares of Series A-III preferred
stock and 666,136 shares of Series D preferred stock for an aggregate of $8.2
million of cash. We sold 150,000 shares of Series A-III preferred stock to GS
Group and 150,000 shares of Series D preferred stock to Doerge-Internet. The
purchase price for the Series A-III and Series D preferred stock was $10.00 per
share.
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During March and April 1999, we issued an aggregate of $4.0 million
principal amount of convertible promissory notes and warrants to purchase an
aggregate of 39,950 shares of common stock for $4.0 million of cash. The notes
accrued interest at 8% per annum. The warrants have an exercise price of $10.00
per share and expire in March 2001. We issued to GS Group $750,000 in principal
amount of convertible promissory notes and warrants to purchase 7,500 shares of
common stock. The principal of these notes, plus accrued interest, automatically
converted into our Series A-IV and Series E preferred stock upon the closing of
the Series A-IV and Series E preferred stock in May 1999.
During May 1999, we issued 76,165 shares of Series A-IV preferred stock and
1,955,661 shares of Series E preferred stock for an aggregate of $15.3 million
of cash and the conversion of all $4.0 million of outstanding convertible
promissory notes and accrued interest that we issued in March and April 1999. We
sold all 76,165 of the shares of Series A-IV preferred stock to GS Group and
750,000 shares of Series E preferred stock to netWorth Partners I, LLC. 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 June 1, 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
Named Executive Officer, and (4) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
NUMBER OF BENEFICIALLY OWNED (2)
SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- -------------------------------------------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Robert R. Gheewalla(3).............................................. 1,933,665 27.0% %
Joseph H. Gleberman(3).............................................. 1,933,665 27.0
The Goldman Sachs Group, Inc.(3).................................... 1,933,665 27.0
85 Broad Street,
New York, NY
John M. Lagana(4)................................................... 1,020,075 12.5
Straight Arrow Publishers Company, L.P.(4).......................... 1,020,075 12.5
1290 Avenue of the Americas
New York, New York
Doerge-Internet, L.P................................................ 774,971 10.8
30 S. Wacker Drive, Suite 2112
Chicago, Illinois
Burton B. Goldstein, Jr.(5)......................................... 750,000 10.5
netWorth Partners I, LLC(5)......................................... 750,000 10.5
One Buckhead Plaza, Suite 780
3060 Peachtree Road
Atlanta, Georgia
Howard A. Tullman(6)................................................ 383,960 5.1
Jerry Mickelson(7).................................................. 383,960 5.1
207 West Goethe Street
Chicago, Illinois
Jam Enterprises Corp.(7)............................................ 383,960 5.1
207 West Goethe Street
Chicago, Illinois
Patrick J. Blake(8)................................................. 204,310 2.8
Stuart B. Frankel(9)................................................ 90,000 1.2
Howard J. Katz(10).................................................. 89,070 1.2
Matthew S. Kaplan................................................... 24,028 *
All directors and executive officers as a group (12 persons)........ 4,450,798 50.3
</TABLE>
- ------------------------
* Less than one percent
(1) Unless otherwise indicated, (a) the persons in the table above have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, and (b) the address for each beneficial owner
of more than 5% of our common stock is c/o Tunes.com Inc., 640 North
LaSalle Street, Suite 560, Chicago, Illinois 60610.
(2) The number of shares includes common stock to be issued upon conversion of
preferred stock prior to the completion of this offering, and common stock
that may be issued upon exercise of options and warrants that are currently
exercisable or that may become exercisable within 60 days of June 1, 1999.
The number of outstanding shares used in calculating percentage ownership
for
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each person includes shares underlying options and warrants that they hold,
but excludes shares underlying options and warrants held by others. The
number of outstanding shares used in calculating percentage ownership after
the offering also includes an assumed additional shares that may be
issued shortly following this offering in connection with our July 1998
acquisition of Tunes Network.
(3) Includes 7,500 shares issuable upon exercise of warrants and 1,926,165
shares owned by certain investment partnerships, of which affiliates of GS
Group are the general partner, managing general partner or investment
manager, including:
- 62,955 shares and warrants to purchase 245 shares held of record by
Bridge Street Fund 1997, L.P.;
- 44,570 shares and warrants to purchase 173 shares held of record by
Goldman, Sachs & Co. Verwaltungs GmbH;
- 1,208,535 shares and warrants to purchase 4,706 shares held of record
by GS Capital Partners II, L.P.;
- 480,444 shares and warrants to purchase 1,871 shares held of record by
GS Capital Partners II Offshore, L.P.; and
- 129,661 shares and warrants to purchase 505 shares held of record by
Stone Street Fund 1997, L.P.
GS 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 GS Group and its affiliates. Each of
such investment partnerships shares voting and investment power with
certain of 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 GS Group. Mr.
Gleberman and Mr. Gheewalla disclaim beneficial ownership of the shares
owned by the GS Group, except to the extent of their pecuniary interests
therein.
(4) Consists of shares issuable upon exercise of warrants held by Straight
Arrow Publishers Company, L.P. Mr. Lagana serves as Vice President and
Chief Financial Officer of Wenner Media, the general partner of Straight
Arrow. Mr. Lagana disclaims beneficial ownership of all securities held by
Straight Arrow.
(5) Shares held by netWorth Partners I, LLC. Mr. Goldstein serves as President
of netWorth Partners, L.P., the managing partner of netWorth Partners I,
LLC, and disclaims beneficial ownership of these shares.
(6) Consists of 57,530 shares and options to purchase 326,430 shares.
(7) Consists of 160,710 shares held by Jam Enterprises Corp. (JEC) and options
to acquire 223,250 shares held by JEC. Mr. Mickelson is a principal
shareholder, executive officer and director of JEC. Mr. Mickelson is our
former Chairman. Excludes options to purchase up to 45,730 shares which may
automatically vest upon the closing of this offering, depending upon our
equity market capitalization immediately prior to the closing of this
offering.
(8) Includes options to purchase 177,520 shares held by Mr. Blake and 26,790
shares held by Red 5 Management, Inc., of which Mr. Blake is a principal
shareholder, executive officer and director. Mr. Blake is our former
President.
(9) Consists of options to purchase 90,000 shares held by Mr. Frankel.
(10) Consists of options to purchase 89,070 shares held by Mr. Katz.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 50 million shares of common stock, $0.01 par value per share, and 5 million
shares of preferred stock, $0.01 par value per share. The following description
is a summary of certain 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 June 1, 1999, we had 7,161,117 shares of common stock outstanding,
held by approximately 120 stockholders, which assumes the conversion of all
outstanding shares of preferred stock into 5,719,962 shares of common stock, and
excludes all outstanding warrants and options under our stock option plans.
Holders of common stock are entitled to one vote per share in all matters to be
voted upon by stockholders. Cumulative voting for the election of directors is
not permitted. Holders of common stock do not have preemptive rights, other
subscription rights or conversion rights. There are no redemption provisions
with respect to common stock. All outstanding shares of common stock are
subordinate to, and may be adversely affected by, the shares of any series of
preferred stock which we may issue in the future. The common stock does not
include any sinking fund provisions and 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, under certain circumstances, 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 $3.00 per share. As of June 1,
1999, the warrant was exercisable into approximately 1,020,075 shares of common
stock. The warrant expires on November 2007.
On January 1, 1999, we issued to Source Enterprises a warrant to purchase up
to 75,000 shares of our common stock at an exercise price of $10.00 per share.
The warrant expires on the earliest to occur of (1) the termination of the
agreement during the initial term, (2) 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 (3) December 31, 2008.
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During March and April 1999, we issued warrants to purchase an aggregate of
39,950 shares of common stock in connection with our issuance of $4.0 million of
convertible promissory notes. The warrants have an exercise price of $10.00 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, warrants to purchase 81,315 shares
of common stock exercisable at $10.00 per share. The warrants expire in May
2002.
REGISTRATION RIGHTS AGREEMENT
We have granted registration rights to the holders of all 5,719,962
outstanding shares of preferred stock and to holders of warrants to purchase
121,265 shares. As a result, following this offering and the conversion of the
preferred stock into common stock, and assuming exercise of these warrants,
holders of 5,841,227 shares of our common stock, or % of the outstanding
common stock, will have registration rights. These registration rights may
permit these stockholders to resell their shares of Tunes.com common stock in
the public market earlier than they otherwise could. The market price for our
common stock could fall if stockholders sell large amounts of common stock in
the public market after this offering. See "Risk Factors -- Shares eligible for
future sale by our current stockholders in the public market could cause our
stock price to decline."
The registration rights are set forth in a registration rights agreement
between Tunes.com and the holders of all of our outstanding preferred stock and
the holders of the warrants described above. The following summary of the
registration rights agreement does not purport to be complete and is subject to,
and qualified in its entirety by, the registration rights agreement, a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
DEMAND REGISTRATION RIGHTS. At any time after this offering, stockholders
who own at least 30% of the number of shares that are subject to registration
rights have the right to 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, which we can exercise only once in any 12 month period, 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.
There is no limit on the number of times the stockholders may require us to
register their shares. However, we are not required to register shares if:
- the aggregate offering price for the shares is less than $30.0 million in
the case of an underwritten offering or a registration to be effected on
Form S-1, the SEC's long-form registration statement, or $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.
We have the right to reject a demand for registration if we plan to sell
shares ourselves in an underwritten public offering, although 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, but 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.
Tunes.com is required to pay all expenses, including the fees of one counsel
representing the stockholders, but excluding underwriting discounts and
commissions, in connection with the first two
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demand registrations on Form S-1 and the first two demand registrations on any
form other than Form S-1. The expenses of each subsequent demand registration
will be paid by the persons who are selling shares.
PIGGYBACK REGISTRATION RIGHTS. The stockholders who have registration
rights can request to have their shares registered under the Securities Act any
time we file a registration statement to register our equity securities for our
own account or for the account of any of our stockholders. There is no limit on
the number of times stockholders may exercise these piggyback registration
rights. We will pay all expenses, other than underwriting discounts and
commissions for selling stockholders, in connection with each piggyback
registration.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
The following provisions of Delaware law and our certificate of
incorporation and bylaws could discourage a third party from seeking to acquire
control of, and could make it more difficult for a third party to acquire
control of, our company. These provisions also may limit the price that
investors might be willing to pay in the future for shares of our common stock.
See "Risk Factors -- Anti-takeover provisions of our charter, bylaws and
Delaware law could make a third-party acquisition of us more difficult."
DELAWARE LAW. We are subject to Section 203 of the Delaware General
Corporation Law. This provision generally prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following 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;
- upon consummation of the transaction that resulted in the stockholder
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, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
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 or 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. Certain 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 generally 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 make nominations of
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 at the direction of the
majority of our board of directors or a special committee of our board of
directors that has been delegated the power to call such special meetings.
See "Management -- Board Composition."
The description set forth above is intended as a summary only and is
qualified in its entirety by reference to our certificate of incorporation and
bylaws which have been filed as exhibits to the registration statement filed in
connection with this offering.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank, Chicago, Illinois has been appointed as the
transfer agent and registrar for our common stock.
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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. As described below, for a period of 180 days after this offering,
shares of our common stock will be subject to certain contractual
restrictions regarding resale.
Upon completion of this offering and (1) assuming that no options or
warrants are exercised, and (2) assuming the issuance of an assumed
additional shares of our common stock arising from our acquisition of Tunes
Network, shares of our common stock will be outstanding. Of this amount,
all 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 shares of common stock held by existing stockholders
were sold by us in reliance upon certain exemptions from the registration
requirements of the Securities Act. Of these shares, which represent
% of our capital stock outstanding immediately prior to this offering and
giving effect to the issuance of shares from our acquisition of Tunes
Network, shares will be subject to "lock-up" agreements described below
commencing on the date of this prospectus. Upon expiration of the 180-day
lock-up period, shares will become immediately eligible for sale to the
public without restriction except in the case of our affiliates, and
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 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 certain 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 restricted shares
will have certain rights with respect to the registration of those shares under
the Securities Act. See "Description of Capital Stock -- Registration Rights
Agreement."
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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 2,050,000 shares of common stock reserved for issuance for options
granted under our 1997 stock option plan and 1999 stock option 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.
76
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Tunes.com has agreed to sell to such underwriter, the number of
shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Smith Barney Inc.......................................................
SG Cowen Securities Corporation................................................
U.S. Bancorp Piper Jaffray Inc.................................................
-------------
Total..................................................................
-------------
-------------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., SG Cowen Securities
Corporation and U.S. Bancorp Piper Jaffray Inc. are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to certain 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 certain other
dealers. If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms. The representatives have advised us that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of common
stock at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
All of our officers and directors and certain other stockholders 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 shares of common stock for certain
directors, stockholders, employees and associates of Tunes.com. There can be no
assurance that any of the reserved shares will be so purchased. The number of
shares available for sale to the general public in the offering will be reduced
by the number of reserved shares sold. Any reserved shares not so purchased will
be offered to the general public on the same basis as the other shares offered
hereby.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares will be
determined by negotiations between us and the representatives. Among the factors
to be considered in determining the initial public offering price will be our
record of operations, our current financial condition, our future prospects, our
markets, the 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
77
<PAGE>
valuations of publicly traded companies considered comparable to Tunes.com. We
cannot assure you, however, that the prices at which the shares will sell in the
public market after this offering will not be lower than the price at which they
are sold by the underwriters or that an active trading market in the common
stock will develop and continue after this offering.
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "TUNZ."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<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 certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of the
common stock to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the Nasdaq National Market or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued at any time.
We estimate that our portion of the total expenses of this offering will be
$800,000.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. SG Cowen Securities Corporation served as our exclusive placement
agent in connection with the private placement of our preferred stock in May
1999 for which SG Cowen Securities Corporation received customary fees and
warrants. 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 certain 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.
78
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of our common stock offered
hereby will be passed upon for us by Freeborn & Peters, Chicago, Illinois.
Certain 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.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TUNES.COM INC.
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 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 three months ended March 31, 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 three months ended March
31, 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 three months ended March 31, 1998 and 1999
(Unaudited)............................................................................................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
PRO FORMA COMBINED FINANCIAL INFORMATION
Overview................................................................................................. F-18
Pro Forma Combined Statement of Operations for the year ended December 31, 1998 (Unaudited).............. F-19
Pro Forma Combined Statement of Operations for the three months ended March 31, 1999 (Unaudited)......... F-20
Pro Forma Combined Balance Sheet as of March 31, 1999 (Unaudited)........................................ F-21
Notes to Pro Forma Combined Financial Information (Unaudited)............................................ F-22
TUNES NETWORK, INC.
Report of Independent Auditors........................................................................... F-23
Balance Sheets as of December 31, 1996 and 1997.......................................................... F-24
Statements of Operations for the years ended December 31, 1996 and 1997.................................. F-25
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996 and 1997............................................................................. F-26
Statements of Cash Flows for the years ended December 31, 1996 and 1997.................................. F-27
Notes to Financial Statements............................................................................ F-28
</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
------------- -------------- MARCH 31,
1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,674,236 $ 4,251,082 $ 4,052,653
Accounts receivable, net of allowance of $17,000 in 1998 and
1999............................................................ 130,016 368,720 580,774
Prepaid expenses and other current assets......................... 88,156 374,195 725,630
Restricted investment............................................. 1,000,000 1,000,000 750,000
------------- -------------- --------------
Total current assets.............................................. 3,892,408 5,993,997 6,109,057
Equipment and leasehold improvements.............................. 840,430 1,712,802 1,791,601
Less: Accumulated depreciation.................................... (131,185) (498,636) (635,414)
------------- -------------- --------------
709,245 1,214,166 1,156,187
Restricted investment, less current portion....................... 1,000,000 -- --
Goodwill, net..................................................... -- 3,488,570 2,907,143
Other intangibles, net............................................ -- 682,498 568,744
Other............................................................. -- 33,941 31,933
------------- -------------- --------------
Total assets...................................................... $ 5,601,653 $ 11,413,172 $ 10,773,064
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable................................................ $ 186,084 $ 743,344 $ 526,999
Accrued compensation............................................ 34,690 410,331 289,538
Acquisition liability........................................... -- 404,000 --
Deferred revenue................................................ 110,831 541,246 547,912
Other accrued expenses and current liabilities.................. 181,895 655,271 666,484
------------- -------------- --------------
Total current liabilities......................................... 513,500 2,754,192 2,030,933
Long-term obligations............................................. -- 160,507 139,811
Notes payable..................................................... -- -- 3,570,000
Redeemable convertible preferred stock............................ 8,430,108 22,116,439 22,652,610
Stockholders' deficit:
Common stock, par value $0.01; 11,500,000 shares authorized;
issued and outstanding: 1,340,530 in 1998 and 1999 and
1,150,530 in 1997............................................. 11,505 13,405 13,405
Additional paid-in capital...................................... 748,195 4,020,834 4,449,761
Common stock to be issued....................................... -- 1,055,420 1,055,420
Accumulated deficit............................................. (4,101,655) (18,707,625) (23,138,876)
------------- -------------- --------------
Total stockholders' deficit....................................... (3,341,955) (13,617,966) (17,620,290)
------------- -------------- --------------
Total liabilities and stockholders' deficit....................... $ 5,601,653 $ 11,413,172 $ 10,773,064
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
TUNES.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 2, 1996
(INCEPTION) THREE MONTHS ENDED MARCH 31
TO DECEMBER YEAR ENDED DECEMBER 31
31, ----------------------------- ----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising............................ $ $ 283,807 $ 970,189 $ 145,451 $ 619,795
Other.................................. -- 280,887 1,514,466 308,850 356,924
------------- ------------- -------------- ------------- -------------
Total revenue............................ -- 564,694 2,484,655 454,301 976,719
Cost of revenue.......................... -- 1,267,521 4,045,056 991,376 984,199
------------- ------------- -------------- ------------- -------------
Gross deficit............................ -- (702,827) (1,560,401) (537,075) (7,480)
Operating expenses:
Operations and development............. 32,003 458,381 1,880,480 197,992 751,297
Sales and marketing.................... 36,769 1,064,502 4,034,115 474,691 1,283,881
General and administrative............. 152,859 1,244,676 2,836,678 385,116 854,588
Depreciation and amortization.......... 2,319 156,529 1,777,931 62,869 831,958
Stock compensation expense............. -- 9,700 1,374,539 46,395 198,927
------------- ------------- -------------- ------------- -------------
Total operating expenses 223,950 2,933,788 11,903,743 1,167,063 3,920,651
------------- ------------- -------------- ------------- -------------
Loss from operations..................... (223,950) (3,636,615) (13,464,144) (1,704,138) (3,928,131)
Other income (expense):..................
Interest income........................ 7,353 99,540 432,566 65,793 39,128
Interest expense....................... -- -- (9,438) (220) (6,078)
Other Income........................... -- 15,040 4,568 1,805 --
------------- ------------- -------------- ------------- -------------
Net loss................................. (216,597) (3,522,035) (13,036,448) (1,636,760) (3,895,081)
Accretion of redeemable convertible
preferred stock........................ -- (363,023) (1,569,522) (204,213) (536,170)
------------- ------------- -------------- ------------- -------------
Net loss attributable to common
stockholders........................... $ (216,597) $ (3,885,058) $ (14,605,970) $ (1,840,973) $ (4,431,251)
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Basic and diluted net loss per common
share.................................. $ (0.38) $ ( 3.38) $ (12.35) $ (1.60) $ (3.31)
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Weighted average shares used in per share
calculation............................ 563,620 1,150,530 1,182,371 1,150,530 1,340,530
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Pro forma basic and diluted net loss per
common share........................... $ (2.92) $ (0.77)
-------------- -------------
-------------- -------------
Weighted average shares used in pro forma
per share calculation.................. 4,472,096 5,028,666
-------------- -------------
-------------- -------------
</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) 1,150,530 11,505 -- 738,495 --
Stock compensation expense............ -- -- -- -- -- 9,700 --
Accretion of redeemable convertible
preferred stock...................... -- -- -- -- -- -- (363,023)
Net loss.............................. -- -- -- -- -- -- (3,522,035)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at December 31, 1997.......... -- -- 1,150,530 11,505 -- 748,195 (4,101,655)
Common stock to be issued............. -- -- -- -- 2,955,420 -- --
Common stock issued in connection with
acquisition.......................... -- -- 190,000 1,900 (1,900,000) 1,898,100 --
Stock compensation expense............ -- -- -- -- -- 1,374,539 --
Accretion of redeemable convertible
preferred stock...................... -- -- -- -- -- -- (1,569,522)
Net loss.............................. -- -- -- -- -- -- (13,036,448)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at December 31, 1998.......... -- -- 1,340,530 13,405 1,055,420 4,020,834 (18,707,625)
Issuance of warrants (unaudited)...... -- -- -- -- -- 230,000 --
Stock compensation expense
(unaudited).......................... -- -- -- -- -- 198,927 --
Accretion of redeemable convertible
preferred stock (unaudited).......... -- -- -- -- -- -- (536,170)
Net loss (unaudited).................. -- -- -- -- -- -- (3,895,081)
--------- ---------- ---------- ----------- -------------- ----------- -------------
Balance at March 31, 1999
(unaudited).......................... -- $ -- 1,340,530 $ 13,405 $ 1,055,420 $ 4,449,761 $ (23,138,876)
--------- ---------- ---------- ----------- -------------- ----------- -------------
--------- ---------- ---------- ----------- -------------- ----------- -------------
<CAPTION>
TOTAL
-------------
<S> <C>
Initial capitalization, July 2,
1996:................................ $ 750,000
Net loss for the period from July 2,
1996 to December 31, 1996............ (216,597)
-------------
Balance at December 31, 1996.......... 533,403
Conversion of Members' units to shares
of common stock...................... --
Stock compensation expense............ 9,700
Accretion of redeemable convertible
preferred stock...................... (363,023)
Net loss.............................. (3,522,035)
-------------
Balance at December 31, 1997.......... (3,341,955)
Common stock to be issued............. 2,955,420
Common stock issued in connection with
acquisition.......................... --
Stock compensation expense............ 1,374,539
Accretion of redeemable convertible
preferred stock...................... (1,569,522)
Net loss.............................. (13,036,448)
-------------
Balance at December 31, 1998.......... (13,617,966)
Issuance of warrants (unaudited)...... 230,000
Stock compensation expense
(unaudited).......................... 198,927
Accretion of redeemable convertible
preferred stock (unaudited).......... (536,170)
Net loss (unaudited).................. (3,895,081)
-------------
Balance at March 31, 1999
(unaudited).......................... $ (17,620,290)
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
TUNES.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 2, 1996 THREE MONTHS ENDED MARCH
(INCEPTION) YEAR ENDED DECEMBER 31, 31,
TO DECEMBER -------------------------- ------------------------
31, 1996 1997 1998 1998 1999
------------ ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................... $ (216,597) $(3,522,035) $ (13,036,448) $(1,636,760) $(3,895,081)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 2,319 156,529 1,777,931 62,869 831,958
Stock compensation expense...................... -- 9,700 1,374,539 46,395 198,927
Other noncash items............................. -- (82,500) 100,000 -- --
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable........................... -- (130,016) (234,864) 74,077 (212,053)
Prepaid expenses and other current assets..... (17,458) (70,698) (292,486) (431,064) (349,427)
Accounts payable.............................. 49,980 136,104 172,035 254,883 (216,345)
Accrued compensation.......................... 4,827 29,863 58,520 74,660 (120,793)
Deferred revenue.............................. -- 110,831 430,415 (95,775) 6,666
Other accrued expenses and current
liabilities................................. 45,856 136,039 353,598 2,228 11,213
------------ ----------- ------------- ----------- -----------
Net cash used in operating activities............. (131,073) (3,226,183) (9,296,760) (1,648,487) (3,744,935)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold
improvements..................................... (29,857) (708,073) (584,761) (207,929) (78,798)
Decrease (increase) in restricted investment...... -- (2,000,000) 1,000,000 250,000 250,000
Acquisitions, net of cash acquired (Note 4)....... (27,663) -- (507,783) -- (404,000)
------------ ----------- ------------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... (57,520) (2,708,073) (92,544) 42,071 (232,798)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable....................... -- 500,000 -- -- 3,800,000
Payments on notes payable and capital leases...... -- -- (1,150,659) -- (20,696)
Proceeds from issuance of members' units.......... 750,000 -- -- -- --
Proceeds from issuance of preferred stock, net of
issue costs...................................... -- 7,547,085 12,116,809 4,026,040 --
------------ ----------- ------------- ----------- -----------
Net cash provided by financing activities......... 750,000 8,047,085 10,966,150 4,026,040 3,779,304
------------ ----------- ------------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 561,407 2,112,829 1,576,846 2,419,624 (198,429)
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 $ 5,093,860 $ 4,052,653
------------ ----------- ------------- ----------- -----------
------------ ----------- ------------- ----------- -----------
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 166,666 shares of
preferred stock.................................. $ -- $ 500,000 $ -- $ -- $ --
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 three-month periods ended
March 31, 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 March 31, 1999 and for the
three-month periods ended March 31, 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 Networks, 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 time that
any advertisement is viewed by users of the Company's Web sites. To the extent
minimum guarantees 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 generally consists of advertising displayed
on other companies' Web sites in exchange for the advertising. Barter revenue
and the corresponding expense is recognized in the period the advertising is
displayed or over the useful life of hardware or software received.
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 multimedia
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 144,771 and 1,060,503
shares, respectively. The weighted average number of shares of Redeemable
Convertible Preferred Stock using the if-converted method for 1997 and 1998 were
1,055,295 and 3,289,725 shares, respectively. The weighted-average number of
common shares to be issued was 52,771 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.
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 295,542 shares of common
stock with a fair value of $10 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 March 31, 1999, 105,542 shares of common stock have not
been issued; such shares will be issued in 1999. In addition 50,000 shares of
common stock may be issuable in the event that certain revenue targets are
achieved by June 30, 1999, and up to an additional 100,000 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 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.
Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming Tunes Network had
been consolidated since January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Revenue........................................................ $ 863,810 $ 2,725,641
Net loss attributable to common stockholders................... (8,392,892) (17,004,117)
Net loss per common share...................................... (6.26) (12.68)
</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.
F-10
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
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).
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.
F-11
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITALIZATION
At March 31, 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.
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.
PREFERRED STOCK
The Company's preferred stock is convertible at any time into common stock
on a one-for-one basis, subject to certain antidilution 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 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.
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 $41,043,000.
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.
NOTES PAYABLE
In March 1999, the Company issued convertible promissory notes in the amount
of $3,800,000. The notes payable bear interest at 8% per annum and are due March
2001. The notes payable automatically convert to preferred stock upon completion
of a Qualified Financing as defined by the agreement (see Note 13).
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 $3.00 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 occurrence of certain dilution criteria, as defined
F-12
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITALIZATION (CONTINUED)
in the Agreement. The estimated fair value of the warrant at each date of
issuance is being amortized over the initial three-year term of the Agreement.
At December 31, 1997 and 1998, warrants to purchase 419,224 and 715,221 shares
of the Company's common stock were outstanding. During 1997 and 1998, $9,700 and
$461,929 was included in stock compensation expense in the Company's statement
of operations, respectively. The warrant may be exercised at any time on or
after certain triggering events, including an initial public offering by the
Company or the closing of a private round of equity financing at a minimum
amount as defined in the Agreement (see Note 13), or upon the occurrence of
certain change of control events.
On January 1, 1999, in connection with an affiliation agreement, the Company
issued a warrant to purchase up to 75,000 shares of common stock at an exercise
price of $10.00 share. The warrant expires December 2008 and 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 (see Note 13), or December 2003. The estimated fair
value at the date of issuance is being amortized over the initial two-year term.
Stock compensation expense of $8,157 was recorded in connection with this
warrant during the three months ended March 31, 1999.
In connection with the convertible promissory notes issued in March 1999,
warrants to purchase 38,000 shares of common stock at an exercise price of
$10.00 per share were issued. These warrants expire upon the earlier of an
initial public offering or March 2001. The value of the warrants ($230,000) has
been recorded in 1999.
7. STOCK OPTION PLAN
Under the Company's 1997 Stock Option Plan (the 1997 Plan), 1,550,000 shares
of common stock are authorized for granting of options to key employees of the
Company as determined by the Compensation Committee of the Board of Directors.
At December 31, 1998, 224,220 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........................... -- $ -- 863,660 $ 2.64
Granted.................................................. 863,660 $ 2.64 480,020 $ 7.31
Canceled................................................. -- $ -- (17,900) $ 6.25
--------- ----------
Outstanding, end of year................................. 863,660 $ 2.64 1,325,780 $ 4.28
--------- ----------
--------- ----------
Exercisable, end of year................................. 390,780 $ 1.53 819,063 $ 3.19
--------- ----------
--------- ----------
</TABLE>
F-13
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTION PLAN
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>
$1.00 287,600 8.4 287,600
3.00 445,410 8.5 252,673
5.00 277,000 8.9 208,790
7.50 197,420 9.2 70,000
10.00 118,350 9.8 --
----------- -------
1,325,780.. 8.8 819,063
----------- -------
----------- -------
</TABLE>
Pursuant to a severance agreement at December 31, 1998, 45,730 stock options
were transferred to the individual's company 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 $3.59 and $15,026,000 and
$12.71 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 $.61 and $1.66, 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 500,000
shares. As of March 31, 1999 there were no options outstanding under the 1999
Plan.
8. RETIREMENT PLAN
Effective June 1, 1998, the Company established a defined contribution plan
that includes an employee 401(k) contribution provision covering substantially
all employees. The plan permits eligible employees to make voluntary
contributions on a pretax basis up to a certain limit. The Company does not
currently make contributions to the plan.
F-14
<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 is also
required to pay a $1,500,000 Trigger License Fee upon completion of a qualified
private or public offering (see Note 13).
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 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 $1,200,000 during 1999.
F-15
<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 realize the benefit of the asset in future years.
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>
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.
F-16
<PAGE>
TUNES.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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 an L.L.C. 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 $130,000 in 1996, 1997 and 1998,
respectively. A stockholder of JPL was the Company's Chairman of the Board
through 1998.
The Company leases office space from an entity in which the Company's CEO
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
founder and CEO. 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 founder and CEO, 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 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 issued in
March and April 1999 and related accrued interest of $60,260 which were
converted to preferred stock. As a result of this private offering the
$1,500,000 Trigger license fee (see Note 9) became due. In addition, warrants to
purchase 1,095,075 shares of common stock became exercisable and the Company
recorded stock compensation expense of approximately $3,585,000 in May 1999 (see
Note 9).
F-17
<PAGE>
TUNES.COM INC.
PRO FORMA FINANCIAL INFORMATION
OVERVIEW
(UNAUDITED)
The following unaudited pro forma financial information (the "Unaudited Pro
Forma 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 Financial Information gives
effect to (i) the issuance of preferred stock in May 1999; (ii) the conversion
of convertible promissory notes into preferred stock in May 1999; (iii) the
conversion of all outstanding preferred stock into common stock upon
consummation of the Company's initial public offering; (iv) the issuance of
additional common stock related to the acquisition of the Tunes Network, which
was effective July 1998; and (v) the payment of a license fee and related
amortization, as if such events had occurred on March 31, 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 three months ended March 31, 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-18
<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...................................... 4,045,056 229,122 214,286(a) 4,488,464
-------------- ------------- ------------ -------------
Gross profit (deficit)............................... (1,560,401) 11,864 (214,286) (1,762,823)
Operating expenses:
Operations and development......................... 1,880,480 440,208 2,321,188
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)
(c)
Stock compensation................................. 1,374,539 203,628 1,578,167
-------------- ------------- ------------ -------------
Total operating expenses............................. 11,903,743 942,980
-------------- ------------- ------------ -------------
Loss from operations................................. (13,464,144) (931,116)
Other income......................................... 427,696 (76,673) 351,023
-------------- ------------- ------------ -------------
Net loss............................................. $ (13,036,448) $ (1,007,789) $ $
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
Basic and diluted net loss per common share.......... $
-------------
-------------
Weighted average number shares used in per share
calculation........................................
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-19
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
TUNES.COM (2)
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
<S> <C> <C> <C>
Revenue:
Advertising................................................... $ 619,795 $ 619,795
Other......................................................... 356,924 356,924
------------- ----------- -------------
Total revenue................................................... 976,719 976,719
Cost of revenue................................................. 984,199 53,571(a) 1,037,770
------------- ----------- -------------
Gross deficit................................................... (7,480) (53,571) (61,051)
Operating expenses:
Operations and development.................................... 751,297 751,297
Sales and marketing........................................... 1,283,881 1,283,881
General and administrative.................................... 854,588 854,588
Depreciation and amortization................................. 831,958 (c)
Stock compensation............................................ 198,927 198,927
------------- ----------- -------------
Total operating expenses........................................ 3,920,651
------------- ----------- -------------
Loss from operations............................................ (3,928,131)
Other income.................................................... 33,050 33,050
------------- ----------- -------------
Net loss........................................................ $ (3,895,081) $
------------- ----------- -------------
------------- ----------- -------------
Basic and diluted net loss per common share..................... $
-------------
-------------
Weighted average number shares used in per share calculation....
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-20
<PAGE>
TUNES.COM INC.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
TUNES.COM (1)
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash..................................................... $ 4,052,653 $ 195,000(a) $ 17,850,653
15,103,000(b)
(1,500,000 (c)
Accounts receivable...................................... 580,774 580,774
Prepaid expenses and other current assets................ 725,630 725,630
Restricted investment.................................... 750,000 750,000
-------------- -------------- --------------
Total current assets................................... 6,109,057 14,008,000 19,907,507
Equipment and leasehold improvements....................... 1,791,601 1,791,601
Accumulated depreciation................................... (635,414) (635,414)
-------------- -------------- --------------
1,156,187 1,156,187
Goodwill, net.............................................. 2,907,143 (e)
Intangibles, net........................................... 568,744 568,744
Other...................................................... 31,933 1,500,000(c) 1,531,933
-------------- -------------- --------------
Total assets............................................... $ 10,773,064 $
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 526,999 $ -- $ 526,999
Accrued compensation..................................... 289,538 289,538
Deferred revenue......................................... 547,912 547,912
Other accrued expenses and current liabilities........... 666,484 666,484
-------------- -------------- --------------
Total current liabilities................................ 2,030,933 2,030,933
Long term obligations...................................... 139,811 139,811
Notes payable.............................................. 3,570,000 195,000(a)
(3,765,000 (b) --
Redeemable convertible preferred stock..................... 22,652,610 18,851,011(b)
(41,503,621 (d) --
Stockholders' equity (deficit)
Common stock............................................... 13,405 57,199(d)
(e)
Additional paid-in capital................................. 4,449,761 77,249(b)
41,446,422(d)
(e)
Accumulated deficit........................................ (23,138,876) (60,260 (b) (23,199,136)
Common stock to be issued.................................. 1,055,420 1,055,420
-------------- -------------- --------------
Total stockholders' equity (deficit)....................... (17,620,290)
-------------- -------------- --------------
Total liabilities and stockholders' equity (deficit)....... $ 10,773,064 $ $
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
F-21
<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 three months ended March 31, 1999.
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 three months ended March 31, 1999, and includes the
following:
(a) To record the amortization of a $1,500,000 license fee and a five-year
extension of a license agreement, both 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 ( ) recorded in
connection with the issuance of 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 $ 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 March 31, 1999.
1. This column represents the pro forma adjustments applied to the Company's
historical consolidated balance sheet as of March 31, 1999, and includes the
following:
(a) To record the issuance of notes payable in April 1999.
(b) To record the May 1999 issuance of 2,031,826 shares of preferred stock
with net proceeds of $15,103,000 and the related conversion of $3,995,000
notes payable and related accrued interest ($60,260) to preferred stock
and to additional paid-in capital for the fair value of a related warrant
($77,249).
(c) To record the payment of a $1,500,000 license fee triggered by the May
1999 equity financing.
(d) To record the conversion on a one-to-one basis of preferred stock into
5,719,962 shares of common stock.
(e) To record as additional consideration for the acquisition of Tunes
Network, the issuance of shares of common stock, which are issuable
upon reaching certain minimum equity market capitalization thresholds
soon after the completion of an initial public offering by the Company.
F-22
<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-23
<PAGE>
TUNES NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable.................................................................. $ 791 $ 13,852
Advances to shareholders............................................................. 10,220 --
Prepaids and other current assets.................................................... 12,474 --
----------- ------------
Total current assets................................................................... 23,485 13,852
Property and equipment, net............................................................ 186,240 172,365
Other assets........................................................................... 5,243 13,615
----------- ------------
Total assets........................................................................... $ 214,968 $ 199,832
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft....................................................................... $ 9,305 $ 3,309
Accounts payable..................................................................... 169,639 251,177
Accrued compensation................................................................. 222,383 536,557
Other accrued expenses............................................................... 6,586 119,969
Payables to officers................................................................. 97,816 271,376
Current obligations under capital leases............................................. 23,701 40,984
Current obligations under revolving line of credit with a related party.............. -- 185,000
Convertible note payable to a related party.......................................... -- 50,000
Notes payable to related parties..................................................... -- 33,465
Note payable......................................................................... -- 15,000
----------- ------------
Total current liabilities.............................................................. 529,430 1,506,837
Obligations under capital leases, net of current portion............................... 91,895 78,803
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 and 5,940,500
shares issued and outstanding at December 31, 1996 and 1997, respectively.......... 21,861 351,019
Accumulated deficit.................................................................. (574,708) (2,201,827)
----------- ------------
Total stockholders' equity (deficit)................................................... (552,847) 1,850,808
----------- ------------
Total liabilities and stockholders' equity (deficit)................................... $ 214,968 $ 199,832
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-24
<PAGE>
TUNES NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -------------
<S> <C> <C>
Revenue............................................................................... $ 62,693 $ 299,116
Cost of revenue....................................................................... 12,048 247,798
----------- -------------
50,645 51,318
Operating expenses:
Operating and development........................................................... 267,257 737,873
Sales and marketing................................................................. 203,336 344,155
General and administrative.......................................................... 190,966 597,033
----------- -------------
661,559 1,679,061
----------- -------------
Loss from operations.................................................................. (610,914) (1,627,743)
Other income.......................................................................... -- 10,000
Interest expense...................................................................... (21,137) (41,661)
----------- -------------
Loss from continuing operations....................................................... (632,051) (1,659,404)
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)
----------- -------------
----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-25
<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)
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-26
<PAGE>
TUNES NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................................................. $ (418,278) $ (1,627,119)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 60,826 105,868
Common stock issued to employees and third parties in exchange for services......... 3,073 329,158
Changes in operating assets and liabilities:
Accounts receivable............................................................... (791) (13,061)
Advances to shareholders.......................................................... (10,220) 10,220
Prepaids and other current assets................................................. (8,536) 12,474
Other assets...................................................................... (9,586) (8,372)
Accounts payable.................................................................. 106,074 81,538
Accrued compensation.............................................................. 139,472 314,174
Other accrued expenses............................................................ 2,322 113,383
----------- -------------
Net cash used in operating activities................................................. (135,644) (681,737)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................................................... (28,650) (66,014)
----------- -------------
Net cash used in investing activities................................................. (28,650) (66,014)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft........................................................................ 7,985 (5,996)
Proceeds from payables to officers.................................................... 145,385 316,700
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
Proceeds from notes payable to related parties........................................ -- 25,000
Repayment of notes payable to related parties......................................... (7,260) (3,025)
Proceeds from notes payable........................................................... -- 15,000
Proceeds from bridge financing........................................................ -- 465,000
Repayment of lease obligations........................................................ (69,247) (21,788)
----------- -------------
Net cash provided by financing activities............................................. 164,294 747,751
----------- -------------
Net increase in cash and cash equivalents............................................. -- --
Cash and cash equivalents at beginning of period...................................... -- --
----------- -------------
Cash and cash equivalents at end of period............................................ $ -- $ --
----------- -------------
----------- -------------
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................................................. $ 15,735 $ 24,571
----------- -------------
----------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment under capital lease obligations.................. $ 112,934 $ 25,979
----------- -------------
----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-27
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
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
website 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.
Effective July 1, 1998, substantially all of the Company's business was
merged with and into Tunes Acquisition Corp., a wholly owned subsidiary of JAMtv
Corporation. No adjustments to recorded amounts of assets or liabilities
resulting from the merger have been included in the accompanying financial
statements.
2. 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.
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.
F-28
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"). The Company is required to
adopt this statement in 1998. SFAS 130 establishes new standards for reporting
and displaying comprehensive income and its components. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
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.
3. 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-29
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. 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.
5. 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.
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
F-30
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
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.
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.
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.
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 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.
F-31
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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.
7. 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.
8. 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.
F-32
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
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.
9. SUBSEQUENT EVENTS
CONVERTIBLE NOTES PAYABLE
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. In June 1998, upon the sale of
the Company to JAMtv, such amounts, in addition to $465,000 received in 1997,
under the bridge financing agreements and $50,000 received under a convertible
note payable were automatically converted into 1,693,093 shares of common stock
of the Company pursuant to the terms of the agreements.
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.
F-33
<PAGE>
TUNES NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. 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-34
<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 (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>
- -----------------------------------
- -----------------------------------
SHARES
COMMON STOCK
[LOGO]
------
P R O S P E C T U S
, 1999
---------
SALOMON SMITH BARNEY
SG COWEN SECURITIES CORPORATION
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.................................................................................. $ 12,788
NASD filing fee....................................................................................... 5,100
Nasdaq National Market listing fee.................................................................... 90,000
Printing expenses..................................................................................... 200,000
Legal fees and expenses............................................................................... 300,000
Accounting fees and expenses.......................................................................... 150,000
Blue Sky fees and expenses............................................................................ 10,000
Transfer agent and registrar fees..................................................................... 10,000
Miscellaneous expenses................................................................................ 22,112
----------
Total............................................................................................. $ 800,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of our certificate of incorporation ("Article X") 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 certain
limitations, Article X eliminates the personal liability of our directors to us
and our stockholders for monetary damages for breaches of fiduciary duty as a
director. However, Article X does not eliminate director liability: (i) for
breaches of the duty of loyalty to us and our stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for transactions from which a director derives improper
personal benefit; and (iv) under Section 174 of the Delaware General Corporation
Law ("Section 174"). 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 requires us to indemnify our directors to the fullest extent
permitted under Section 145 ("Section 145") of the Delaware General Corporation
Law (which is described in part below). In addition, with certain limitations,
Section 6.1 of our bylaws ("Section 6.1") 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 Section 145,
indemnification is limited to officers and directors who have acted in good
faith and in a manner they reasonably believed to be in our best interests or
not opposed to our best interests and, with respect to any criminal proceeding,
had no reasonable cause to believe their conduct was illegal. Any questions
regarding whether the current officer or director has met the required standards
of conduct are to be answered by: (i) a majority of our disinterested directors;
(ii) by a committee of disinterested directors designated by a majority vote
II-1
<PAGE>
of the disinterested directors; (iii) if there are no disinterested directors or
if the directors so direct, a written opinion of independent legal counsel
selected by our board of directors or (iv) our stockholders. Section 6.1
requires us to pay the person's expenses for the defense of any such proceeding
before the final disposition, provided such person undertakes to repay all
advanced funds if the person is ultimately determined to be liable.
Indemnification rights under Article X are non-exclusive. Rights under Section
6.1 are separable, and if any part of that section is determined to be invalid
for any reason, all other parts remain in effect.
Under Section 145, directors and officers, as well as other employees and
individuals, may be indemnified against expenses (including 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 -- 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.
The Company maintains a directors and officers liability insurance policy
which provides for indemnification of our directors, officers and certain
employees for certain liabilities.
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."
Our predecessor, Digital Entertainment, issued a principal amount of
$500,000 of notes as of March, April and May 1997 to its members. No underwriter
was involved and no selling commissions were paid.
On June 2, 1997, we issued 1,150,350 shares of common stock to the members
of Digital Entertainment in exchange for all outstanding equity interests of
Digital Entertainment as part of our reorganization of Digital Entertainment
into our Company. No underwriter was involved and no selling commissions were
paid.
On June 2, 1997, we issued 1,500,000 shares of Series A-I preferred stock to
GS Group for $4.5 million at $3.00 per share and 166,666 shares of Series A-I
preferred stock to the holders of Digital Entertainment's notes which were
issued as of March 31, 1997, as described above. The noteholders received the
stock in exchange for cancellation of the notes issued by Digital Entertainment.
No underwriter was involved in the offering and no commissions were paid.
II-2
<PAGE>
On October 31, 1997, we issued 200,000 shares of Series A-II preferred stock
to GS Group for $1.0 million at $5.00 per share. In addition, in November and
December 1997, we issued 472,000 shares of Series B preferred stock for an
aggregate price of $2.3 million at $5.00 per share. No underwriter was involved
in the offering and no commissions were paid.
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 $3.00 per
share. As of June 1, 1999, the warrant was exercisable into approximately
1,020,075 shares of common stock. The warrant was granted in connection with our
agreement to be the exclusive licensee of certain music content of ROLLING STONE
magazine. The warrant expires in November 2007. No underwriter was involved in
the offering and no commissions were paid.
During February and March 1998, we issued 533,334 shares of Series C
preferred stock for $4.0 million at $7.50 per share. No underwriter was involved
in the offering and no selling commissions were paid.
During May and June 1998, we issued 150,000 shares of Series A-III preferred
stock to GS Group for $1.5 million at $10.00 per share. In addition, we issued
666,136 shares of Series D preferred stock for $6.7 million at $10.00 per share.
No underwriter was involved in the offering and no selling commissions were
paid.
In connection with our acquisition of Tunes Network in July 1998,
headquartered in Berkeley, California, we issued an aggregate of 190,000 shares
of common stock to the shareholders of Tunes Network. We have also issued an
additional 100,000 shares. In addition, we agreed to issue up to an additional
100,000 shares if we meet certain minimum equity market capitalization
thresholds at any time prior to three months after the date of our initial
public offering, determined by multiplying the number of shares outstanding
immediately prior to our initial public offering by the initial public offering
price per share or the trading price of our common stock during such three-month
period. No underwriter was involved in the offering and no commissions were
paid.
On January 1, 1999, we issued to Source Enterprises a warrant to purchase up
to 75,000 shares of our common stock at an exercise price of $10.00 per share.
The warrant was granted in connection with our agreement to be the exclusive
licensee of certain music content of THE SOURCE magazine. The warrant expires on
the earliest to occur of (a) the termination of the agreement during the initial
term, (b) 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 (c) December 31, 2008.
No underwriter was involved in the offering and no commissions were paid.
During March and April 1999, we issued an aggregate of $4.0 million
principal amount of convertible promissory notes, which accrued interest at 8%
per annum. These notes automatically converted into Series A-IV and Series E
preferred stock in May 1999. Purchasers of the notes received a two-year warrant
to purchase one share of our common stock for each $100 of principal under the
notes at an exercise price of $10.00 per share.
During May 1999, we issued 76,165 shares of Series A-IV preferred stock and
1,955,661 shares of Series E preferred stock for $15.1 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 81,315 shares of our common stock
exercisable at $10.00 per share for serving as placement agent and we paid Keith
Ohnmies $23,000 for serving as a finder.
Since our inception and until March 31, 1999, we have granted options under
our 1997 and 1999 stock option plans to acquire an aggregate of 1,477,929 shares
of common stock. The exercise prices of
II-3
<PAGE>
those options range from $1.00 per share for options issued in 1997 to $10.00
per share for options issued since June 1998.
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.
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
II-4
<PAGE>
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.
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on June 14, 1999.
<TABLE>
<S> <C> <C>
TUNES.COM INC.
By: /s/ HOWARD A. TULLMAN
-----------------------------------------
Howard A. Tullman
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Howard A. Tullman and Stuart B. Frankel,
and each of them acting individually, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof. This power of attorney may be executed
in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 14, 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
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ BURTON B. GOLDSTEIN, JR.
------------------------------------------- Director
BURTON B. GOLDSTEIN, JR.
/s/ MATTHEW S. KAPLAN
------------------------------------------- Director
MATTHEW S. KAPLAN
/s/ JOHN M. LAGANA
------------------------------------------- Director
JOHN M. LAGANA
</TABLE>
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 Amended and Restated Registration Rights Agreement by and among Registrant and its preferred
stockholders
*4.4 1997 Stock Option Plan
*4.5 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
*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
*10.5 Employment Agreement with Howard A. Tullman dated as of June 2, 1997
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*10.6 Employment Agreement with Stuart B. Frankel dated as of April 1, 1998
21.1 List of Subsidiary Corporation
23.1 Consent of Ernst & Young LLP
23.2 Consent of Freeborn Peters (included in Exhibit 5.1)
24.1 Power of Attorney -- reference is made to II-2
27.1 Financial Disclosure Schedule
</TABLE>
- ------------------------
* To be filed by amendment
+ Confidential treatment has or will be requested.
E-2
<PAGE>
AGREEMENT OF REORGANIZATION
This AGREEMENT OF REORGANIZATION ("Agreement") is made as of the 21st
day of May, 1997, by and between Digital Entertainment Networks, L.L.C., an
Illinois limited liability company (the "Company"), each member of the
Company (collectively, the "Members," each individually, a "Member"), Howard
A. Tullman ("Tullman"), Red 5 Management, Inc., an Illinois corporation ("Red
5"), Jam Enterprises Corp., an Illinois corporation ("Jam Enterprises," and
together with Red 5 and Tullman, the "Managers"), each holder of options to
acquire Units of the Company (collectively, the "Option Holders," and each
individually, an "Option Holder"), and JAMtv Corporation, a Delaware
corporation ("JAMtv"). Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed such terms in that certain
Operating Agreement of the Company dated July 2, 1996 by and among the
Members and the Managers, as amended (the "Operating Agreement").
RECITALS
WHEREAS, the Members and Managers collectively hold all of the 115,053
issued and outstanding Units of the Company;
WHEREAS, the Option Holders collectively hold all of the 28,760 issued
and outstanding options (the "LLC Options") granted pursuant to a certain
Unit Option Plan of the Company (the "Unit Option Plan") to acquire Units of
the Company;
WHEREAS, the Members and the Managers desire to amend the Operating
Agreement with respect to certain matters set forth herein;
WHEREAS, the parties deem it advisable and in the best interests of the
stockholders of JAMtv that JAMtv enter into a certain Preferred Stock
Purchase Agreement, by and between the Company, G.S. Capital Partners, L.P.,
a Delaware limited partnership (or such other party or parties as Goldman,
Sachs & Co. may designate) (hereinafter "GSCP"), and certain Members who have
previously entered into a Note Purchase Agreement made as of the 31st day of
March 1997, with the Company, and that pursuant to such Preferred Stock
Purchase Agreement, JAMtv shall issue shares of Series A Convertible
Preferred Stock, par value $0.01 per share, of JAMtv ("JAMtv Preferred
Stock");
WHEREAS, the parties deem it advisable and in the best interests of the
stockholders of JAMtv and the Members of the Company that, subject to certain
conditions precedent, including the closing of the stock purchase and sale
transaction contemplated by the Preferred Stock
<PAGE>
Purchase Agreement, all of the Members exchange all of their Units for shares
of common stock, par value $.01 per share, of JAMtv ("JAMtv Common Stock")
pursuant to the terms hereof; and
WHEREAS, subject to certain conditions precedent, including the closing
of the stock purchase and sale transaction contemplated by the Preferred
Stock Purchase Agreement, the parties desire to provide for the distribution,
conveyance, and transfer to JAMtv of all of the rights, properties, assets,
and interests of the Company and the assumption by JAMtv of all of the
Company's obligations and liabilities, and to further provide for the
dissolution of the Company all in accordance with the terms hereof.
NOW THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged
by all parties hereto, the parties agree as follows:
ARTICLE I
AMENDMENT TO OPERATING AGREEMENT
1.1 EXECUTION AND DELIVERY OF AMENDMENT. Each of the Members and
Managers hereby approves, and shall execute and deliver contemporaneously
herewith, the Second Amendment to Operating Agreement in the form attached
hereto as EXHIBIT A (the "Second Amendment"). Each of the Members and
Managers acknowledges and agrees that the Second Amendment is necessary and
desirable to correct certain erroneous provisions of that certain First
Amendment to Operating Agreement of Digital Entertainment Networks, L.L.C.
dated on or about September 18, 1996 by and among the "Members" (as defined
therein).
ARTICLE II
EXCHANGE OF UNITS FOR JAMTV COMMON STOCK; UNIT OPTION PLAN
2.1 EXCHANGE. Notwithstanding any term or provision of the Operating
Agreement to the contrary, at the "Effective Time" (as hereinafter defined)
and without any further action by the Company, JAMtv, the Members, the
Managers, or any other person, each Member shall and hereby does contribute,
convey, and assign over to JAMtv all Units of the Company held by such Member
(and JAMtv does hereby accept the same), and JAMtv shall and hereby does
issue to each Member ten (10) shares of JAMtv Common Stock in exchange for
each Unit of the Company held by such Member (the "Exchange"). The "Unit
Exchange Schedule" attached hereto as SCHEDULE 1 and made a part hereof shall
be conclusive, absent manifest error, as to the amount of Units held by an
Member immediately prior to the Exchange and the amount of shares
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of JAMtv Common Stock issuable to such Member pursuant to this SECTION 2.1.
In furtherance of the Exchange, each of the Members shall execute and
deliver, contemporaneously herewith, a Subscription Agreement (a
"Subscription Agreement") in the form attached hereto as EXHIBIT B, together
with a "Questionnaire" and a "Power of Attorney," each attached to such
Subscription Agreement.
2.2 EFFECTIVE TIME. The time at which the Exchange becomes effective
is the time at which the following conditions have been fulfilled:
(a) the Company receives Subscription Agreements duly completed and
executed by all of the Members, and
(b) GSCP shall enter into the Preferred Stock Purchase Agreement and
shall pay, or shall commit to pay, for the purchase of 1,500,000 shares of
JAMtv Preferred Stock in accordance with the terms of Preferred Stock
Purchase Agreement.
Such time is sometimes herein referred to as the "Effective Time" and the
date on which the Effective Time occurs is sometimes herein referred to as
the "Effective Date."
2.3 ISSUANCE OF JAMTV COMMON STOCK CERTIFICATES. The shares of JAMtv
Common Stock issued pursuant to the Exchange shall be deemed to have been
issued at the Effective Time. On the Effective Date (or such other date
subsequent thereto as JAMtv and a Member shall agree), JAMtv, or its transfer
agent or other agent designated by JAMtv for such purpose (the "Issuing
Agent") shall issue and deliver to each Member a certificate evidencing the
shares of JAMtv Common Stock to which it, he or she is entitled under SECTION
2.1. From and after the Effective Time until such certificates are so
delivered, the registered owner on the books and records of the Company of
the applicable exchanged Unit shall have and be entitled to exercise any
voting and other rights with respect to, and to receive dividends and other
distributions upon, the shares of JAMtv Common Stock to be represented by
such certificate. Each certificate representing JAMtv Common Stock so issued
in the Exchange shall bear legends describing the restrictions on
transferability to which such shares of JAMtv Common Stock shall be subject,
including the restrictions contained in the Stockholders' Agreement described
in SECTION 6.1(b) below.
2.4 CANCELLATION OF OUTSTANDING SHARES OF JAMTV COMMON STOCK Upon the
Effective Time, all shares of JAMtv Common Stock outstanding immediately
prior to the Effective Time shall, without any action on the part of the
holders thereof, be canceled without payment of any consideration therefor
and cease to exist and be outstanding.
2.5 OPTIONS TO PURCHASE UNITS.
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(a) EXCHANGE OF OPTIONS. Notwithstanding any term or provision to
the contrary in the Operating Agreement, the Unit Option Plan, the Option
Grant Letter (as defined in the Unit Option Plan), or any other agreement
relating to the LLC Options (collectively, the "LLC Option Documents"),
upon the Effective Time, each of the LLC Options which is issued and
outstanding immediately prior to the Exchange shall be converted into and
become an option (the "JAMtv Options") to purchase ten shares of JAMtv
Common Stock pursuant to the terms and conditions of the JAMtv Corporation
Stock Option Plan (a copy of which is attached hereto as EXHIBIT C-1) (the
"JAMtv Stock Option Plan"). Notwithstanding the foregoing, the conversion
of LLC Options into JAMtv Options shall not be effective until the
execution and delivery by the Option Holders of a Stock Option Agreement in
a form substantially the same as the Stock Option Agreement attached hereto
as EXHIBIT C-2 (the "Stock Option Agreement"), which, together with the
JAMtv Corporation Stock Option Plan, shall govern all rights and
obligations with respect to the JAMtv Options. The "Unit Exchange
Schedule" attached hereto as SCHEDULE 1 and made a part hereof shall be
conclusive, absent manifest error, as to the number of LLC Options held by
an Option Holder immediately prior to the Exchange and the number of shares
of JAMtv Common Stock which such Option Holder shall be entitled to
purchase upon exercise of the JAMtv Options.
(b) EXERCISE PRICE AND VESTING. The parties acknowledge and agree
that, pursuant to Section 8.a. of the Unit Option Plan, the LLC Options
would have been immediately exercisable in full upon written notice from
the Management Board (as defined in the Unit Option Plan) that the Exchange
has become effective. Therefore, the JAMtv Options into which the LLC
Options shall be converted on the Effective Date shall become vested and be
immediately exercisable in full on such date. The exercise price of the
JAMtv Options shall be $1.00 per share of JAMtv Common Stock, which is
equal to the exercise price of the LLC Options (after giving effect to the
ten-for-one exchange provided in the Exchange).
(c) LLC OPTION DOCUMENTS. Upon the issuance of the JAMtv Options to
the Option Holders on the Effective Date, the LLC Option Documents shall
terminate and have no further effect. At such time, neither the Company,
JAMtv, nor any of the Option Holders shall have any rights or obligations
under or with respect to any of the LLC Option Documents, and each shall be
governed by the JAMtv Option documents, as provided in subsection (a)
above.
2.6 CERTIFICATE OF INCORPORATION. Each of the Members and Option
Holders hereby acknowledges the execution of, and filing of, the Restated and
Amended Certificate of Incorporation of JAMtv in the form attached hereto as
EXHIBIT D-1 (the "Restated Certificate") by JAMtv with the Secretary of State
of the State of Delaware.
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2.7 BY-LAWS. Each of the Members and Option Holders hereby
acknowledges the adoption by JAMtv of the By-laws of JAMtv in the form
attached hereto as EXHIBIT D-2.
2.8 STOCK OPTION PLAN. Each of the Members and Option Holders hereby
acknowledges the adoption by JAMtv of the JAMtv Stock Option Plan.
2.9 DIRECTORS AND OFFICERS. Each of the Members and the Option
Holders hereby acknowledges the election of the directors and the appointment
of officers of JAMtv set forth on SCHEDULE 2 attached hereto and made a part
hereof.
ARTICLE III
DISTRIBUTION OF ASSETS OF THE COMPANY TO JAMTV AND
ASSUMPTION OF COMPANY LIABILITIES BY JAMTV
Notwithstanding any term or provision in the Operating Agreement to the
contrary, effective at the Effective Time:
3.1 SALE OF PURCHASED ASSETS. The Company shall and hereby does
convey, assign, and transfer to JAMtv, and JAMtv shall and hereby does
accept, on a going concern basis, all of the Company's right, title, and
interest in all properties, assets, rights and interests of every kind and
nature (including under the Assigned Contracts defined below), whether real
or personal, tangible or intangible, and wherever located and by whomever
possessed, owned by, used by, occupied by or held by or for the benefit of
the Company as of the Effective Time, including, without limitation, those
assets described on SCHEDULE 3 hereto and made a part hereof (the "Conveyed
Assets").
3.2 ASSIGNMENT AND ASSUMPTION. The Company shall and hereby does
convey, assign, and transfer, to JAMtv, and JAMtv shall and hereby does
accept and assume, all of the Company's debts, duties, liabilities, and
obligations, including any debts, duties, liabilities, or obligations under
any contracts, agreements, leases, licenses, instruments, promises (written
or oral), undertakings, instruments or other writings to which the Company is
a party, by which the Company is bound, or to which any of the Conveyed
Assets are subject (the "Assumed Liabilities"), including, without
limitation, those agreements set forth on SCHEDULE 4 attached hereto and made
a part hereof (the "Assigned Contracts"); PROVIDED, HOWEVER, that each of the
Operating Agreement and (subject to Section 2.5 herein) the LLC Option
Documents shall terminate and shall be of no further force or effect.
3.3 NO WARRANTIES. THE COMPANY EXPRESSLY DISCLAIMS ALL WARRANTIES,
WHETHER EXPRESS OR IMPLIED, OF ANY NATURE, RELATING TO THE CONVEYED ASSETS,
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INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE, WITH RESPECT TO THE CONVEYED ASSETS, AND JAMTV ACQUIRES
ALL OF THE CONVEYED ASSETS "AS IS, WHERE IS."
3.4 DISTRIBUTION. The conveyance of the Conveyed Assets and the
assignment and assumption of the Assumed Liabilities as set forth in this
Article III are sometimes referred to as the "Distribution."
ARTICLE IV
THE DISSOLUTION OF THE COMPANY
Notwithstanding any term or provision in the Operating Agreement to the
contrary, effective immediately after to the Distribution:
4.1 DISSOLUTION. Each party hereto does hereby acknowledge and
consent to any and all actions taken by JAMtv, in its capacity as sole member
of the Company, necessary or desirable to dissolve the Company, and upon such
dissolution, to effect the transfer and conveyance to, and the assumption by,
JAMtv of all of the Company's rights, interests, and properties, and all of
its debts, duties, and liabilities (if any) remaining with the Company
subsequent to the Distribution (the "Dissolution"). Without limiting the
generality of the foregoing, each party hereto consents to the filing of the
documents required to effect the Dissolution in Illinois, including the
filing with the Secretary of State of the State of Illinois of Articles of
Dissolution (the "Articles of Dissolution").
4.2 FURTHER ACTION. If, at any time after the date hereof, any
further action is necessary or desirable to carry out the Dissolution, or to
vest in JAMtv the full right and title to and possession of all assets,
property, rights, privileges, immunities, powers, and franchises of the
Company, the officers and directors of JAMtv and the Managers of the Company
are fully authorized to take, and shall take, all such action. Each of the
parties hereto shall take any action and execute and deliver any additional
document, instrument, or agreement necessary or desirable to consummate the
transactions contemplated hereby.
4.3 INTENT OF PARTIES WITH RESPECT TO EXCHANGE, DISTRIBUTION AND
DISSOLUTION. Each party hereto hereby acknowledges and agrees that, under
the Illinois Limited Liability Company Act (the "Illinois LLC Act"), no
provision exists which would allow for the reorganization of the Company as a
Delaware corporation through a merger of the Company (as an Illinois limited
liability company) with and into JAMtv with JAMtv being the surviving entity,
and that it is the parties' intent hereunder that the Exchange, Distribution
and Dissolution reasonably approximate such a reorganization transaction.
Accordingly, each party hereto agrees to take any action and
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execute and deliver any document, instrument, or agreement reasonably
determined necessary or desirable by the Company or JAMtv to accomplish this
intent.
ARTICLE V
EXERCISE OF RIGHTS UNDER "BRIDGE NOTES"
5.1 ELECTION TO RECEIVE PAYMENT OR JAMTV PREFERRED STOCK. Each of the
Members who is a party to a Note Purchase Agreement (a "Note Agreement")
dated March 31, 1997 with the Company and who purchased a "Bridge Note" (as
such term is defined in such Member's respective Note Agreement) shall
execute and deliver to the Company contemporaneously herewith an election
notice (an "Election Notice") in the form attached hereto as EXHIBIT E-1,
which Election Notice shall state that such Member has elected one of the
following:
(a) to receive payment in cash of the "Principal Amount" (as defined
in such Note Agreement) plus interest thereon; or
(b) to convert such Principal Amount into JAMtv Preferred Stock upon
the terms set forth in such Note Agreement.
5.2 PAYMENT. Members who have elected to receive cash with respect to
such Member's Bridge Note shall receive, pursuant to the applicable Note
Agreement, the Principal Amount of such Bridge Note, plus interest thereon
pursuant to such Note Agreement.
5.3 THE CONVERSION. If such Member has elected to convert such
Principal Amount into JAMtv Preferred Stock, such Member (an "Investing
Member") shall deliver in addition to the original Bridge Note, a
Subscription Agreement in the form attached hereto as EXHIBIT E-2.
Notwithstanding anything to the contrary in the foregoing or in the Note
Agreement, any issuance of JAMtv Preferred Stock shall be made pursuant to
the terms and conditions of the Goldman Documents (as defined in Section 6.2
below).
5.4 WAIVER OF PARTICIPATION RIGHTS. Each Member, other than an
Investing Member, hereby expressly waives any and all right of such Member,
if any, to participate in the purchase of JAMtv Preferred Stock as described
herein, whether such right arises under the Note Agreement, the Operating
Agreement or otherwise.
ARTICLE VI
THE GOLDMAN TRANSACTION
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6.1 GOLDMAN TRANSACTION DOCUMENTS. Subject to Article VII,
contemporaneously herewith, each Investing Member shall execute and deliver,
or cause its duly authorized agent to execute and deliver, to JAMtv each of
the following documents:
(a) The Preferred Stock Purchase Agreement in the form attached
hereto as EXHIBIT F-1 (the "Stock Purchase Agreement");
(b) The Stockholders' Agreement in the form attached hereto as
EXHIBIT F-2 (the "Stockholders' Agreement"); and
(c) The Registration Rights Agreement in the form attached hereto as
EXHIBIT F-3 (the "Registration Rights Agreement");
and all Members shall execute and deliver, or cause its duly authorized agent
to execute and deliver, to JAMtv, the Stockholders' Agreement described in
paragraph (b) above.
6.2 FURTHER ASSURANCES. Each of the parties hereto shall take, on a
timely basis, any action and execute and deliver any additional document,
instrument, or agreement necessary or desirable to consummate the
transactions contemplated by the Stock Purchase Agreement, the Stockholders'
Agreement, the Registration Rights Agreement, and the Restated Certificate,
together with any other documents, agreements, or instruments to be delivered
therewith (collectively, the "Goldman Documents").
ARTICLE VII
CONDITIONS PRECEDENT TO AGREEMENT; TERMINATION
OF AGREEMENT
7.1 CONDITIONS PRECEDENT. It is the express intent of the parties
hereto that each of the transactions contemplated by this Agreement,
including the delivery of documents and agreements contemplated herein (other
than the Second Amendment) are all specifically conditioned upon the prior
fulfillment of the conditions set forth in Section 2.2 hereof. Without
limiting the generality of the foregoing, if the conditions set forth in
Section 2.2 are not fulfilled on or prior to June 15, 1997, then this
Agreement and each delivery made pursuant hereto (other than delivery of the
Second Amendment) shall terminate and shall be of no further force and
effect.
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ARTICLE VIII
REPRESENTATIONS OF JAMTV
JAMtv represents, warrants and agrees as follows:
8.1 EXISTENCE AND GOOD STANDING. JAMtv is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, with all necessary corporate power and authority to own its
assets and conduct its operations in the jurisdictions where the same are
owned and conducted.
8.2 CAPITALIZATION. The entire authorized capital stock of JAMtv
consists of 8,000,000 shares of common stock with a par value of $.01 per
share ("JAMtv Common Stock"), and of 4,500,000 shares of preferred stock of
which 2,500,000 shares have designated as Series A Convertible Preferred
Stock with a par value of $.01 per share ("JAMtv Preferred Stock"). As of
the date hereof, there are only three shares of JAMtv Common Stock issued and
outstanding and no authorized share of JAMtv Preferred Stock is issued and
outstanding. As of the date hereof, except as contemplated hereunder, there
are no outstanding or authorized options, warrants, rights, contracts, calls,
puts, rights to subscribe, conversion rights, or other agreements or
commitments to which JAMtv is a party or which are binding upon JAMtv
providing for the issuance, disposition, or acquisition of any of its capital
stock.
8.3 EXECUTION AND VALIDITY OF AGREEMENT. JAMtv has full corporate
power and authority to make, execute, deliver and perform this Agreement and
the transactions contemplated hereby. The execution and delivery of this
Agreement by JAMtv and the consummation of the transactions contemplated
hereby have been duly authorized by all required corporate action on behalf
of JAMtv, and this Agreement has been duly and validly executed and delivered
by JAMtv, and constitutes the valid and binding obligation of JAMtv,
enforceable against it in accordance with its terms.
ARTICLE IX
REPRESENTATIONS OF THE COMPANY
The Company hereby represents, warrants and agrees as follows:
9.1 EXISTENCE AND GOOD STANDING. The Company is a limited liability
company duly formed, validly existing and in good standing under the laws of
the State of Illinois, with all necessary power and authority to own its
assets and conduct its operations in the jurisdictions where the same are
owned and conducted.
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9.2 EXECUTION AND VALIDITY OF AGREEMENT. The Company has full power
and authority to make, execute, deliver and perform this Agreement and the
transactions contemplated hereby. The execution and delivery of this
Agreement by the Company and the consummation of the transactions
contemplated hereby have been duly authorized by all required action on
behalf of the Company and its Members and Managers, and this Agreement has
been duly and validly executed and delivered by the Company, and constitutes
the valid and binding obligation of the Company, enforceable against it in
accordance with its terms.
ARTICLE X
INDIVIDUAL REPRESENTATIONS OF THE MEMBERS AND THE MANAGERS
Each of the Members and the Managers hereby represents, warrants and
agrees, with respect to such Member or Manager, as applicable, as follows:
10.1 EXISTENCE AND GOOD STANDING. If not an individual, such Member or
Manager is duly formed or organized, validly existing and in good standing
under the laws of the state of its formation or incorporation, with all
necessary power and authority to own its assets and conduct its operations in
the jurisdictions where the same are owned and conducted.
10.2 EXECUTION AND VALIDITY OF AGREEMENT. If not an individual, such
Member or Manager has the full (corporate or partnership, if applicable)
power and authority to make, execute, deliver and perform this Agreement and
the transactions contemplated hereby, and the execution and delivery of this
Agreement by such Member or Manager and the consummation of the transactions
contemplated hereby have been duly authorized by all required (corporate or
partnership, if applicable) action on behalf of such Member or Manager. With
respect to all Members and Managers, this Agreement has been duly and validly
executed and delivered by such Member or Manager, and constitutes the valid
and binding obligation thereof, enforceable against it in accordance with its
terms.
10.3 NO CONFLICT. Neither the execution or delivery of this Agreement
and each other agreement entered into in connection herewith by such Member
or Manager, nor the consummation of the transactions contemplated hereby,
will result, whether or not with the giving of notice or the lapse of time,
or both, in the breach of, or in the creation or imposition of any lien,
charge, pledge, security interest or other encumbrance of any kind upon his,
her, or its respective Units or Options pursuant to any provision of, any
mortgage, lien, lease, agreement, license, or instrument to which such Member
or Manager is a party (or by which such Units are bound) or violate or result
in the breach of any judgment, arbitration award, order, or decree of any
court or governmental authority to which such Member or Manager is a party or
by which it
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or such Units are bound.
10.4 NO SECURITY INTERESTS. Such Member has good and marketable title
to his, her, or its respective Units, and such Units shall be tendered in the
Exchange to JAMtv free and clear of all liens, hypothecations, pledges,
security interests, and encumbrances of any kind.
ARTICLE XI
MISCELLANEOUS
11.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one agreement.
11.2 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of each of JAMtv,
the Company, and the Members holding 51% of the issued and outstanding Units
as of the date hereof.
11.3 WAIVER. Any of the terms or conditions of this Agreement may be
waived at any time by the party entitled to the benefit thereof, but such
waiver must be in writing and shall not constitute or be deemed a waiver as
to any future event not within the scope of such waiver.
11.4 NOTICES. All notices, requests, demands and other communications
required under this Agreement shall be in writing and shall be deemed to have
been duly given (i) on the date given if delivered personally or by telecopy,
telegram or telex, or (ii) if mailed, three business days after the date of
mailing by certified mail (return receipt requested), if delivered to the
parties at their respective addresses listed on the signature pages hereto.
11.5 ASSIGNMENT. This Agreement is not assignable by any party hereto
without the prior written consent of each of JAMtv, the Company, and the
Members holding 51% of the issued and outstanding Units as of the date
hereof.
11.6 FURTHER ASSURANCES. Each party hereto agrees that, from time to
time, such party shall execute and deliver, without further consideration,
such further certificates, resolutions, authorizations, assignments,
instruments, and other documents and shall take such other actions as may be
reasonably necessary to carry out the purposes and intents of this Agreement.
11.7 REMEDIES. Each party hereto will be entitled to enforce its
rights under this Agreement specifically (without posting a bond or other
security) to recover damages by reason
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of any breach of any provision of this Agreement and to exercise all other
rights existing in its favor. The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions
of this Agreement and that any party may, in his or its sole discretion,
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief in order to enforce or prevent any
violation of the provisions of this Agreement. Accordingly, any such breach
or threatened breach may be preliminarily or permanently enjoined without
bond and the parties hereby agree to the entry and enforcement of such
injunctive relief. The injunctive relief provided is in addition to any and
all other remedies available to any party hereunder.
11.8 ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it may be
entitled.
11.9 EXPENSES. Except as otherwise provided for in this Agreement,
whether the transactions contemplated hereunder are or are not consummated,
all legal and other costs and expenses incurred in connection with this
Agreement, and the transactions contemplated hereby, shall be paid by the
party incurring such costs and expenses.
11.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
11.11 CAPTIONS. The section and other headings contained herein are
for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
***SIGNATURE PAGES FOLLOW***
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IN WITNESS WHEREOF, the undersigned have caused the execution of this
Agreement by their duly authorized officer or other duly authorized
representative as of the date first above written.
JAMTV:
ATTEST: JAMtv Corporation,
a Delaware corporation
By:
- ------------------------------- -------------------------------
Its: Secretary Howard A. Tullman,
Chief Executive Office
Address:
640 N. LaSalle Street, Suite 560,
Chicago, Illinois 60610.
THE COMPANY:
DIGITAL ENTERTAINMENT NETWORKS,
L.L.C., an Illinois limited
liability company
By:
-------------------------------
Howard A. Tullman, one of its
Managers
By: Jam Enterprises Corp., one of its
Managers
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
By: Red 5 Management, Inc., one of
its Managers
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address:
640 N. LaSalle Street, Suite 560,
Chicago, Illinois 60610.
13
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the execution of this
Agreement by their duly authorized officer or other duly authorized
representative as of the date first above written
THE MANAGERS:
RED 5 MANAGEMENT, INC.
By:
-------------------------------
Its: President
Address:
--------------------------
--------------------------
JAM ENTERPRISES CORP.
By:
-------------------------------
Its: Executive Vice-President
Address:
-------------------------
-------------------------
HOWARD A. TULLMAN
-----------------------------
Address: 640 N. LaSalle Street, Suite 560,
Chicago, Illinois 60610.
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the date first above written.
INDIVIDUAL MEMBER:
---------------------------------
Signature
---------------------------------
Print Name of Member
Address:
--------------------------
--------------------------
Social Security Number:
------------------
16
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the execution of this
Agreement by their duly authorized officer or other duly authorized
representative as of the date first above written.
CORPORATE AND OTHER NON-INDIVIDUAL
MEMBER:
---------------------------------
Print Name of Member
By:
---------------------------------
Title:
-------------------------------
Address:
--------------------------
--------------------------
FEIN:
------------------
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the date first above written.
OPTION HOLDERS:
---------------------------------
Signature
---------------------------------
Print Name of Option Holder
Address:
--------------------------
--------------------------
Social Security Number:
------------------
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<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the execution of this
Agreement by their duly authorized officer or other duly authorized
representative as of the date first above written.
CORPORATE AND OTHER NON-INDIVIDUAL
OPTION HOLDER:
---------------------------------
Print Name of Option Holder
By:
---------------------------------
Title:
------------------------------
Address:
--------------------------
--------------------------
FEIN:
------------------
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AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "Agreement") is dated as of June 9, 1998
among JAMtv CORPORATION, a Delaware corporation ("JAMtv"), TUNES ACQUISITION
CORP., a Delaware corporation and a wholly-owned subsidiary of JAMtv ("Merger
Sub"), and TUNES NETWORK, INC., a California corporation ("Tunes").
RECITAL
WHEREAS, the Boards of Directors of each of JAMtv, Tunes and Merger Sub
have approved the terms and conditions of the acquisition of Tunes by JAMtv
to be effected by the merger of Tunes with and into Merger Sub, pursuant to
the terms and subject to the conditions of this Agreement, the Delaware
General Corporation Law (the "DGCL") and the California General Corporation
Law (the "CGCL").
NOW THEREFORE, in consideration of the premises and mutual covenants
and agreements contained in this Agreement, JAMtv, Merger Sub and Tunes agree
as follows:
SECTION 1
THE MERGER; DEFINITIONS
1.1 MERGER. Subject to the terms and conditions of this Agreement
and of the Certificate of Merger in substantially the form attached hereto as
EXHIBIT A (the "Merger Certificate"), Tunes shall be merged with and into
Merger Sub (the "Merger") in accordance with the applicable provisions of the
DGCL and the CGCL, and Merger Sub shall survive the Merger. The Merger
Certificate provides for the mode of consummating the Merger and the effects
thereof. The Merger Certificate shall be executed by the parties thereto
concurrently with the execution of this Agreement.
1.2 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement and the Merger Certificate, the Merger Certificate, together with
required certificates, if any, shall be duly filed in accordance with the
DGCL and the CGCL simultaneous with or as soon as practicable following the
Closing (as defined in Section 1.3 hereof). The Merger shall become
effective (the "Effective Time") as provided under the DGCL and the CGCL.
1.3 CLOSING. Unless this Agreement shall have been terminated
pursuant to Section 8 hereof, the closing of the Merger (the "Closing") will
take place at 10:00 a.m. on June 15, 1998 (the "Closing Date"), or, if the
closing conditions contained in Section 6 hereof are not satisfied or waived
on or prior to such date, the first business day after satisfaction or waiver
of all such conditions, at the offices of Freeborn & Peters, 311 South Wacker
Drive, Suite 3000, Chicago, Illinois 60606-6677.
1.4 EFFECT OF MERGER. Subject to the terms and conditions of this
Agreement and the Merger Certificate, at the Effective Time: (i) the separate
existence of Tunes shall cease and Tunes
<PAGE>
shall be merged with and into Merger Sub (Merger Sub and Tunes are each
sometimes referred to as the "Constituent Corporations," and Merger Sub,
after the Merger, is sometimes referred to as the "Surviving Corporation")
and (ii) the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises, of a public as well as of a private nature, of
each of the Constituent Corporations; and all property, real, personal and
mixed, and all debts due on whatever account, including subscriptions to
shares, and all other choses in action, and all and every other interest of
or belonging to or due to each of the Constituent Corporations shall be taken
and deemed to be vested in the Surviving Corporation without further act or
deed; and the title to any real estate, or any interest therein, vested in
either of the Constituent Corporations shall not revert or be in any way
impaired by reason of such merger or consolidation; and the Surviving
Corporation shall thenceforth be responsible and liable for all the
liabilities and obligations of each of the Constituent Corporations; and any
claim existing or action or proceeding pending by or against a Constituent
Corporation may be prosecuted as if such merger or consolidation had not
taken place; and neither the rights of creditors nor any liens upon the
property of any Constituent Corporation shall be impaired by the Merger.
1.5 CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. At
the Effective Time, (i) the Certificate of Incorporation of Merger Sub,
substantially in the form attached hereto as EXHIBIT B, shall be the
Certificate of Incorporation of the Surviving Corporation, until thereafter
duly altered, amended or repealed as provided in the DGCL; (ii) the Bylaws of
Merger Sub, as in effect immediately prior to the Effective Time, shall be
the Bylaws of the Surviving Corporation, until thereafter duly altered,
amended or repealed as provided in the DGCL or in the Certificate of
Incorporation or Bylaws of the Surviving Corporation; (iii) Howard A.
Tullman, Neal Moszkowski, and Kamran Mohsenin shall be the initial directors
of the Surviving Corporation and will hold office from the Effective Time
until they first resign or their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of the Surviving Corporation, as such instruments
may be amended from time to time, either before or after the Effective Time,
or as otherwise provided by law; and (iv) Howard A. Tullman, as Chief
Executive Officer, Kamran Mohsenin, as President, David Anderson, as
Executive Vice President, and Stuart Frankel, as Treasurer and Secretary,
shall be the initial officers of the Surviving Corporation.
1.6 TAKING OF NECESSARY ACTION. Prior to the Effective Time, the
parties shall take, or cause to be taken, all such reasonable actions as may
be necessary or appropriate in order to effect, as expeditiously as
reasonably practicable, the Merger.
1.7 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of
the Code. The parties to this Agreement hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
1.8 DEFINITIONS. As used in this Section 1 and elsewhere in this
Agreement, the following terms shall have the following respective meanings:
"AAA" shall have the meaning set forth in Section 9.3 hereof.
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"Accounts Receivable" shall have the meaning set forth in Section
3.6 hereof.
"Aggregate Closing Consideration" shall mean the amount equal to
the aggregate consideration payable upon the Closing with respect to all
outstanding shares of Tunes Common Stock, Tunes Options, and Convertible Debt
that an Investor has elected to convert into shares of Tunes Common Stock, as
calculated in accordance with the provisions of Sections 2.1, 2.2 and 2.3
hereof, as applicable, minus the aggregate of the Pro Rata Share of Total
Closing Consideration attributable to all Dissenting Shares.
"Applicable Deduction" shall mean, with respect to each share of
Tunes Common Stock (including shares underlying Vested Tunes Options and
Convertible Debt that an Investor has elected to convert into shares of Tunes
Common Stock), the amount equal to the product of (A) the Excess Liability
Amount, if any, on the date of Closing, multiplied by (B) a fraction, the
numerator of which is the applicable Pro Rata Share of Cash Closing
Consideration for such share, and the denominator of which is equal to
$1,550,000 minus the aggregate of the Pro Rata Share of Cash Closing
Consideration attributable to all Dissenting Shares.
"Artists Guild" shall have the meaning set forth in Section
3.16(b) hereof.
"Balance Sheet Date" means June 30, 1998.
"Cash Closing Consideration" means $1,550,000, subject to
reduction in accordance with the terms of this Agreement.
"Closing" shall have the meaning set forth in Section 1.3 hereof.
"Closing Date" shall have the meaning set forth in Section 1.3
hereof.
"Closing Shares" means the shares of JAMtv Common Stock to be
issued by JAMtv at the Closing, which shall be the Initial Closing Shares as
reduced in accordancd with Sections 2.9 and 2.10 of this Agreement, which
shall be the Initial Closing Shares, subject to reduction in accordance with
Section 2.7.5 of this Agreement.
"COBRA" shall have the meaning set forth in Section 3.11(m)
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Computer System" shall have the meaning set forth in Section
3.17 hereof.
"Constituent Corporations" shall have the meaning set forth in
Section 1.4 hereof.
"Contingent Shares" shall have the meaning set forth in Section
2.7(a) hereof.
"Convertible Debt" shall mean the indebtedness of Tunes that is
convertible into Tunes Common Stock.
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"Convertible Debt Instrument" shall mean a Convertible Promissory
Note or such other debt instrument which evidences Convertible Debt.
"Copyrights" shall have the meaning set forth in Section
3.16(a)(2) hereof.
"Damages" shall have the meaning set forth in Section 7.1(a)
hereof.
"Dissenting Shares" shall mean any shares of Tunes Common Stock
held by a holder who has properly exercised appraisal rights for such shares
in accordance with the DGCL or the CGCL, as applicable, and who, as of the
Effective Time, has not effectively withdrawn or lost such appraisal rights.
"Earnest Money" means the $200,000 cash deposit previously paid
to Tunes by JAMtv, the receipt of which Tunes hereby acknowledges and which
deposit is refundable to JAMtv in accordance with Section 8 hereof.
"Effective Time" shall have the meaning set forth in Section 1.2
hereof.
"Employee Bonus Payment" shall have the meaning set forth in
Section 5.15 hereof.
"Environmental Laws" shall have the meaning set forth in Section
3.21(c) hereof.
"ERISA" shall have the meaning set forth in Section 3.11(a)
hereof.
"Escrow Agent" shall have the meaning set forth in Section 6.2
hereof.
"Escrow Agreement" shall mean the Escrow Agreement substantially
in the form attached as EXHIBIT C hereto.
"Escrow Fund" shall have the meaning set forth in Section 2.7
hereof.
"Excess Liability Amount" shall mean the amount by which the
liabilities of Tunes which exist as of the Closing Date or otherwise areise
out of or reelate to Tunes; conduct before the Closing Date (including all
amounts paid by JAMtv to Tunes before the Closing Date to enable Tunes to
satisfy such liabilities ) exceed $105,082. The Excess Liability Amount as
of May 31, 1998, is attached herto as SCHEDULE 1.8, and, from time to time,
shall be adjusted as of the Closing Date.
"Exchange Agent" shall have the meaning set forth in Section 2.8
hereof.
"Financial Statements" shall have the meaning set forth in
Section 3.5 hereof.
"Former Shareholders" shall have the meaning set forth in Section
7.8 hereof.
"GAAP" shall have the meaning set forth in Section 3.5 hereof.
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"Governmental Entity" shall have the meaning set forth in Section
3.4(c) hereof.
"Hazardous Material" shall have the meaning set forth in Section
3.21(a) hereof.
"Indemnification Deadline Date" shall have the meaning set forth
in Section 7.2(d) hereof.
"Information Statement" shall have the meaning set forth in
Section 3.26 hereof.
"Initial Closing Shares" means 300,000 shares of JAMtv Common
Stock.
"Intellectual Property Assets" shall have the meaning set forth
in Section 3.16(a) hereof.
"IPO Shares" shall have the meaning set forth in Section 2.7
hereof.
"Investor" shall mean each of the persons identified on SCHEDULE
2.3 that is a holder of Convertible Debt in such amounts as are set forth on
SCHEDULE 2.3.
"JAMtv Audited Financial Statements" shall have the meaning set
forth in Section 4.6 hereof.
"JAMtv Claim" shall have the meaning set forth in Section 7.4(a)
hereof.
"JAMtv Certificate"shall have the meaning set forth in Section
7.4(a) hereof.
"JAMtv Common Stock" shall mean the common stock, $.01 par value
per share, of JAMtv.
"JAMtv Indemnified Person(s)" shall have the meaning set forth in
Section 7.1(a) hereof.
"JAMtv Intellectual Property Assets" shall have the meaning set
forth in Section 4.12(a) hereof.
"JAMtv Licenses" shall the meaning set forth in Section 4.13
hereof.
"JAMtv Returns" shall have the meaning set forth in Section
4.11(a) hereof.
"JAMtv Preferred Stock" shall have the meaning set forth in
Section 4.2(a) hereof.
"JAMtv Unaudited Balance Sheet" shall have the meaning set forth
in Section 4.6 hereof.
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"JAMtv Unaudited Financial Statements" shall have the meaning
set forth in Section 4.6 hereof.
"Licenses" shall have the meaning set forth in Section 3.19
hereof.
"Marks" shall have the meaning set forth in Section 3.16(a)(1)
hereof.
"Material Adverse Effect" shall mean any change, event or effect
that is materially adverse to the business, assets (including, without
limitation, intangible assets), liabilities, financial condition or results
of operations of Tunes or any of its subsidiaries or JAMtv or any of its
subsidiaries, as the case may be, taken as a whole.
"Material Interest" shall have the meaning set forth in Section
3.15 hereof.
"Merger" shall have the meaning set forth in Section 1.1 hereof.
"Merger Certificate" shall have the meaning set forth in Section
1.1 hereof.
"Microsoft" means Microsoft Corporation, a Washington corporation.
"Microsoft Deluxe CD Player" means the Microsoft utility which
permits a user to play standard audio CDs in a personal computer's CD player,
which includes functionality of a CD player appliance, such as play, pause,
and other standard functions, and the ability to query Tunes's website for
information about the CD being played, such as title, artist, track names,
label, release date and special menus with unique URLs that, when selected,
launch the user's web browser to load relevant pages from Tunes's website.
"Microsoft Windows 98 Plus Pack!" means the software utility
product that Microsoft bundles with its Windows 98 operating system.
"Music Rights Holder" shall have the meaning set forth in Section
3.16(b) hereof.
"Patents" shall have the meaning set forth in Section 3.16(a)(4)
hereof.
"PBGC" shall have the meaning set forth in Section 3.11(h) hereof.
"Pending Claims" shall have the meaning set forth in Section
7.2(d) hereof.
"Performance Rights Society" shall have the meaning set forth in
Section 3.16(b) hereof.
"Performance Shares" shall have the meaning set forth in Section
2.7 hereof.
"Permitted Liens" shall have the meaning set forth in Section
3.18(d) hereof.
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"Plans" shall have the meaning set forth in Section 3.11(a)
hereof.
"Principal Shareholders" shall have the meaning set forth in
Section 5.4 hereof.
"Pro Forma Balance Sheet" shall have the meaning set forth in
Section 3.5 hereof.
"Projections" shall have the meaning set forth in Section 3.5
hereof.
"Pro Rata Share of Cash Closing Consideration" shall mean, with
respect to each share of Tunes Common Stock issued and outstanding or
underlying the Vested Tunes Options and the Convertible Debt that an Investor
has elected to convert into shares of Tunes Common Stock, the amount of cash,
if any, as is determined by dividing the amount of Cash Closing Consideration
by the aggregate number of shares of Tunes Common Stock issued and
outstanding or underlying the Vested Tunes Options and Convertible Debt that
an Investor has elected to convert into shares of Tunes Common Stock prior to
Closing.
"Pro Rata Share of Total Closing Consideration" shall mean, with
respect to each share of Tunes Common Stock issued and outstanding or
underlying the Vested Tunes Options and the Convertible Debt that an Investor
has elected to convert into shares of Tunes Common Stock, (i) the Pro Rata
Share of Cash Closing Consideration plus (ii) such number of shares of JAMtv
Common Stock as shall reflect such Tunes shareholder's pro rata share of the
Closing Shares.
"Publicity Rights" shall have the meaning set forth in Section
3.16(a) hereof.
"Related Person" shall have the meaning set forth in Section 3.15
hereof.
"Retention Amount" shall have the meaning set forth in Section
2.7 hereof.
"Series A Preferred" shall have the meaning set forth in Section
4.2(a) hereof.
"Series A-I Convertible Preferred Stock" shall have the meaning
set forth in Section 4.2(a) hereof.
"Series A-II Convertible Preferred Stock" shall have the meaning
set forth in Section 4.2(a) hereof.
"Series A-III Convertible Preferred Stock" shall have the meaning
set forth in Section 4.2(a) hereof.
"Series B Preferred" shall have the meaning set forth in Section
4.2(a) hereof.
"Series C Preferred" shall have the meaning set forth in Section
4.2(a) hereof.
"Series D Preferred" shall have the meaning set forth in Section
4.2(a) hereof.
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"Shareholder Agreements" shall have the meaning set forth in
Section 5.4 hereof.
"Shareholders' Agent" shall have the meaning set forth in Section
7.8(a) hereof.
"Shareholders' Agent Certificate" shall have the meaning set
forth in Section 7.5 hereof.
"Shareholders' Agent Expenses" shall have the meaning set forth
in Section 7.8(a) hereof.
"Shareholders' Claim" shall have the meaning set forth in Section
7.5 hereof.
"Surviving Corporation" shall have the meaning set forth in
Section 1.4 hereof.
"Tax," "Taxes" and "Taxable" shall have the meaning set forth in
Section 3.14(f) hereof.
"Taxing Authority" shall have the meaning set forth in Section
3.14(f) hereof.
"Total Consideration" shall mean the aggregate value of the (i)
Aggregate Closing Consideration, (ii) aggregate of the Pro Rata Share of
Total Closing Consideration attributable to all Dissenting Shares, (iii)
Performance Shares, (iv) IPO Shares and (v) the Retention Amount.
"Trade Secrets" shall have the meaning set forth in Section
3.16(a) hereof.
"Tunes Common Stock" shall mean the common stock, no par value,
of Tunes.
"Tunes Disclosure Schedule" shall have the meaning set forth in
Section 3 hereof.
"Tunes Indemnified Person(s)" shall have the meaning set forth in
Section 7.1(b) hereof.
"Tunes Third Party Consents" shall have the meaning set forth in
Section 3.4(b) hereof.
"Tunes Options" shall mean the outstanding options to purchase
shares of Tunes Common Stock.
"Tunes Returns" shall have the meaning set forth in Section
3.14(a) hereof.
"Unaudited Balance Sheet" shall have the meaning set forth in
Section 3.5 hereof.
"Unaudited Financial Statements" shall have the meaning set
forth in Section 3.5 hereof.
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"Vested Tunes Options" shall mean the Tunes Options that are
vested and exercisable immediately prior to the Effective Time.
SECTION 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS;
TUNES OPTIONS; SURRENDER OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK OF TUNES. At the Effective Time, subject
and pursuant to the terms of this Agreement and the Merger Certificate, each
issued and outstanding share of Tunes Common Stock shall, by virtue of the
Merger and without any action on the part of the Constituent Corporations or
the holder thereof, be converted into the right to receive the Pro Rata Share
of Total Closing Consideration for one share of Tunes Common Stock minus the
Applicable Deduction.
2.2 EFFECT ON TUNES OPTIONS. At the Effective Time, subject and
pursuant to the terms of this Agreement and the Merger Certificate, the
holder of each Vested Tunes Option shall be entitled to receive, for each
share of Tunes Common Stock underlying such Vested Tunes Option, the Pro Rata
Share of Total Closing Consideration for one share of Tunes Common Stock
minus the Applicable Deduction. At the Effective Time, all Tunes Options
that are not then vested and exercisable shall be cancelled.
2.3 EFFECT ON CONVERTIBLE DEBT OF TUNES. At the Effective Time, the
Convertible Debt, subject and pursuant to the terms of this Agreement and the
Merger Certificate, shall be converted into the right to receive the number
of shares of Tunes Common Stock underlying each Investor's Convertible Debt
in accordance with SCHEDULE 2.3. Accordingly, at the Effective Time, subject
and pursuant to the terms of this Agreement and the Merger Certificate, each
Investor shall be entitled to receive, for each share of Tunes Common Stock
underlying such Investor's Convertible Debt, the Pro Rata Share of Total
Closing Consideration for one share of Tunes Common Stock minus the
Applicable Deduction. At the Effective Time, the Convertible Debt shall be
cancelled and deemed paid and satisfied in full pursuant to this Section 2.3.
2.4 CANCELLATION OF TUNES CAPITAL STOCK OWNED BY TUNES. At the
Effective Time, subject and pursuant to the terms of this Agreement and the
Merger Certificate, all shares of Tunes capital stock that are owned directly
or indirectly by Tunes or any subsidiary of Tunes shall, by virtue of the
Merger and without any action on the part of Tunes or any subsidiary of
Tunes, be cancelled, and no consideration shall be delivered in exchange
therefor.
2.5 ADJUSTMENT.
(a) Notwithstanding the provisions of Section 2.1, 2.2 and 2.3
hereof and the Merger Certificate, the Aggregate Closing Consideration shall
not exceed $4,550,000 (including the issuance of up to 300,000 shares of
JAMtv Common Stock, valued at $10 per share).
(b) If prior to the Effective Time and subject to Section 5.1
hereof, the outstanding shares of Tunes Common Stock shall be changed into a
different number of shares or
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a different class of stock by reason of any reclassification,
recapitalization, exchange of shares, or if a stock split, stock combination
or stock dividend thereon shall be declared with a record date within such
period, or by the issuance of shares of Tunes Common Stock or Vested Tunes
Options, the Pro Rata Share of Total Closing Consideration with respect to
each share of Tunes Common Stock, shall be correspondingly adjusted so that
the Aggregate Closing Consideration shall not exceed $4,550,000 (including
the issuance of up to 300,000 shares of JAMtv Common Stock, valued at $10 per
share).
(c) The Total Consideration and the Pro Rata Share of Total
Closing Consideration with respect to each share of Tunes Common Stock
(including shares of underlying Tunes Common Stock issuable upon exercise of
Vested Tunes Options and conversion of Convertible Debt) are premised on
there being issued and outstanding (i) no more than 6,930,214 shares of Tunes
Common Stock; (ii) Vested Tunes Options to purchase 784,030 shares of Tunes
Common Stock; and (iii) no more than 1,693,093 shares of Tunes Common Stock
issuable upon conversion of the Convertible Debt. In the event that the
actual number of such shares or options issued and outstanding, or, in the
case of the Convertible Debt, to be issued, differ from the number of such
shares or options set forth in this Section 2.5(c), the Pro Rata Share of
Total Closing Consideration with respect to each share of Tunes Common Stock
shall be correspondingly adjusted so that the Aggregate Closing Consideration
shall not exceed $4,550,000 (including the issuance of up to 300,000 shares
of JAMtv Common Stock, valued at $10 per share).
(d) Except as otherwise provided in this Agreement, all shares
(or rights to acquire shares) of Tunes capital stock other than Tunes Common
Stock shall be cancelled as of the Effective Time without consideration
received in exchange therefor.
2.6 DISSENTERS' RIGHTS. Any Dissenting Shares shall not be converted
into cash or stock but shall instead be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the DGCL or the CGCL, as applicable. Tunes
agrees that, except with the prior written consent of JAMtv, or as required
under the DGCL or the CGCL, as applicable, it will not voluntarily make any
payment with respect to, or settle or offer to settle, any such purchase
demand to repurchase Tunes Common Stock. If after the Effective Time any
Dissenting Shares shall lose their status as Dissenting Shares, JAMtv shall
deliver, upon surrender by the holder of such Dissenting Shares of a
certificate or certificates representing shares of Tunes Common Stock in
accordance with Section 2.8(c) hereof, the consideration which the holder
thereof would otherwise be entitled to receive under Sections2.1, 2.2 and 2.3
hereof.
2.7 ADDITIONAL MERGER CONSIDERATION.
(a) Upon the Closing, in addition to the Aggregate Closing
Consideration, JAMtv shall deposit (i) a certificate, executed by the Chief
Executive Officer and the Secretary of JAMtv certifying in accordance with
the Escrow Agreement that JAMtv shall issue and deliver: up to 50,000 shares
of JAMtv Common Stock (the "Performance Shares") and up to 100,000 shares of
JAMtv Common Stock (the "IPO Shares") (the Performance Shares and the IPO
Shares are referred to collectively as the "Contingent Shares") into the
Escrow Fund; and (ii) $750,000 in immediately available funds (the "Retention
Amount") into the Escrow Fund. The Escrow Fund shall be
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governed by the terms set forth in this Agreement and in the Escrow
Agreement. The Performance Shares, the IPO Shares and the Retention Amount
shall constitute the "Escrow Fund."
(b) The Performance Shares and the IPO Shares, as the case may
be, shall be issued and disbursed to the Former Shareholders of Tunes, if at
all, as follows:
(1) with respect to the Performance Shares, in the amounts
set forth on SCHEDULE 2.7 attached hereto, and on the terms and conditions
set forth in Section 2.7(d) hereof, the Escrow Agreement and the
"earn-out" schedule set forth on SCHEDULE 2.7;
(2) with respect to the IPO Shares, in the amounts set forth
on SCHEDULE 2.7 attached hereto, and on the terms and conditions set forth
in the Escrow Agreement, upon the closing of a firmly underwritten initial
public offering of JAMtv Common Stock (or within three months thereafter)
which results in an aggregate market value of JAMtv in any of the amounts
set forth in SCHEDULE 2.7.
(c) The Retention Amount shall be disbursed to the Former
Shareholders of Tunes, if at all, on the terms and conditions set forth in
Section 7.9 hereof and the Escrow Agreement.
(d) The issuance and disbursement of the Performance Shares
shall be subject to the following:
(1) JAMtv shall calculate, and deliver notice of such
calculation to the Shareholders' Agent, on or before August 1, 1999
(or as soon as practicable thereafter) the number of Performance
Shares to be disbursed from the Escrow Fund to the Shareholders'
Agent in accordance with this Section 2.7 and SCHEDULE 2.7 (the
"Performance Share Calculation").
(2) JAMtv shall maintain separate books and records
for Tunes in accordance with generally accepted accounting
principles in order to make the Performance Share Calculation.
(3) The Shareholders' Agent will be entitled to audit
the Performance Share Calculation in accordance with this
subsection. The Shareholders' Agent may, within ten (10) business
days after its receipt of the Performance Share Calculation from
JAMtv, request in writing that JAMtv deliver to the Shareholder's
Agent within ten (10) business days of such written request the
books and records reasonably necessary for the Shareholder's Agent
or its accountant to confirm the Performance Share Calculation. If
the Shareholders' Agent does not request such books and records
pursuant to this subsection or if within ten (10) business days
after receipt of such books and records JAMtv does not receive from
the Shareholders' Agent a written notice of objection to the
Performance Share Calculation, JAMtv shall deposit into the Escrow
Fund the Performance Shares subject to the Performance Share
Calculation and shall deliver instructions to the
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Escrow Agent for disbursement of the Performance Shares to the
Shareholders' Agent in accordance with the Escrow Agreement and the
Performance Share Calculation. If the Shareholders' Agent requests
such books and records and, within ten (10) business days after receipt
of such books and records, the Shareholders' Agent objects in writing
to the Performance Share Calculation, then JAMtv and the Shareholders'
Agent shall attempt in good faith to mutually agree upon the
Performance Share Calculation. If, within fifteen (15) business days
after receipt by the Shareholders' Agent of such books and records,
JAMtv and the Shareholder's Agent have not agreed upon the Performance
Share Calculation, then JAMtv and the Shareholder's Agent shall
mutually designate a nationally recognized accounting firm to
independently calculate the Performance Share Calculation, or if JAMtv
and the Shareholder's Agent do not mutually designate such accounting
firm, then each of JAMtv and the Shareholders' Agent shall appoint one
nationally recognized accounting firm, which accounting firms shall
designate a third nationally recognized accounting firm which shall
resolve the dispute regarding the Performance Share Calculation. If
either JAMtv or the Shareholders' Agent shall fail to select a
nationally recognized firm in accordance with the provisions of this
subsection within thirty (30) days after notice by the other party that
such selection should be made, and such other party has selected a
nationally recognized accounting firm pursuant to the provisions
hereof, such dispute shall be referred to the accounting firm selected
by such party. The decision of such accounting firm shall be conclusive
and binding on both parties. Each of JAMtv and the Shareholders' Agent
shall pay the costs and expenses of its accounting firm and the
Shareholders' Agent shall pay the costs of its accounting firm and the
independent accounting firm, if any, designated to resolve any dispute
hereunder (the "Independent Accountant"); provided, however, that if a
dispute arises that is resolved by the Independent Accountant and the
amount of the Performance Shares as calculated by the Independent
Accountant exceeds by more than twenty-five percent (25%) JAMtv's
Performance Share Calculation, JAMtv shall pay the reasonable costs and
expenses of the Shareholders' Agent and the Independent Accountant for
such review. If there is no dispute regarding the Performance Share
Calculation and JAMtv does not instruct the Escrow Agent to deliver the
Performance Shares within ten (10) days of August 1, 1999, or such
later date as JAMtv delivers the Performance Share Calculation in
accordance with this Section 2.7(d)(3), then, provided that shares of
JAMtv Common Stock are then publicly traded, interest shall accrue
thereafter on the market value of such Performance Shares at the rate
per annum equal to the Prime Rate as listed in the Money Rates section
of the WALL STREET JOURNAL plus three percent (3%) (the "Default
Rate"). In the event there is a dispute regarding the Performance
Share Calculation, then, provided that shares of JAMtv Common Stock are
then publicly traded, the Former Shareholders shall be entitled to
receive interest from the Due Date at the Default Rate on the market
value of the number of Performance Shares determined to be due to the
Former Shareholders if such amount exceeds by twenty- five percent
(25%) the market value of the shares included in the Performance Share
Calculation.
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(4) If Microsoft shall fail to make the Microsoft
Deluxe CD Player generally available to consumers as part of the
Windows 98 Plus Pack! on or before June 30, 1999 or if Tunes shall
otherwise breach its warranty made pursuant to Section 3.32 hereof,
then the amount of Performance Shares disbursable pursuant to the
Performance Share Calculation shall be subject to reduction by an
amount equal to the lesser of (i) 25,000 shares or (ii) the
Performance Share Calculation.
(e) During the period from and after the Effective Time and
until June 30, 1999: (i) JAMtv shall conduct its business in conformity with
sound business practices, (ii) if JAMtv (A) sells fifty percent (50%) or more
of its assets, (B) sells more than fifty percent (50%) of its common stock to
a single acquiror or group of related acquirors in a single transaction or
(C) merges into another company and JAMtv immediately prior to such merger
does not own in excess of fifty percent (50%) of the shares of capital stock
of the surviving company, JAMtv will cause such sale or merger to be subject
to the assumption by the buyer or surviving company of all of JAMtv's
obligations under this Agreement, and (iii) JAMtv shall not take any
voluntary action for the intended purpose of preventing the Principal
Shareholders from earning their Performance Shares or avoiding or seeking to
avoid the observance or performance of JAMtv's obligations under this Section
2.7, and shall at all times deal in good faith with the Principal
Shareholders in connection with JAMtv's obligations hereunder.
(f) If between the Effective Time and June 30, 1999, JAMtv
commences a voluntary case under the federal bankruptcy laws or a petition is
filed against JAMtv under the federal bankruptcy laws and is not dismissed
within ninety (90) days of such filing, the Former Shareholders may seek
treatment as unsecured creditors of JAMtv in the related bankruptcy
proceedings with respect to the Performance Shares the Former Shareholders
are entitled to receive hereunder, if any, as of such filing.
2.8 SURRENDER OF TUNES CERTIFICATES; ISSUANCE OF JAMTV CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Closing Date, JAMtv shall
appoint American National Bank and Trust Company of Chicago or such other
third party as shall be reasonably satisfactory to Tunes to act as exchange
agent (the "Exchange Agent") in the Merger. In the alternative, JAMtv may,
at its sole option, act as Exchange Agent.
(b) JAMTV TO PROVIDE THE AGGREGATE CLOSING CONSIDERATION. At
the Effective Time, JAMtv shall deposit with the Exchange Agent for exchange
in accordance with Sections 2.1, 2.2 and 2.3 hereof and the Merger
Certificate, through such reasonable procedures as JAMtv may adopt, the
Aggregate Closing Consideration.
(c) EXCHANGE PROCEDURES. Prior to the Closing Date, Tunes
shall mail to each holder of record of certificate(s) or other documents
which represent Tunes Common Stock (the "Certificates"), as well as to
holders of Vested Tunes Options and Convertible Debt, to be converted into
cash and stock pursuant to Sections 2.1, 2.2 and 2.3 hereof and the Merger
Certificate: (i) a letter of transmittal (which shall specify that, with
respect to the Certificates, delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates
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to the Exchange Agent and shall be in such form and have such other
provisions as JAMtv may reasonably specify); and (ii) instructions for use in
effecting the surrender of the Certificates, Vested Tunes Option and
Convertible Debt Instruments in exchange for cash and JAMtv Common Stock.
Upon surrender of a Certificate, Vested Tunes Option or Convertible Debt
Instrument for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by JAMtv, together with such letter of
transmittal, duly executed, the holder of such Certificate, Vested Tunes
Option or Convertible Debt Instrument shall be entitled to receive in
exchange therefor that portion of the Aggregate Closing Consideration with
respect to the Tunes Common Stock, Vested Tunes Options and Convertible Debt
properly covered by such Certificate, Vested Tunes Option or Convertible Debt
Instrument, as the case may be, as to which such holder is entitled pursuant
to Sections 2.1, 2.2 and 2.3 hereof and the Merger Certificate.
Certificates, Vested Tunes Options and Convertible Debt Instruments so
surrendered pursuant to this Section 2.8 shall forthwith be cancelled (if not
otherwise cancelled or terminated in accordance with their terms). The
portion of the Pro Rata Cash Closing Consideration to which such holder is
entitled shall be payable in cash or by a check drawn on a United States bank
in United States dollars in immediately available funds, and shall not accrue
or otherwise bear interest; provided that persons entitled to receive more
than $1.0 million shall be entitled to obtain a wire transfer of immediately
available funds of the Pro Rata Cash Closing Consideration payable to such
persons from the Exchange Agent immediately after the Effective Time. In the
event of a transfer of ownership of Tunes Common Stock which is not
registered on the transfer records of Tunes, the appropriate amount of cash
and shares of JAMtv Common Stock may be delivered to a transferee if the
Certificate representing such transferred security is presented to the
Exchange Agent and accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 2.8, each
Certificate, Vested Tunes Option or Convertible Debt Instrument shall be
deemed at any time after the Effective Time to represent solely the right to
receive upon such surrender that portion of the Aggregate Closing
Consideration (without interest and subject to applicable withholding,
escheat, and other laws) to which such holder is entitled.
(d) NO FURTHER OWNERSHIP RIGHTS IN CAPITAL STOCK OF TUNES. The
amounts paid in respect of Tunes Common Stock, Vested Tunes Options and
Convertible Debt in accordance with the terms of this Agreement and the
Merger Certificate shall be deemed to have been delivered in full
satisfaction of all rights pertaining thereto, and following the Effective
Time, holders of the Certificate, Vested Tunes Options and Convertible Debt
shall have no further rights to, or ownership in, shares of Tunes capital
stock or rights to acquire Tunes capital stock. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Tunes capital stock which were outstanding
immediately prior to the Effective Time. If, after the Effective time,
Certificates, Vested Tunes Options and Convertible Debt Instruments are
presented to the Surviving Corporation for any reason, they shall be
cancelled and exchanged in accordance with the terms of this Agreement and
the Merger Certificate.
(e) DISSENTING SHARES. The provisions of this Section 2.8
shall also apply to Dissenting Shares that lose their status as such, except
that the obligations of JAMtv under this Section 2.8 shall commence on the
date of loss of such status.
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(f) ISSUANCE OF JAMTV CERTIFICATES. The certificates
representing the Closing Shares shall contain the follow legend:
"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.
THE SALE, ASSIGNMENT, PLEDGE, ENCUMBRANCE OR OTHER TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
PROVISIONS OF A STOCKHOLDERS' AGREEMENT, DATED AS OF JUNE 2, 1997,
AS AMENDED, AMONG THE COMPANY AND THE STOCKHOLDERS NAMED ON THE
SIGNATURE PAGES THERETO, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY."
2.9 EXCESS LIABILITY AMOUNT. Immediately prior to the Closing Date,
the Excess Liability Amoutn shall be calculated by Tunes, consistent with
past practice, as of the Closing date( the "Closing ELA"). If the Closing
ELA amount is greater than $1,550,000, then, at JAMtv's option, the amount of
such difference shall be (i) deducted from the Retention Amoutn and set-off
by JAMtv pursuant to Section 7.3 of this Agreement, and (ii) divided by ten
(which is the deemed fair market value of a share of JAMtv Common Stock),
with the result that the quotient obtaine shall be the number of shares of
JAMtv Common Stock which may be deducted by JAMtv from the Initial Closing
Shares and added to the Retention Amount. For example, if Closing ELA equals
$2,000,000, then (x) the difference between Closing ELA and $1,550,000 is
$450,000, (y) 450,000 divided by 10 is 45,000, and (z) 45,000 shares may be
deducted from the Initial Closing shares and added to the Retention Amount
for distribution in accordance with Section 7 of this Agreement.
2.10 DEDUCTION OF SPECIAL HOLDBACK SHARES. At the closing, JAMtv
shall dduct 100,000 shares (the "Special Holdback Shares") from the Initial
Closing Shares to secure the indemnity obligations of Tunes and the Former
Shareholders as provided in Section 7 of this Agreement.
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SECTION 3
REPRESENTATIONS AND WARRANTIES OF TUNES
Except as disclosed on the Disclosure Schedule of even date herewith
and delivered to JAMtv concurrently with the execution of this Agreement,
which identifies any exception to the representations and warranties set
forth in this Section 3 (the "Tunes Disclosure Schedule"), Tunes hereby
represents and warrants to JAMtv and Merger Sub as of the Closing Date as
follows:
3.1 ORGANIZATION; GOOD STANDING; AND CORPORATE POWER. Tunes is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its
business as now being conducted. Tunes is duly qualified as a foreign
corporation and is in good standing in each jurisdiction in which the failure
to so qualify would have a Material Adverse Effect. SCHEDULE 3.1 sets forth
a true and complete list of the jurisdictions where Tunes is qualified as a
foreign corporation. Tunes has delivered to JAMtv complete and correct
copies of its Articles of Incorporation and Bylaws, in each case as amended
to the date hereof, and has delivered or made available to JAMtv copies of
its corporate minute books which include all minutes of Tunes's directors'
and shareholders' meetings and a ledger reflecting the record ownership of
all outstanding shares of Tunes capital stock.
3.2 CAPITAL STRUCTURE.
(a) The entire authorized capital stock of Tunes consists of
10,000,000 shares of Tunes Common Stock, no par value, of which 6,930,214 are
issued and outstanding, 784,030 shares of which are issuable upon the
exercise of Vested Tunes Options, and 1,693,093 shares of which are issuable
upon the conversion of the Convertible Debt. There are no treasury shares of
capital stock of Tunes. Other than as required by applicable federal and
state securities laws, no legend or other reference to any purported
encumbrance appears upon any certificate representing equity securities of
Tunes. All outstanding shares of Tunes Common Stock are, and any shares of
Tunes Common Stock issuable upon exercise of any Vested Tunes Option or any
Convertible Debt would be, duly authorized, validly issued, fully paid and
nonassessable. None of the Tunes Common Stock is subject to any preemptive
rights, whether created by statute, Tunes's Articles of Incorporation or
Bylaws, agreement or otherwise.
(b) Other than as described in this Section 3.2, there are no
issued or outstanding shares of capital stock of Tunes, and there are no
options, warrants, calls, conversion rights, commitments or agreements of any
character (whether oral, written, express, or implied) to which Tunes is a
party or by which Tunes may be bound that do or may obligate Tunes to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of Tunes capital stock or that do or may obligate Tunes to grant, extend or
enter into any such option, warrant, call, conversion right, commitment or
agreement. There are no outstanding agreements, contracts, obligations,
promises, commitments, indentures, plans, instruments, arrangements,
undertakings or understandings (whether oral, written, express or implied) to
which Tunes is a party or is bound or which affects or relates to the voting,
issuance, purchase, redemption, repurchase or transfer of any capital stock
of
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Tunes or any other securities of Tunes, except as set forth in this Section
3.2 or as contemplated by Section 5.4 hereof. Other than as provided by this
Agreement, Tunes has not, and prior to the Effective Time will not, become
party to or subject to any contract or obligation wherein any person has a
right or option to purchase or acquire any rights in any additional capital
stock or securities of Tunes. None of the outstanding equity securities or
other securities of Tunes was issued in violation of any law, rule or
regulation, including, without limitation, state and federal securities laws.
Tunes does not own, and does not have any contract to acquire, any equity
securities or other securities of any person or entity (including any
subsidiary) or any direct or indirect equity or ownership interest in any
other business.
(c) SCHEDULE 3.2 contains (i) a complete and accurate list of,
and the number of shares owned by each of the record holders of, all
outstanding Tunes Common Stock, (ii) a complete and accurate list of all
Tunes Options, the number of Tunes Options owned by each of the record
holders of all outstanding Tunes Options, the number of shares and kind of
stock issuable upon the exercise of Vested Tunes Options with respect to each
holder thereof, and the exercise price for such Vested Tunes Options with
respect to each holder thereof, and (iii) a complete and accurate list of all
outstanding Convertible Debt the amount of Convertible Debt owned by each of
the record holders of all outstanding Convertible Debt, the number of shares
and kind of stock issuable upon the conversion of the Convertible Debt with
respect to each holder thereof, and the conversion price for such Convertible
Debt with respect to each holder thereof. SCHEDULE 3.2 contains a complete
and accurate list of the name, address, and citizenship of each holder of
Tunes Common Stock, Tunes Options, and Convertible Debt. The shareholders
named on SCHEDULE 3.2 are all of the record and beneficial owners and holders
of Tunes Common Stock, and such stock is free and clear of all liens and
encumbrances. The option holders named on SCHEDULE 3.2 are all of the record
and beneficial owners and holders of Tunes Options, and such options are free
and clear of all liens and encumbrances. The holders of Convertible Debt
named on SCHEDULE 3.2 are all of the record and beneficial owners and holders
of Convertible Debt, and such Convertible Debt is free and clear of all liens
and encumbrances.
(d) The Pro Rata share of Merger Consideration with respect to
each share of Tunes Common Stock (including shares underlying Vested Tunes
Options and Convertible Debt), as adjusted, if required in accordance with
the terms of this Agreement, has been calculated in accordance with and
satisfies the terms and conditions of the dividend, conversion and
liquidation provisions of Tunes's Articles of Incorporation as in effect
immediately prior to the Effective Time.
(e) The aggregate exercise price of the Vested Tunes Options is
$78,403, which shall be payable to Tunes by the holders of Vested Tunes
Options in accordance with SCHEDULE 3.2(e). The Tunes Options (including the
Vested Tunes Options) shall terminate in accordance with their terms as of
the Effective Time; provided, however, that the holders of Vested Tunes
Options shall be entitled to the consideration set forth in Section 2.2
hereof.
(f) The aggregate amount of the Convertible Debt is $630,000.
The Convertible Debt shall be cancelled and deemed satisfied and paid in full
as of the Effective Date; provided, however, that the Investors shall be
entitled to the consideration set forth in Section 2.3 hereof.
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3.3 CORPORATE NAME; PRIOR TRANSACTIONS; SUBSIDIARIES. Tunes has not
during its existence been known by or used any other corporate or fictitious
name other than "Surf Communications, Inc." or been a party to any merger or
consolidation, or acquired all or substantially all of the assets of any
person or entity, or acquired any of its property outside of the ordinary
course of business. Tunes has no subsidiaries or affiliated companies and
does not otherwise own or control directly or indirectly, any equity interest
or debt in any corporation (including any non-profit corporation), general or
limited partnership, limited liability company, joint venture, estate, trust,
association, organization, labor union, governmental authority, or other
entity.
3.4 AUTHORITY; VALIDITY; NO CONFLICT; CONSENTS.
(a) Tunes has all requisite corporate power and authority to
enter into this Agreement and the Merger Certificate and, subject to approval
of this Agreement and the Merger Certificate by the shareholders of Tunes, to
perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Merger Certificate, the performance by Tunes of its
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of Tunes, including, without
limitation, the approval by the Board of Directors and the shareholders of
Tunes. This Agreement is, and the Merger Certificate, when delivered by the
parties thereto, will be, legal, valid and binding obligations of Tunes and
its shareholders enforceable against Tunes and its shareholders in accordance
with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies is subject to the discretion of the court before which any
proceeding therefor may be brought. The only vote of the holders of any class
or series of Tunes capital stock necessary to approve this Agreement and the
Merger Certificate and the transactions contemplated hereby and thereby is
the affirmative vote of a majority of the outstanding shares of Tunes Common
Stock voting separately as a class.
(b) The execution and delivery of this Agreement does not, and
the execution and delivery of the Merger Certificate and the consummation of
the transactions contemplated hereby and thereby will not, conflict with or
result in any violation of any statute, law, rule, regulation, judgment,
order, decree, or ordinance applicable to Tunes or its properties or assets,
or conflict with or result in any breach or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material
benefit under, or result in the creation of a lien or encumbrance on any of
the material properties or assets of Tunes pursuant to (i) any provision of
the Articles of Incorporation or Bylaws of Tunes or (ii) any material
agreement, contract, obligation, promise, commitment, mortgage, indenture,
plan, lease, instrument, permit, concession, franchise, arrangement, license,
undertaking or understanding (whether oral, written, express or implied) to
which Tunes is a party or by which Tunes or any of its property or assets may
be bound or affected. SCHEDULE 3.4 lists all consents, waivers, and
approvals under any agreement, contract, obligation, promise, commitment,
mortgage, indenture, plan, lease, instrument, permit, concession, franchise,
license, undertaking or understanding (whether oral, written, express or
implied) to which Tunes is a party or by which Tunes or any of its property
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or assets may be bound or affected which are required to be obtained in
connection with the consummation of the transactions contemplated hereby and
by the Merger Certificate ("Tunes Third Party Consents").
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission, regulatory authority or other governmental authority or
instrumentality, whether domestic or foreign (a "Governmental Entity"), is
required by Tunes in connection with the execution and delivery of this
Agreement and the Merger Certificate by Tunes or the consummation by Tunes of
the transactions contemplated hereby or thereby, except for the filing of (i)
the Merger Certificate and officers' certificates with the Delaware Secretary
of State and the California Secretary of State in such form as is required
by, and executed in accordance with, the applicable provisions of the DGCL
and the CGCL and (ii) appropriate documents with the relevant approvals,
authorizations, registrations or qualifications as may be required under
federal and state securities or "Blue Sky" laws in connection with the Merger.
3.5 FINANCIAL STATEMENTS. Tunes has furnished or made available to
JAMtv its financial statements for each of the fiscal years ended on December
31, 1996 and December 31, 1997, including balance sheets of Tunes, and the
related statements of operations and cash flow (collectively, the "Financial
Statements"), and the related management letters, if any, and Tunes's
unaudited financial statements as at March 31, 1998, including an unaudited
balance sheet of Tunes (the "Unaudited Balance Sheet") as at March 31, 1998
and the related unaudited statements of operations and cash flow (the
"Unaudited Financial Statements"). Tunes has furnished or made available to
JAMtv the pro forma balance sheet of Tunes as at June 30, 1998 (the "Pro
Forma Balance Sheet"). The Financial Statements, the Unaudited Balance
Sheet, and the Unaudited Financial Statements are collectively referred to as
the "Financial Statements." Tunes has furnished or made available to JAMtv
the projections dated June 30, 1998 of Tunes's monthly financial condition,
results of operations, and cash flow through June 30, 1998 (the
"Projections"), and the Projections represent Tunes's best estimate of its
future financial performance for the periods set forth therein. The
Projections have been prepared on the basis of the assumptions set forth
therein, which Tunes believes are fair and reasonable in light of current and
reasonably foreseeable business conditions. The Financial Statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") consistency applied and fairly present the financial position of
Tunes as at the dates thereof and the results of their operations and cash
flows for the periods then ended and the Pro Forma Balance Sheet presents
fairly and accurately Tunes's financial condition as at such date as if the
transactions contemplated by this Agreement had occurred on such date and the
Closing Date had been such date, and has been prepared in accordance with
GAAP, except that the Unaudited Financial Statements prepared since the
Balance Sheet Date and the Pro Forma Balance Sheet do not contain the
footnote disclosure required by GAAP and may not include the same refinement
of estimates and accruals as are contained in the Audited Financial
Statements. Since January 1, 1996, there has been no change in Tunes's
accounting policies, except as described in notes to the Financial Statements.
3.6 RECEIVABLES. All accounts receivable of Tunes that are reflected
on the Balance Sheet or the Unaudited Balance Sheet or on the accounting
records of Tunes as of the Effective Time (collectively, the "Accounts
Receivable") represent or will represent valid obligations arising from
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sales actually made or services actually performed in the ordinary course of
business of Tunes. The Accounts Receivable have been collected or are
collectible in the book amounts thereof, less an amount not in excess of the
allowance for doubtful accounts provided for in the Financial Statements, in
the case of Accounts Receivable reflected in the Financial Statements, and
less allowances for doubtful accounts and warranty returns determined in
accordance with the past practices of Tunes, in the case of Accounts
Receivable arising after the Balance Sheet Date. Allowances for doubtful
accounts and warranty returns are adequate and have been prepared in
accordance with GAAP consistently applied and in accordance with the past
practices of Tunes. No Account Receivable is subject to any material claim
of offset, recoupment, set off or counterclaim and Tunes has no knowledge of
any specific facts or circumstances (whether asserted or unasserted) that
could give rise to any such claim. No material amount of Accounts Receivable
are contingent upon the performance by Tunes of any obligation or contract
other than normal warranty performance. SCHEDULE 3.6 sets forth an aging of
Accounts Receivable of Tunes and its subsidiaries in the aggregate and by
customer (0-30 days, 31-60 days, 61-90 days and greater than 90 days), and
indicates for each category the respective amounts of allowances for doubtful
accounts and warranty returns and the amounts of Accounts Receivable within
each category which are subject to warranty claims in the aggregate.
3.7 COMPLIANCE WITH LAW; CHARTER DOCUMENTS; AND ORDERS. Tunes is in
compliance, and has conducted its business so as to comply, with all laws,
rules and regulations, judgments, decrees or orders of any Governmental
Entity applicable to its operations or with respect to which compliance is a
condition of engaging in the business thereof, except to the extent that
failure to comply, individually or in the aggregate, has not had and would
not be reasonably expected to have a Material Adverse Effect. There are no
judgments or orders, injunctions, decrees, stipulations or awards (whether
rendered by a court or administrative agency or by arbitration) against Tunes
or against any of its properties or businesses. To the best of Tunes'
knowledge, no officer, director, agent, or employee of Tunes is subject to
any order that prohibits such officer, director, agent, or employee from
engaging in or continuing any conduct, activity, or practice relating to the
business of Tunes. SCHEDULE 3.7 contains a summary of any violation of, or
conflict with, any applicable statute, law, rule, regulation, ruling, order,
judgment or decree, including any of the foregoing relating to Environmental
Laws, occurring within the last four (4) years. Tunes is not, nor has it
received notice that it is or would be with the passage of time, in violation
of any provision of its Articles of Incorporation, Bylaws or resolutions, or
in default or violation of any term, condition or provision of any judgment,
decree, order, injunction or stipulation applicable to Tunes, its business or
properties.
3.8 LITIGATION. Except as disclosed on SCHEDULE 3.8, there is no
action, suit, proceeding, claim, arbitration or investigation pending by or
against Tunes or any of its subsidiaries, any director, officer, employee or
shareholder of Tunes or any of its subsidiaries relating to or affecting
Tunes' or any subsidiary's business, properties or capital stock, or which in
any manner challenges or seeks to prevent, enjoin, alter or delay any of the
transactions contemplated hereby by or against Tunes, any director, officer,
employee or shareholder of Tunes relating to or affecting Tunes's business,
its properties or its capital stock (including, without limitation, any
claims by any Performance Rights Society (as defined in Section 3.16),
Artists Guild (as defined in Section 3.16), or any other Music Rights Holder
(as defined in Section 3.16), for the payment of any fees or royalties for
the
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reproduction, creation of derivative works, distribution, public performance
(including digital performance), or public display of any Intellectual
Property Assets), or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated hereby. To the
best of Tunes's knowledge, except as set forth on SCHEDULE 3.8, no such
action, suit, proceeding, claim, arbitration or investigation has been
threatened and no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such action, suit,
proceeding, claim, arbitration or investigation. SCHEDULE 3.8 sets forth
with respect to each pending action, suit, proceeding, claim, arbitration or
investigation to which Tunes is a party, the forum, the parties thereto, a
description of the subject matter thereof and the amount of damages claimed.
3.9 NO MATERIAL ADVERSE EFFECT. Except as set forth on SCHEDULE 3.9
hereto, since the Balance Sheet Date, Tunes has conducted its business in the
ordinary course and there has not occurred:
(a) Any Material Adverse Effect;
(b) Any amendments or changes in the Articles of Incorporation
or Bylaws of Tunes;
(c) Any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting any of the properties or
businesses of Tunes;
(d) Any issuance, redemption, repurchase or other acquisition
of shares of capital stock of Tunes (other than in the ordinary course under
employee benefit plans), or any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to the capital stock of Tunes;
(e) Any increase in or modification of the compensation or
benefits payable or to become payable by Tunes to any of its directors or
employees, except in the ordinary course of business consistent with past
practice;
(f) Any increase in or modification of any bonus, pension,
insurance or other employee benefit plan, payment or arrangement (including,
but not limited to, the granting of stock options, restricted stock awards or
stock appreciation rights) made to, for or with any of its employees, except
in the ordinary course of business consistent with past practice;
(g) Any sale of the property or assets of Tunes individually in
excess of $5,000 or in the aggregate in excess of $10,000 other than
inventory sales in the ordinary course of business consistent with past
practice;
(h) Any alteration in any term of any outstanding debt or
capital stock of Tunes;
(i) Any (i) incurrence, assumption or guarantee by Tunes of any
debt for borrowed money; (ii) issuance or sale of any securities convertible
into or exchangeable for debt
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securities of Tunes; or (iii) issuance or sale of options or other rights to
acquire from Tunes, directly or indirectly, debt securities of Tunes or any
securities convertible into or exchangeable for any such debt securities;
(j) Any creation or assumption by Tunes of any mortgage,
pledge, security interest or lien or other encumbrance on any asset;
(k) Any making of any loan, advance or capital contribution to,
or investment in, any person other than (A) travel loans or advances made in
the ordinary course of business of Tunes and (B) other loans and advances in
an aggregate amount which does not exceed $10,000 outstanding at any time;
(l) Any entry into, amendment of, relinquishment, termination,
cancellation or nonrenewal by Tunes or any other party of any contract,
lease, commitment, license, permit, or other right or obligation to which
Tunes is a party or by which any of its assets is bound, other than in the
ordinary course of business consistent with past practice;
(m) Any amendment of, relinquishment, termination,
cancellation, nonrenewal, default, or notice of default by Tunes or any other
party of any agreement, contract, obligation, promise, commitment, mortgage,
indenture, plan, lease, instrument, permit, concession, right, franchise,
arrangement, license, undertaking or understanding (whether oral, written,
express or implied) which is described or disclosed in Section 3.12 hereof.
(n) Any sale, lease, disposition, transfer, license, grant,
loss, abandonment, or termination of a right under the Intellectual Property
Assets (as defined in Section 3.16 hereof) other than nonexclusive licenses
granted in the ordinary course of business consistent with past practice;
(o) Any strike, walkout, work slowdown or labor dispute other
than routine individual grievances, or any activity or proceeding by a labor
union or representative thereof to organize any employees of Tunes;
(p) Any change in its accounting methods; or
(q) Any agreement or arrangement made by Tunes to take any
action which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Section 3.9 untrue or incorrect
as of the date when made.
3.10 ABSENCE OF UNDISCLOSED LIABILITIES. Tunes has no liabilities or
obligations (whether absolute, accrued or contingent or otherwise) except
liabilities or obligations (i) adequately provided for in the Financial
Statements (ii) incurred in the ordinary course of business consistent with
past practice and which are not, individually or in the aggregate, material
to Tunes.
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3.11 EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 3.11 contains a list of all plans, agreements or
arrangements relating to deferred compensation, pension, profit sharing,
money purchase or other retirement benefits, membership interests purchase,
membership interests grant, membership interests option, membership interests
appreciation rights, and other equity-based compensation or benefits, salary,
bonus, commission, incentive, severance, parachute or change in control
payments or benefits, health and welfare benefits, life, disability or other
insurance benefits, layoff or unemployment benefits, or any other employee
benefits or fringe benefits maintained or contributed to by Tunes, or under
which Tunes has any liabilities or obligations including, but not limited, to
any employee benefit plan within the meaning of Section 3(3) of the
Employment Retirement Income Security Act of 1974, as amended ("ERISA")
(individually, a "Plan" and, collectively, the "Plans"). For purposes of
this Section 3.11, references to Tunes include any entity affiliated with
Tunes under Sections 414(b), (c) and (m) of the Code or Section 4001(b) of
ERISA (excluding any foreign affiliate of Tunes). Tunes is not required to
contribute to, and has no liability under or with respect to, any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. Tunes
has previously delivered to JAMtv true and complete copies of (i) each
written Plan, including all amendments to date, (ii) the most recent Form
5500 and schedules thereto for each Plan required to file the same, (iii)
where applicable, trust or other funding agreements or policies under each
Plan, (iv) where applicable, investment management or other service
agreements in respect of each Plan, (v) where applicable, the most recent
actuarial reports and financial statements relating to each Plan, (vi) where
applicable, the most recent determination letter from the Internal Revenue
Service regarding each Plan intended to be qualified under Section 401(a) of
the Code, (vii) summary plan descriptions and any other material employee
communications with respect to each Plan and (viii) all employment or
personal handbooks, policies or manuals.
(b) All material obligations of Tunes existing on or prior to
the date hereof, whether arising by operation of law, by contract or by past
custom, for payments to trusts or other funds or to any governmental agency
or to or in respect of any Plan have been paid, or adequate accruals for such
payments have been made by Tunes on its books of account.
(c) Each Plan has been administered and operated in all
material respects in accordance with its terms and applicable law. Each Plan
intended to be "qualified" within the meaning of Section 401(a) of the Code
has received a determination letter or notification letter to the effect that
it is so qualified and each related trust is exempt from tax under Section
501(a) of the Code. Except for required contributions, benefit accruals, and
administrative expenses, no material liability under ERISA or the Code or the
terms of a Plan has been incurred or, based upon existing facts, may
reasonably be expected to be incurred by Tunes with respect to any Plan
except for any such liabilities that have been fully settled and discharged.
None of the Plans, nor any trust created thereunder, has engaged in any
non-exempt material "prohibited transaction" as such term is defined in
Section 4975 of the Code and Section 406 of ERISA, which involves Tunes.
(d) Each of the Plans is, and in administering each of the
Plans, Tunes is, in material compliance with all applicable laws including,
without limitation, ERISA and the Code. Tunes has not incurred any liability
under Title IV of ERISA, Section 412 of the Code or Section
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302 of ERISA, with respect to any employee benefit plan subject to any of
those provisions, and there exist no facts, conditions or circumstances which
would make it reasonable to anticipate that Tunes will incur any such
liability.
(e) The projected benefit obligation, within the meaning of
Statement of Financial Accounting Standards No. 87 of the Financial
Accounting Standards Board, under each Plan which is subject to Title IV of
ERISA, determined on the basis of actuarial assumptions ordinarily used under
such Plan as of the most recent actuarial valuation date for such Plan and as
of December 31, 1997, does not exceed the current value of all of the assets
of such Plan.
(f) All reports relating to the Plans required to be filed with
or furnished to any governmental body, agency or court, Plan participants or
beneficiaries prior to the date hereof have been timely filed or furnished in
accordance with applicable law.
(g) There are no actions, suits or claims pending (other than
routine claims for benefits), or, to Tunes's knowledge, threatened against
any of the Plans or against the assets of any of such Plans.
(h) Tunes has not (i) experienced any reportable event within
the meaning of ERISA or other event or condition which presents a material
risk of the termination of any pension Plan by the Pension Benefit Guaranty
Corporation ("PBGC"); (ii) had any tax imposed on it by the Internal Revenue
Service for any violation under Section 4975 of the Code; and (iii) engaged
in any transaction which could reasonably be expected to subject Tunes or any
Plan to any liability for any tax under Section 4975 of the Code.
(i) There is no matter involving any Plan maintained or
established for employees of Tunes which is pending before the Internal
Revenue Service, the Department of Labor or any other governmental agency or
court.
(j) As to any Plan subject to Title IV of ERISA, (i) there has
been no reportable event within the meaning of Section 4043 of ERISA; (ii) no
notice of intent to terminate the Plan has been given under Section 4041 of
ERISA; (iii) no proceeding has been instituted under Section 4042 of ERISA to
terminate any Plan; (iv) no liability to the PBGC has been incurred (other
than PBGC insurance premiums); and (v) as to any Plan intended to be
qualified under Section 401 of the Code, there has been no termination or
partial termination of any such Plan within the meaning of Section 411(d)(3)
of the Code.
(k) No act, omission or transaction has occurred which could
reasonably be expected to result in imposition on Tunes of (i) a breach of
fiduciary duty liability under Section 409 of ERISA, or (ii) a civil penalty
assessed pursuant to subsections (c), (i) or (l) of Section 502 of ERISA.
(l) Each Plan which is a "welfare plan" (as defined in Section
(3)(1) of ERISA) is either (i) unfunded or (ii) funded through insurance
contracts.
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(m) Tunes does not provide medical or life insurance benefits
to or in respect of employees beyond the date of retirement or other
termination of employment, other than as required under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or other
applicable law, nor does it have any current or projected liability for any
unfunded post-retirement medical or life insurance benefits in respect of any
employee or former employee.
(n) No employer securities, employer real property or other
employer property is included in the assets of any Plan.
(o) Tunes is not a party to any written or oral deferred or
incentive compensation, employment, severance, consulting or other similar
contract, arrangement or policy or labor contracts or collective bargaining
agreements relating to its employees that could reasonably be expected to
result in any Material Adverse Effect.
(p) No Plan (including any agreement with any employee or
former employee) provides for benefits by reason of severance or change in
control, except as may be required by COBRA. The consummation of the
transactions contemplated under this Agreement will not cause the payment
(including without limitation severance, unemployment compensation, golden
parachute, bonus or otherwise), acceleration (other than the acceleration of
certain of the Tunes Options as described in SCHEDULE 3.2), vesting or
funding of any compensation, benefit or other entitlement with respect to any
employee, consultant, officer or director of Tunes under any Plan (other
than the acceleration of certain of the Tunes Options as described in
SCHEDULE 3.2) and will not materially increase any benefits otherwise payable
under any Plan.
3.12 MATERIAL CONTRACTS AND COMMITMENTS.
(a) SCHEDULE 3.12 lists and describes every agreement,
contract, obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license, undertaking
or understanding (whether oral, written, express or implied) to which Tunes
is a party or by which it or any of its assets are or are purportedly bound
and which:
(1) involves performance of services or delivery of goods or
materials by Tunes of an amount or value in excess of $10,000;
(2) involves performance of services or delivery of goods or
materials to Tunes of an amount or value in excess of $10,000;
(3) was not entered into in the ordinary course of business
and that involves expenditures or receipts of Tunes in excess of $5,000;
(4) evidences a lease, rental or occupancy agreement,
license, installment or conditional sale agreement, or otherwise affecting
the ownership of, leasing of, title to, use of, or any leasehold or other
interest in, any real or personal property;
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(5) relates to (including, without limitation, by way of
license or restriction on use or transfer) Intellectual Property Assets
(except for any license implied by the sale of a product and perpetual,
paid-up licenses for commonly available software programs with a value of
less than $500 under which Tunes is the licensee), including, without
limitation, any which relates to (i) the All-Music Guide or similar
resource, (ii) the so-called Rating and Recommendation Engine or RARE,
(iii) automated music encoding, (iv) CD cataloging and imaging, (v)
streaming music delivery, (vi) music databases, (vii) order fulfillment or
customer support, (viii) CGI technology, (ix) music search engines, (x)
performance, reproduction, or display rights in musical compositions,
sound recordings, artwork (including album art, liner notes, and other
collateral works), charts, music databases, or other Copyrights,
including, without limitation, those with or relating to any Performance
Rights Society, Artists Guild, or other Music Rights Holder, or (xi)
current or former officers, directors, employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of
the Intellectual Property Assets;
(6) relates to a collective bargaining arrangement or other
arrangement to or with any labor union or other employee representative of
a group of employees;
(7) radio station affiliates;
(8) evidences any joint venture or partnership;
(9) involves any sharing of revenues (including, without
limitation, any advertising revenues), profits, losses, costs, or
liabilities of Tunes with any other person or entity or of any other
person or entity with Tunes;
(10) involves any barter or in-kind exchange for goods or
services;
(11) involves the supply or fulfillment of sales of CDs,
other sound recordings, or related merchandise to customers or users;
(12) contains any covenants that in any material way purport
to restrict the business activity of Tunes or any affiliate of Tunes or
limit the freedom of Tunes or any affiliate of Tunes to engage in any line
of business or to compete with any person or entity or to enter into or
perform the transactions contemplated by this Agreement;
(13) provides for payments or commissions to or by any person
or entity based on sales, purchases, or profits, other than direct
payments for goods;
(14) evidences a power of attorney that is currently
effective and outstanding;
(15) relates to capital expenditures which, by its terms,
provides for an aggregate balance payable thereunder since December 31,
1996 in excess of $10,000 thereunder;
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(16) evidences a warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by Tunes
other than in the ordinary course of business; or
(17) evidences any amendment, supplement, modification or
waiver (whether oral or written) in respect of any of the foregoing.
(b) Tunes has delivered to JAMtv true and complete copies of
(or, if oral, descriptions of) each of the following agreements, together
with any amendment, supplement, modification or waiver (whether oral or
written) thereof, between Tunes and each of the following parties:
(1) that certain Terms Sheet for Internet Movie Database
Soundtrack Mini-Store between Internet Movie Database, Ltd. and Tunes
dated August 18, 1997;
(2) that certain Microsoft Corporation CD Merchant Agreement
between Microsoft Corporation and Tunes dated as of February 6, 1998, a
true and complete copy of which is attached hereto as EXHIBIT H;
(3) that certain License and Service Agreement between
MATRIX Software, Inc. and Tunes dated May 9, 1996;
(4) that certain Terms Sheet for Co-Marketing Agreement
between Radio & Records, Inc. and Tunes dated July 22, 1997; and
(5) that certain Software License Agreement between David
Anderson and Tunes dated as of September 1, 1995.
(c) Each agreement, contract, obligation, promise, commitment,
mortgage, indenture, plan, lease, instrument, permit, concession, franchise,
arrangement, license, undertaking or understanding (whether oral, written,
express or implied) listed on or attached to SCHEDULE 3.12 is valid and
binding on Tunes, and is in full force and effect, and neither Tunes nor any
other party thereto, has breached, any material provision of, or is in
material default under the terms thereof. No such agreement, contract,
obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license, undertaking
or understanding (whether oral, written, express or implied) contains any
material liquidated damages, penalty or similar provision. Tunes does not
intend to cancel, withdraw, modify or amend any such agreement, contract,
obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license, undertaking
or understanding (whether oral, written, express or implied) and Tunes has
not been notified by any other party that any party to any such agreement,
contract, obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license, undertaking
or understanding (whether oral, written, express or implied) intends to
cancel, withdraw, modify or amend such agreement, contract, obligation,
promise, commitment, mortgage, indenture, plan, lease, instrument, permit,
concession,
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franchise, arrangement, license, undertaking or understanding (whether oral,
written, express or implied).
3.13 INDEBTEDNESS. Tunes is not obligated as a borrower, guarantor or
accommodation party with respect to any indebtedness for borrowed money other
than as disclosed in the Financial Statements. Tunes is not a lender with
respect to any indebtedness for borrowed money other than as disclosed in the
Financial Statements.
3.14 TAXES.
(a) All Tax Returns, statements, reports and forms (including
estimated tax returns and reports and information returns and reports)
required to be filed with any Taxing Authority with respect to any Taxable
period ending on or before the Effective Time, by or on behalf of Tunes
(collectively, the "Tunes Returns"), have been or will be filed when due
(including any extension of such due date), and all amounts shown due thereon
or before the Effective Time have been or will be paid on or before such
date. The Unaudited Balance Sheet (i) fully accrued all actual and
contingent liabilities for Taxes with respect to all periods through the
Balance Sheet Date and Tunes has not and will not incur any Tax liability in
excess of the amount reflected on the Unaudited Balance Sheet with respect to
such periods, and (ii) properly accrues in accordance with GAAP all
liabilities for Taxes payable following the Balance Sheet Date with respect
to all transactions and events occurred on or prior to such date. All
information set forth in the notes to the Financial Statements relating to
Tax matters is true, complete and accurate in all material respects.
(b) No material Tax liability has been incurred since the
Balance Sheet Date other than in the ordinary course of business and adequate
provision has been or will be made for all Tax liability incurred since that
date in accordance with GAAP on at least a quarterly basis. Tunes has
withheld and paid to the applicable financial institution or Taxing Authority
all amounts required to be withheld. Except as set forth on SCHEDULE 3.14,
all Tunes Returns filed with respect to Taxable years of Tunes through the
Taxable year ended December 31, 1997, in the case of the United States, have
been examined and closed or are Tunes Returns with respect to which the
applicable period for assessment under applicable law, after giving effect to
extensions or waivers, has expired. Neither Tunes nor any member of any
affiliated or combined group of which Tunes has been a member has granted any
currently effective extension or wavier of the limitation period applicable
to any Tunes Returns.
(c) There is no material claim, audit, action, suit,
proceeding, or investigation now pending or, to the knowledge of Tunes,
threatened against or with respect to Tunes in respect of any Tax or
assessment. No notice of deficiency or similar document of any Tax Authority
has been received by Tunes, and there are no liabilities for Taxes (including
liabilities for interest, additions to Tax and penalties thereon and related
expenses) with respect to the issues that have been raised (and are currently
pending) by any Tax authority that could, if determined adversely to Tunes,
materially and adversely affect the liability of Tunes for Taxes. Neither
Tunes, nor any person on behalf of Tunes, has entered into nor will it enter
into any agreement or consent pursuant to Section 341(f) of the Code. There
are no liens for Taxes upon the assets of Tunes except liens for current
Taxes not yet due. Except as may be required as a result of the Merger,
Tunes has not been or will
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be required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) ending on or after the Closing pursuant to
Section 481 or 263A of the Code or any comparable provision under state or
foreign tax laws as a result of transactions, events or accounting methods
employed prior to the closing.
(d) There is no contract, agreement, plan or arrangement,
including, but not limited to, the provisions of this Agreement, covering any
employee or independent contractor or former employee or independent
contractor of Tunes that, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Section
280G, 162 or 404 of the Code, other than as may apply with respect to the
acceleration of stock option vesting as described on SCHEDULE 3.2. Other
than pursuant to this Agreement, Tunes is not a party to or bound by (or will
prior to the Effective Time become a party to or bound by) any Tax indemnity,
Tax sharing or Tax allocation agreement (whether written, unwritten or
arising under operation of federal law as a result of being a member of a
group filing consolidated tax returns, under option of certain state laws as
a result of being a member of a unitary group, or under comparable laws of
other states or foreign jurisdictions) which includes a party other than
Tunes. None of the assets of Tunes (i) is property that Tunes is required to
treat as owned by any other person pursuant to the so-called "safe harbor
lease" provisions of former Section 168(f)(8) of the Code, (ii) directly or
indirectly secures any debt the interest on which is tax exempt under Section
103(a) of the Code or (iii) is "tax exempt use property" within the meaning
of Section 168(h) of the Code. Tunes has not participated in (nor will prior
to the Effective Time participate in) an international boycott within the
meaning of Section 999 of the Code. Tunes has previously provided or made
available to JAMtv true and correct copies of all material Tax Returns, and,
as reasonably requested by JAMtv, prior to or following the date hereof,
information statements, reports, work papers, Tax opinions and memoranda and
other Tax data and documents.
(e) SCHEDULE 3.14 lists (i) any foreign Tax holidays that Tunes
has in any jurisdiction, including the nature, amount and lengths of such Tax
holiday, (ii) any intercompany transfer pricing agreements or other
arrangements that have been established by Tunes in any foreign jurisdiction,
and (iii) any expatriate tax programs or policies affecting Tunes.
(f) For purposes of this Agreement, the following terms have
the following meanings: "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom,
duty or other tax governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or any penalty, addition to tax
or additional amount imposed by any Governmental Entity (a "Taxing
Authority") responsible for the imposition of any such tax (domestic or
foreign), (ii) any liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any Taxable period and (iii) any
liability for the payment of any amounts of the type described in clause (i)
or (ii) as a result of any express or implied obligation to indemnify any
other person.
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3.15 RELATED TRANSACTIONS. No shareholder of Tunes or any Related
Person of any shareholder or of Tunes has, or since January 1, 1996 has had,
any interest in any property (whether real, personal, or mixed and whether
tangible or intangible), used in or pertaining to Tunes's business, except
for rights as a shareholder, and except for rights under any Plan. No
shareholder of Tunes or any Related Person of any shareholder or of Tunes is,
or since January 1, 1996 has owned (of record or as a beneficial owner) an
equity interest or any other financial or profit interest in, a Person that
has (i) had business dealings or a material financial interest in any
transaction with Tunes, or (ii) engaged in competition with Tunes with
respect to any line of the products or services of Tunes in any market
presently served by Tunes. No shareholder of Tunes or any Related Person of
any shareholder of Tunes is a party to any contract with, or has any claim or
right against, Tunes.
"Related Person" means, (i) with respect to an individual, (a) each
other member of such individual's family; (b) any Person that is directly or
indirectly controlled by such individual or one or more members of such
individual's family; (c) any Person in which such individual or members of
such individual's family hold (individually or in the aggregate) a Material
Interest; and (d) any Person with respect to which such individual or one or
more members of such individual's family serves as a director, officer,
partner, executor, or trustee (or in a similar capacity); and (ii) with
respect to a specified Person other than an individual, (a) any Person that
directly or indirectly controls, is directly or indirectly controlled by, or
is directly or indirectly under common control with such specified Person;
(b) any Person that holds a Material Interest in such specified Person; (c)
each Person that serves as a director, officer, partner, executor, or trustee
of such specified Person (or in a similar capacity); (d) any Person in which
such specified Person holds a Material Interest; (e) any Person with respect
to which such specified Person serves as a general partner or a trustee (or
in a similar capacity); and (f) any Related Person of any individual
described in clause (b) or (c). "Material Interest" means direct or indirect
beneficial ownership of voting securities or other voting interests
representing at least 5% of the outstanding voting power of a Person or
equity securities or other equity interests representing at least 5% of the
outstanding equity securities or equity interests in a Person.
3.16 INTELLECTUAL PROPERTY ASSETS.
(a) INTELLECTUAL PROPERTY ASSETS. "Intellectual Property
Assets" means all of the following, whether owned, used, or licensed (as
licensee or licensor) by Tunes, and all rights corresponding thereto
throughout the world, in any form and on any medium now known or hereafter
developed and all embodiments thereof, whether tangible, intangible, printed,
recorded, digitized, fixed, stored, electronic, or otherwise:
(1) Tunes's corporate name, the uniform resource locator
"www.tunes.com," all fictitious business names, trade names, brand names,
trade dress, logos, trademarks, service marks, trademark registrations,
service mark registrations, applications for registration and the goodwill
symbolized by the foregoing and connected therewith (collectively,
"Marks");
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(2) (A) all copyrights, whether or not published, protected
or registered under the Copyright Act of 1909 or the Copyright Act of 1976
(as either shall be amended from time to time, and any predecessor or
successor statute thereto), applications for registration of copyrights,
all works of authorship, and all secondary and subsidiary rights therein;
(B) art, audiovisual works, animations, compilations, collective works,
computer software and programs, data, databases, designs, emblems, films,
film clips, graphics, images, illustrations, likenesses, literary works,
logos, motion pictures, musical compositions, music videos, performances,
photographs, pictorial works, song lyrics, sound clips, sound recordings,
scripts, screenplays, video recordings, and all other copyrightable
subject matter; (C) all renewals, derivative works, enhancements,
improvements, modifications, updates, new releases or other revisions
thereof; and (D) publication rights, display rights, attribution rights,
integrity rights, performance rights (including digital performance
rights), mechanical rights, synchronization rights, publishing rights,
approval rights, reproduction rights, rights to create derivative works,
distribution rights, or moral rights (collectively, "Copyrights");
(3) all publicity rights or privacy rights (or waivers or
quitclaims thereof) of any person or entity related thereto ("Publicity
Rights");
(4) patents, patent applications and extensions,
continuations and renewals thereof and inventions and discoveries that may
be patentable (collectively, "Patents"); and
(5) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets").
(b) CERTAIN OTHER DEFINED TERMS. The following capitalized
terms used in this Agreement relating to Intellectual Property Assets shall
have the following meanings:
"Performance Rights Society" means any performance rights
society or clearinghouse concerning the performance, reproduction,
display, or distribution of Copyrights, including, without
limitation, American Society of Composers, Authors and Publishers
(ASCAP), Broadcast Music, Inc. (BMI), Recording Industry Association
of America (RIAA), The Society of European Stage Authors and
Composers (SESAC), and The Harry Fox Agency (HFA).
"Artists Guild" means any guild, union, or collective
bargaining entity representing artists, performers, or other talent,
including, without limitation, American Federation of Musicians,
Songwriters Guild, American Federation of Television and Radio
Artists, American Society of Media Photographers, Graphic Artists
Guild, Writers Guild of America, and Screen Actors Guild.
"Music Rights Holder" means any record label, music publisher,
songwriter, artist, photographer, or any other holder of any rights
in any sound recording, musical
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composition, artwork (including album art, liner notes, and other
collateral works), chart, music database or other Copyright.
(c) MARKS. SCHEDULE 3.16 contains a complete and accurate list
(including, without limitation, identifying registration numbers,
registration dates, application numbers, and filing dates) and summary
description of all Marks.
(d) COPYRIGHTS. SCHEDULE 3.16 sets forth a complete and
accurate list of all Copyrights, including, without limitation, (i) rights in
the All-Music Guide or similar resources; (ii) computer software (including,
without limitation, software for the so-called Rating and Recommendation
Engine or RARE, automated music encoding, compact disk cataloging and
imaging, order fulfillment or customer support, CGI technology, and music
search engines); (iii) compact disk catalogues, tables of contents (TOCs),
and other music databases, and (iv) performance, reproduction, or display
rights in musical compositions, sound recordings, artwork (including album
art, liner notes, and other collateral works), charts, and music databases,
including, without limitation, rights relating to any Performance Rights
Society, Artists Guild, or other Music Rights Holder.
(e) PUBLICITY RIGHTS. SCHEDULE 3.16 contains a complete and
accurate list of all Publicity Rights.
(f) PATENTS. SCHEDULE 3.16 contains a complete and accurate
list (including identifying numbers and dates of filing and issuance) and
summary description of all Patents.
(g) TRADE SECRETS. The documentation relating to each Trade
Secret is current, accurate, and sufficient in detail and content to identify
and explain it and to allow its full and proper use without reliance on the
knowledge or memory of any individual. Tunes has taken all reasonable
precautions to protect the secrecy, confidentiality, and value of its Trade
Secrets.
(h) INTELLECTUAL PROPERTY ASSETS NECESSARY FOR THE BUSINESS.
(1) Tunes owns, or is licensed or otherwise entitled to
exercise all rights in Intellectual Property Assets employed in the
operation of the business of Tunes as currently conducted or as currently
proposed to be conducted including, without limitation, (i) rights in the
All-Music Guide or similar resources; (ii) computer software (including,
without limitation, software for the so-called Rating and Recommendation
Engine or RARE, automated music encoding, compact disk cataloging and
imaging, order fulfillment or customer support, CGI technology, and music
search engines); (iii) compact disk catalogues, tables of contents (TOCs),
and other music databases, (iv) performance, reproduction, or display
rights in musical compositions, sound recordings, artwork (including album
art, liner notes, and other collateral works), charts, and music
databases, including, without limitation, rights relating to any
Performance Rights Society, Artists Guild, or other Music Rights Holder;
and (v) the musical compositions, sound recordings, artwork (including
album art, liner notes, and other collateral works), charts, music
databases, and computer software code employed at the web site
"www.tunes.com." Tunes is the owner of all right, title, and
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interest in and to each of the Intellectual Property Assets, free and
clear of all material liens, security interests, charges, encumbrances,
equities, and other adverse claims, and has the right to use all of the
Intellectual Property Assets without payment to any third party
(including, without limitation, any Performance Rights Society, Artists
Guild, or other Music Rights Holder).
(2) All of the former and current employees and officers of
Tunes (including, without limitation, Kamran Mohsenin and David Anderson)
have executed valid and binding agreements with Tunes which assign to
Tunes all rights to all Intellectual Property Assets created or discovered
by such employee or officer in the course of employment with Tunes. No
employee, officer, or director of Tunes has entered into any contract,
obligation, promise, commitment, undertaking or understanding (whether
oral, written, express or implied) that restricts or limits in any way the
scope or type of work in which such employee, officer, or director may be
engaged or requires such employee, officer, or director to transfer,
assign, or disclose information concerning his or her work to any party
other than Tunes.
(i) INTELLECTUAL PROPERTY AGREEMENTS. A complete and accurate
list of every contract, obligation, promise, commitment, mortgage, indenture,
plan, lease, instrument, permit, concession, franchise, arrangement, license,
undertaking or understanding (whether oral, written, express or implied)
relating to the Intellectual Property Assets to which Tunes is a party or by
which Tunes is bound (except for any license implied by the sale of a product
and perpetual, paid-up licenses for commonly available software programs with
a value of less than $500 under which Tunes is the licensee) is set forth on
SCHEDULE 3.12. There are no outstanding and, to the best of Tunes's
knowledge, no threatened disputes with respect to any such contract,
obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license, undertaking
or understanding (whether oral, written, express or implied) (including,
without limitation, any claims by any Performance Rights Society, Artists
Guild, or any other Music Rights Holder, for the payment of any fees or
royalties for the reproduction, creation of derivative works, distribution,
public performance (including digital performance), or public display of any
Intellectual Property Asset).
(j) COMPLIANCE WITH LEGAL AND CONTRACTUAL REQUIREMENTS. Tunes
has all Copyright, computer software and other Intellectual Property Asset
licenses, and has paid all royalties and fees with respect thereto required
to be paid prior to the date of this Agreement, necessary to operate its
business in compliance with all laws, rules and regulations, and all material
contractual requirements to which it or its properties is subject (including,
without limitation, any fees or royalties for the reproduction, creation of
derivative works, distribution, public performance (including digital
performance), or public display of any Intellectual Property Asset required
by any Performance Rights Society, Artists Guild, or any other Music Rights
Holder). Without limiting the foregoing, Tunes has not been subject to a
computer software audit and no software audit of Tunes is pending.
(k) CLAIMS AGAINST INTELLECTUAL PROPERTY ASSETS. No claims
with respect to the Intellectual Property Assets have been asserted or, to
the best knowledge of Tunes, threatened, by
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any person or entity (including, without limitation, by any Performance
Rights Society, Artists Guild, or other Music Rights Holder): (i) to the
effect that any business of Tunes as currently conducted or proposed to be
conducted infringes on or misappropriates any Intellectual Property Assets in
which a third party has any rights or (ii) challenging the ownership,
validity or effectiveness of any of the Intellectual Property Assets. All
Intellectual Property Assets are valid and subsisting assets of Tunes. There
is no material unauthorized use, infringement or misappropriation of any of
the Intellectual Property Assets by any third party, including any employee.
Except as set forth in the Tunes Disclosure Schedule, Tunes is not obligated
to and has not agreed or committed to indemnify any other person or entity
against any charge or infringement relating to any Intellectual Property
Assets. No employee or officer of Tunes is in violation of any term of any
employment contract, patent disclosure agreement or any other contract,
agreement, arrangement, or understanding (whether written or oral) relating
to the relationship of any such employee or officer with Tunes or any other
party (including prior employers) because of the nature of the business
conducted or proposed to be conducted by Tunes.
3.17 YEAR 2000 COMPLIANT. Except as set forth in the Tunes Disclosure
Schedule, all computers or computer related hardware or software which are
owned by Tunes (the "Computer System") are Year 2000 compliant. "Year 2000
compliant" means that the Computer System (a) allows for the input of all
dates in a four-digit format; (b) provides date output in a four-digit
format; (c) accommodates same century and multi-century date related formulas
and calculations (including leap year calculations); (d) functions and will
function accurately and without interruption before, during and after January
1, 2000; and (e) responds to two-digit date input in a way that resolves any
ambiguity as to century as disclosed in the System Specifications.
3.18 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION
OF PROPERTY.
(a) TITLE TO PROPERTY. Tunes has good and marketable title,
or valid leasehold rights (in the case of leased property), to all real
property and all personal property (including, without limitation, the
Intellectual Property Assets) purported to be owned, leased, or licensed by
it or used in the operation of its business, free and clear of all liens,
security interests, claims and encumbrances of any nature, other than the
Permitted Liens. SCHEDULE 3.18 sets forth a complete and accurate list of
the following: (i) all real property leased or used by Tunes in the conduct
of its business, (ii) Tunes's catalogue of compact disks, albums, tapes,
artwork (including album art, liner notes, and other collateral works), and
all other tangible embodiments of copyrightable materials (which Tunes
represents and warrants are not subject to return to any third party), and
(iii) all other tangible personal property (and intangible personal property,
to the extent not otherwise disclosed on the other Schedules hereto relating
to Intellectual Property Assets) owned, leased, or licensed by Tunes or used
in connection with its business, including without limitation, all inventory,
machinery, equipment, furniture, supplies, vehicles, office equipment and
other tangible personal property used in conducting its business, and all
leases of equipment or other personal property used in the conduct of its
business, to the extent such personal property has a value in excess of
$5,000 individually or $25,000 in the aggregate.
(b) LEASE TERMS. SCHEDULE 3.18 sets forth with respect to each
lease to which Tunes is a party, the commencement date, termination date,
renewal options, if any, and annual base
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rents. Tunes has delivered, prior to the Closing Date, copies of all leases,
and all amendments thereto, for real property leased or used by Tunes in the
conduct of the Business. Tunes has furnished or made available to JAMtv,
copies of all engineering, geologic and environmental reports prepared by or
for Tunes, if any, with respect to the real property leased or used by Tunes.
Tunes does not own any fee interest in real property.
(c) CONDITION. The machinery and equipment and other tangible
personal property (and intangible personal property, to the extent not
otherwise comprising Intellectual Property Assets) owned, leased, or used by
Tunes is, taken as a whole, (i) adequate for the conduct of the business of
Tunes consistent with its past practice, (ii) suitable for the uses to which
it is currently employed, (iii) in good operating condition, and (iv) not
obsolete.
(d) PERMITTED LIENS. "Permitted Liens" shall mean:
(i) liens for taxes, assessments or governmental charges
or levies on property of Tunes if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are being diligently
contested in good faith and by appropriate actions or proceedings and for
which Tunes shall have set aside reserves on its books as required by GAAP
and which are reflected on the Financial Statements;
(iii) liens imposed by law, such as carrier's,
warehousemen's and mechanic's liens and other similar liens, which arise in
the ordinary course of business with respect to obligations not yet due or
being contested in good faith by appropriate actions or proceedings and for
which Tunes shall have set aside reserves on its books as required by GAAP
and which are reflected on the Financial Statements;
(iv) liens arising out of pledges or deposits under
workmen's compensation laws, unemployment insurance, old age pensions, or
other social security benefits other than any lien imposed by ERISA; and
(vii) liens listed on any title report previously delivered
to and accepted by Tunes and zoning restrictions, easements, licenses or
other restrictions on the use of real property or other irregularities in
title thereto so long as the same does not materially impair the use of such
real property in the operation by Tunes of its business.
3.19 GOVERNMENTAL AUTHORIZATIONS AND LICENSES. Tunes is the holder of
all material licenses, authorizations, permits, concessions, certificates and
other franchises of any Governmental Entity required to operate its business
(collectively, the "Licenses") and in compliance in all material respects
with the terms, conditions, limitations, restrictions, standards,
prohibitions, requirements and obligations of such Licenses. The Licenses
are in full force and effect. There is not now pending, nor is there
threatened in writing, any action, suite, investigation or proceeding against
Tunes before any Governmental Entity with respect to the Licenses, nor is
there any issued or outstanding notice, order to complaint with respect to
the violation by Tunes of the terms of any License or any rule or regulation
applicable thereto.
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3.20 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no material
agreement, judgment, injunction, order or decree binding upon Tunes which has
or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Tunes, any acquisition of
property by Tunes or the conduct of business of Tunes as currently conducted
or as currently proposed to be conducted.
3.21 ENVIRONMENTAL MATTERS.
(a) No substance that is regulated by any Governmental Entity
or that has been designated by any Governmental Entity to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment (a
"Hazardous Material") is present in, on or under any property that Tunes has
at any time owned, operated, occupied or leased, which is reasonably likely
to form the basis of a material claim, action, suit, proceeding hearing or
investigation against Tunes.
(b) Tunes does not and has not in the conduct of its business
transported, stored, used, manufactured, released or exposed its employees or
any other person to any Hazardous Material (other than customary uses of
hazardous materials for janitorial and office purposes in compliance with
applicable law).
(c) No permits, consents, waivers, exemptions, licenses,
approvals and other authorizations are required to be obtained by it under
the laws of any Governmental Entity relating to land use, public and employee
health and safety, pollution or protection of the environment (collectively,
"Environmental Laws"). Tunes is in compliance in all material respects with
all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws or contained in any regulation, code, plan, order, decree,
judgment, notice or demand letter issued, entered, promulgated or approved
thereunder. Tunes has not received any notice and is not aware of any past
or present condition or practice of the businesses conducted by Tunes which
forms the basis of any material claim, action, suite, proceeding, hearing or
investigation against Tunes, arising out of the manufacture, processing,
distribution, use, treatment, storage, spill, disposal, transport, or
handling, or the emission, discharge, release or threatened release into the
environment, of any Hazardous Material by Tunes or any of its subsidiaries.
3.22 INSURANCE. SCHEDULE 3.22 lists all insurance policies and
fidelity bonds covering the assets, business, equipment, properties,
operations, employees, officers and directors of Tunes, their termination
dates and the amounts of coverage under each such policy and bond of Tunes.
Within the last four (4) years, Tunes has not been refused any requested
coverage. All premiums payable under all such policies and bonds have been
paid and Tunes is otherwise in full compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). Such policies of insurance and bonds are of the
type and in amounts customarily carried by persons conducting businesses
similar to that of Tunes. Tunes does not know of any threatened termination
of or material premium increase with respect to, any of such policies.
3.23 LABOR MATTERS. Tunes has not been, and is not, a party to any
collective bargaining or other labor Contract. There has not been, there is
not presently pending or existing, and to
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Tunes's knowledge there is not threatened, (a) any strike, slowdown,
picketing, work stoppage, or employee grievance process, (b) any proceeding
against or affecting Tunes relating to the alleged violation of any laws or
regulations pertaining to labor relations or employment matters, including
any charge or complaint filed by an employee or union with the National Labor
Relations Board, the Equal Employment Opportunity Commission, or any
comparable governmental authority, organizational activity, or other labor or
employment dispute against or affecting Tunes or its premises, or (c) any
application for certification of a collective bargaining agent. To Tunes's
knowledge no event has occurred or circumstance exists that could provide the
basis for any work stoppage or other labor dispute. There is no lockout of
any employees by Tunes, and no such action is contemplated by Tunes. Tunes
has complied in all material respects with all laws and regulations relating
to employment, equal employment opportunity, nondiscrimination, immigration,
wages, hours, benefits, collective bargaining, the payment of social security
and similar taxes, occupational safety and health, and plant closing. Tunes
is not liable for the payment of any compensation, damages, taxes, fines,
penalties, or other amounts, however designated, for failure to comply with
any of the foregoing laws and regulations.
3.24 EMPLOYEES.
(a) SCHEDULE 3.24 contains a complete and accurate list of the
following information for each employee, officer, and director of Tunes,
including, without limitation, each employee on leave of absence or layoff
status: name; title; current compensation and bonus paid or payable;
vacation accrued; severance arrangements; and vested and unvested Tunes
Options held.
(b) No director, officer or employee of Tunes is a party to, or
is otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, between
such director or employee and any other Person that in any way adversely
affects or will affect the performance of his duties as an employee, officer
or director of Tunes or Merger Sub, or the ability of Tunes to conduct its
business. To Tunes's knowledge, no director, officer, or employee of Tunes
intends to terminate his employment with Tunes.
(c) SCHEDULE 3.24 identifies each employee, officer or director
of Tunes who was employed by Tunes within the past two years but is no longer
employed by Tunes, and contains a complete and accurate list of the following
information for each retired employee, officer or director of Tunes, or their
dependents, receiving benefits or scheduled to receive benefits from Tunes or
the Plans in the future: name, pension benefit, pension option election,
retiree medical insurance coverage, retiree life insurance coverage, and
other benefits.
3.25 QUESTIONABLE PAYMENTS. Neither Tunes nor any director, officer
or other employee of Tunes has: (i) made any payments or provided services or
other favors in the United States of America or in any foreign country in
order to obtain preferential treatment or consideration by any Governmental
Entity with respect to any aspect of the business of Tunes; or (ii) made any
political contributions which would not be lawful under the laws of the
United States (including, without limitation, the Foreign Corrupt Practices
Act) or the foreign country in which such payments were made. Neither Tunes
nor, any director, officer or other employee of Tunes has been the subject of
any inquiry or investigation by any Governmental Entity in connection with
payments or benefits
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or other favors to or for the benefit of any governmental or armed services
official, agent, representatives or employee with respect to any aspect of
the business of Tunes or with respect to any political contribution.
3.26 INFORMATION STATEMENT. The information supplied or to be
supplied by Tunes for inclusion in the materials to be prepared for use in
soliciting approval of the Merger by Tunes's shareholders as described in
Section 5.3 hereof and other solicitation materials relating to the Merger
(the "Information Statement"), on the date on which Tunes mails such
materials to its shareholders and at all times from such date up to and
including the Effective Time complies or will comply in all respects with the
CGCL, the DGCL, and the applicable federal and state securities law
requirements and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they will be made, not
misleading; PROVIDED, HOWEVER, that Tunes makes no representation or warranty
with respect to any information that JAMtv may supply expressly for use in
the Information Statement.
3.27 ACCOUNTS PAYABLE. All accounts payable of Tunes have been
incurred in the ordinary course of business consistent with past practice.
3.28 SUPPLIERS AND CUSTOMERS. There are no pending or, to Tunes's
knowledge, threatened disputes between Tunes and any of its vendors,
suppliers, customers or other parties which in any way relate to the
operation of Tunes's business, including, without limitation, with respect to
any Performance Rights Society, Artists Guild, or other Music Rights Holder
or with respect to any of the parties to the agreements attached to SCHEDULE
3.12 hereto.
3.29 BANK ACCOUNTS. SCHEDULE 3.29 hereto lists the names and
locations of all banks at which Tunes has an account and/or safe deposit box,
the numbers of any such accounts and the names of all persons authorized to
draw thereon or to have access thereto.
3.30 BROKERS; FINDERS. Tunes represents and warrants that no agent,
broker, investment banker or other firm or person is, or will be, entitled to
any broker's or finder's fee or any similar commission or fee in connection
with any of the transactions contemplated by this Agreement or the Merger
Certificate.
3.31 DISCLOSURE. No representation or warranty made by Tunes in this
Agreement, nor any financial statement, certificate, schedule or exhibit
prepared and furnished or to be prepared and furnished by Tunes or its
representatives pursuant hereto contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary
to make the statements or facts contained herein or therein not misleading in
light of the circumstances under which they were furnished. There is no
event, fact or condition that has caused a Material Adverse Effect, that has
not been set forth in this Agreement or the Tunes Disclosure Schedule, other
than general economic or competitive conditions.
3.32 MICROSOFT DELUXE CD PLAYER. Tunes warrants that (i) the
Microsoft Deluxe CD Player shall have the ability to query Tunes's website
for information about the CD being played,
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such as title, artist, track names, label, release date and that certain
special menus with unique URLs, when selected by the user, shall launch the
user's web browser to load relevant pages from Tunes's website and (ii) and
that Microsoft shall make the Microsoft Deluxe CD Player generally available
to consumers as part of the Windows 98 Plus Pack! on or before June 30, 1999.
3.33 CLIPS MUSIC SYSTEM. Attached hereto as SCHEDULE 3.33 is a true
and complete copy of the Asset Purchase Agreement by and between Tunes and
Kamran Mohsenin, dated as of a date prior to the date hereof. Such agreement
constitutes the entire agreement between the parties with respect to the sale
by Tunes to Mr. Mohsenin of the assets constituting the "CLIPS Music System"
as defined therein, and supersedes all prior agreements and understandings,
both written and oral (if any), among the parties with respect to the subject
matter thereof.
3.34 CDDB. Attached hereto as SCHEDULE 3.34 is a draft of a License
and Service Agreement between Tunes and CDDB, LLC with respect to the
"CDDB-DATABASE" (as defined therein) owned by CDDB, LLC. The transactions
contemplated by such draft agreement are material to the business of Tunes
and failure to consummate such transactions upon terms and conditions no less
favorable to Tunes than those set forth in SCHEDULE 3.34 could have a
Material Adverse Effect on Tunes. Tunes hereby warrants that it shall
consummate such transactions on or before August 31, 1998 upon terms no less
favorable to Tunes than those set forth in SCHEDULE 3.34 (or, alternatively,
shall consummate a transaction whereby Tunes or an affiliate of Tunes would
purchase the business and substantially all of the assets of CDDB, LLC).
3.35 AMG. SCHEDULE 3.35 attached hereto sets forth the material terms
and conditions of a pending transaction which would grant to Tunes certain
rights and benefits with respect to (i) general interest music guides
containing, among other things, lists of artists, albums, ratings, reviews
and other information, and general interest movie guides containing, among
other things, lists of film stars, motion pictures, ratings, reviews and
other information, which are published in electronic form under the trade
names "All-Music Guide" and the "All Movie Guide," using the "AMG" and
"MATRIX" logos and marks, and (ii) a database which provides information
regarding the availability and pricing of record and video products. The
transactions contemplated by SCHEDULE 3.35 are material to the business of
Tunes and failure to consummate such transactions upon terms and conditions
no less favorable to Tunes than those set forth in SCHEDULE 3.35 could have a
Material Adverse Effect on Tunes. Tunes hereby warrants that it shall
consummate such transactions on or before June 25, 1998 upon terms no less
favorable to Tunes than those set forth in SCHEDULE 3.35.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF JAMTV AND MERGER SUB
JAMtv and Merger Sub each represent and warrant as follows such
representations and warranties to be true as of the Closing Date:
4.1 ORGANIZATION; GOOD STANDING; AND CORPORATE POWER. Each of JAMtv
and Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as now being conducted. Each of JAMtv's subsidiaries
are
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duly organized, validly existing and in good standing under the laws of the
state of incorporation and have all requisite corporate power and authority
to own, operate and lease its properties and to carry on its business as now
being conducted. JAMtv has delivered to Tunes complete and correct copies of
its Certificate of Incorporation and Bylaws, in each case as amended to the
date hereof, and has made available to Tunes a ledger reflecting the record
ownership of all outstanding shares of JAMtv capital stock.
4.2 CAPITAL STRUCTURE.
(a) The authorized capital stock of JAMtv consists of (i)
10,500,000 shares of common stock, par value $0.01 per share (the "JAMtv
Common Stock"); and (ii) 5,000,000 shares of preferred stock, par value $0.01
per share (the "JAMtv Preferred Stock"), issuable in series, of which
2,500,000 shares are designated Series A Convertible Preferred Stock (the
"Series A Preferred"), 500,000 shares are designated Series B Convertible
Preferred Stock (the "Series B Preferred"), 533,340 shares are designated
Series C Convertible Preferred Stock (the "Series C Preferred") and 800,000
shares are designated Series D Convertible Preferred Stock (the "Series D
Preferred"). There are issued and outstanding: 1,150,530 shares of JAMtv
Common Stock; 2,016,666 shares of Series A Preferred, of which 1,666,666
shares are designated "Series A-I Convertible Preferred Stock," 200,000
shares are designated "Series A-II Convertible Preferred Stock," and 150,000
shares are designated "Series A-III Convertible Preferred Stock;" 472,000
shares of Series B Preferred; 533,334 shares of Series C Preferred, and up to
800,000 shares of Series D Preferred. In addition, 1,300,000 shares of JAMtv
Common Stock have been reserved for issuance under the Stock Option Plan of
JAMtv, and JAMtv has delivered to Straight Arrow Publishers Company, L.P. a
warrant for the purchase of 419,224 shares of JAMtv Common Stock at an
exercise price of $3.00 per share, which number of shares is subject to
increase upon the occurrence of certain events so that the warrant holder is
entitled to purchase shares of JAMtv Common Stock in an amount equal to
approximately a ten percent ownership interest in JAMtv prior to certain
events including a public or private offering in which the net proceeds from
the sale are at least $15,000,000. All outstanding shares of JAMtv Common
Stock and JAMtv Preferred Stock are validly issued, fully paid and
nonassessable. The Closing Shares, Performance Shares, and IPO Shares have
been duly reserved for issuance, and when issued as provided by the terms of
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Except as disclosed on SCHEDULE 4.2 hereto, none of the JAMtv
Common Stock issued pursuant to this Agreement is subject to any preemptive
rights, whether created by JAMtv's Certificate of Incorporation, Bylaws, or
any agreement.
(b) Other than as described in this Section 4.2 or as set forth
on SCHEDULE 4.2, there are no issued or outstanding shares of capital stock
of JAMtv, and there are no options, warrants, calls, conversion rights,
commitments or agreements of any character (whether oral, written, express,
or implied) to which JAMtv is a party or by which JAMtv may be bound that do
or may obligate JAMtv to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of JAMtv capital stock or that do or may
obligate JAMtv to grant, extend or enter into any such option, warrant, call,
conversion right, commitment or agreement. There are no outstanding
agreements, contracts, obligations, promises, commitments, indentures, plans,
instruments, arrangements, undertakings or understandings (whether oral,
written, express or implied) to which
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JAMtv is a party or is bound or which affects or relates to the voting,
issuance, purchase, redemption, repurchase or transfer of any capital stock
of JAMtv or any other securities of JAMtv, except as set forth in this
Section 4.2 or as set forth on SCHEDULE 4.2. Except as described on SCHEDULE
4.2 hereto, to JAMtv's knowledge, none of the outstanding equity securities
or other securities of JAMtv was issued in violation of any law, rule or
regulation, including, without limitation, state and federal securities laws.
4.3 CORPORATE NAME; PRIOR TRANSACTIONS; SUBSIDIARIES. Except as
disclosed on SCHEDULE 4.3, JAMtv has not during its existence been known by
or used any other corporate or fictitious name or been a party to any merger
or consolidation, or acquired all or substantially all of the assets of any
person or entity. Except as disclosed on SCHEDULE 4.3 hereto and other than
JAMtv Interactive Services Corporation and Merger Sub, JAMtv has no
subsidiaries, does not have any contract to acquire, and does not hold any
equity securities or other securities of, any person or entity (including any
subsidiary).
4.4 AUTHORITY; VALIDITY; NO CONFLICT; CONSENTS.
(a) JAMtv and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and the Merger Certificate, to perform
its obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by JAMtv and by
Merger Sub of this Agreement, and the execution and delivery by Merger Sub of
the Merger Certificate, the performance by JAMtv of its obligations hereunder
and thereunder and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on
the part of JAMtv and Merger Sub, including, without limitation, the approval
by the Board of Directors of JAMtv. This Agreement is, and the Merger
Certificate when delivered by the parties thereto, will be, legal, valid and
binding obligations of each of JAMtv and Merger Sub enforceable against JAMtv
and Merger Sub in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency, or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefor may be brought. Except as disclosed on
SCHEDULE 4.4 hereto, no vote of the holders of any class or series of JAMtv
capital stock is necessary to approve this Agreement and the Merger
Certificate and the transactions contemplated hereby and thereby.
(b) The execution and delivery of this Agreement does not, and
the execution and delivery of the Merger Certificate and the consummation of
the transactions contemplated hereby and thereby will not other than as
described or provided in this Agreement, conflict with or result in any
violation of any material statute, law, rule, regulation, judgment, order,
degree or ordinance applicable to JAMtv or any of its subsidiaries or their
respective properties or assets, or conflict with or result in any breach or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any
obligation or loss of a material benefit under or result in the creation of a
lien or encumbrance on any of the material properties or assets of JAMtv
pursuant to (i) any provision of the Certificate of Incorporation or Bylaws
of JAMtv or any of its subsidiaries or (ii) any material agreement, contract,
note, obligation, promise, commitment, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, license,
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undertaking or understanding (whether oral, written, express or implied) to
which JAMtv or any of its subsidiaries is a party or by which JAMtv or any of
its subsidiaries or their respective properties or assets may be bound or
affected.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required
by JAMtv or Merger Sub in connection with the execution and delivery of this
Agreement and the Merger Certificate by JAMtv and Merger Sub or the
consummation by JAMtv and Merger Sub of the transactions contemplated hereby
or thereby, except for the filing of (i) the Merger Certificate and officers'
certificates with the Delaware Secretary of State and the California
Secretary of State in such form as is required by, and executed in accordance
with, the applicable provisions of the DGCL and the CGCL, (ii) appropriate
documents with the relevant authorities of other states in which JAMtv and
Merger Sub are qualified to do business, and (iii) appropriate documents with
the relevant approvals, authorizations, registrations or qualifications as
may be required under federal and state securities or "Blue Sky" laws in
connection with the Merger.
4.5 FINANCIAL STATEMENTS. JAMtv has furnished or made available to
Tunes its consolidated financial statements for the fiscal year ended on
December 31, 1997, including balance sheets of JAMtv, and the related
statements of operations, cash flow and stockholders' equity (collectively,
the "JAMtv Audited Financial Statements"), and the related management
letters, if any, and JAMtv's unaudited financial statements as at March 31,
1998, including an unaudited balance sheet of JAMtv (the "JAMtv Unaudited
Balance Sheet") as at March 31, 1998 and the related unaudited statements of
operations and cash flow (the "JAMtv Unaudited Financial Statements"). The
JAMtv Audited Financial Statements, the JAMtv Unaudited Balance Sheet, and
the JAMtv Unaudited Financial Statements are collectively referred to as the
"JAMtv Financial Statements." The JAMtv Financial Statements have been
prepared in accordance with GAAP consistency applied and fairly present the
financial position of JAMtv as at the dates, except that the Unaudited
Financial Statements prepared since the Balance Sheet Date do not contain the
footnote disclosure required by GAAP and may not include the same refinement
of estimates and accruals as are contained in the JAMtv Financial Statements.
Since its inception, there has been no change in JAMtv's accounting
policies, except as described in notes to the JAMtv Financial Statements.
4.6 COMPLIANCE WITH LAW; CHARTER DOCUMENTS; AND ORDERS. JAMtv and
each of its subsidiaries are in compliance, and have conducted their
respective businesses so as to comply, with all laws, rules and regulations,
judgments, decrees or orders of any Governmental Entity applicable to their
respective operations or with respect to which compliance is a condition of
engaging in the business thereof, except to the extent that failure to
comply, individually or in the aggregate, has not had and would not be
reasonably expected to have a Material Adverse Effect. There are no
judgments or orders, injunctions, decrees, stipulations or awards (whether
rendered by a court or administrative agency or by arbitration) against JAMtv
or against any of its properties or businesses. To JAMtv's knowledge, no
officer, director, or employee of JAMtv or any subsidiary is subject to any
order that prohibits such officer, director, or employee from engaging in or
continuing any conduct, activity, or practice relating to the business of
JAMtv or the respective subsidiary. JAMtv nor any of its subsidiaries is
not, nor has it received notice that it is or would be with the passage of
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time, in violation of any provision of its Certificate of Incorporation,
Bylaws or resolutions, or in default or violation of any term, condition or
provision of any judgment, decree, order, injunction or stipulation
applicable to JAMtv or any subsidiary, its respective business or properties.
4.7 LITIGATION. Except as disclosed on SCHEDULE 4.7, there is no
action, suit, proceeding, claim, arbitration or investigation pending by or
against JAMtv or any of its subsidiaries, any director, officer, employee or
stockholder of JAMtv or any of its subsidiaries relating to or affecting
JAMtv's or any subsidiary's business, properties or capital stock, or which
in any manner challenges or seeks to prevent, enjoin, alter or delay any of
the transactions contemplated hereby. Except as disclosed on SCHEDULE 4.7,
to JAMtv's knowledge, no such action, suit, proceeding, claim, arbitration or
investigation has been threatened and no event has occurred or circumstance
exists that may give rise to or serve as a basis for the commencement of any
such action, suit, proceeding, claim, arbitration or investigation.
4.8 NO MATERIAL ADVERSE EFFECT. Except as set forth on SCHEDULE 4.8,
since the Balance Sheet Date, JAMtv and each of its subsidiaries has
conducted its business in the ordinary course and there has not occurred:
(a) Any Material Adverse Effect;
(b) Any amendments or changes in the Certificate of
Incorporation or Bylaws of JAMtv or any of its subsidiaries;
(c) Any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting any of the properties or
businesses of JAMtv or any of its subsidiaries;
(d) Any issuance, redemption, repurchase or other acquisition
of shares of capital stock of JAMtv or any of its subsidiaries (other than in
the ordinary course under employee benefit plans), or any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock or property) with respect to the capital stock of JAMtv or any of
its subsidiaries;
(e) Any alteration in any term of any outstanding debt or
capital stock of JAMtv or any of its subsidiaries;
(f) Any (i) incurrence, assumption or guarantee by JAMtv or any
of its subsidiaries of any debt for borrowed money; or (ii) issuance or sale
of any securities convertible into or exchangeable for debt securities of
JAMtv or any of its subsidiaries; or
(g) Any sale, lease, disposition, transfer, license, grant,
loss, abandonment, or termination of a right under the Intellectual Property
Assets other than in the ordinary course of business consistent with past
practice;
(h) Any change in its accounting methods; or
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(i) Any agreement or arrangement made by JAMtv or any of its
subsidiaries to take any action which, if taken prior to the date hereof,
would have made any representation or warranty set forth in this Section 4.8
untrue or incorrect as of the date when made.
4.9 ABSENCE OF UNDISCLOSED LIABILITIES. To JAMtv's knowledge,
neither JAMtv nor any of its subsidiaries has any liabilities or obligations
(whether absolute, accrued or contingent or otherwise) except liabilities or
obligations (i) adequately provided for in the JAMtv Financial Statements
(ii) incurred in the ordinary course of business consistent with past
practice and which are not, individually or in the aggregate, material to
JAMtv or any of its subsidiaries.
4.10 INDEBTEDNESS. Neither JAMtv nor any of its subsidiaries is
obligated as a borrower, guarantor or accommodation party with respect to any
indebtedness for borrowed money other than as disclosed in the JAMtv
Financial Statements. Neither JAMtv nor any of its subsidiaries is a lender
with respect to any indebtedness for borrowed money other than as disclosed
in the JAMtv Financial Statements.
4.11 TAXES.
(a) All Tax Returns, statements, reports and forms (including
estimated tax returns and reports and information returns and reports)
required to be filed with any Taxing Authority with respect to any Taxable
period ending on or before the Effective Time, by or on behalf of JAMtv or
any of its subsidiaries (collectively, the "JAMtv Returns"), have been or
will be filed when due (including any extension of such due date), and all
amounts shown due thereon or before the Effective Time have been or will be
paid on or before such date. The JAMtv Unaudited Balance Sheet (i) fully
accrues all actual and contingent liabilities for Taxes with respect to all
periods through the Balance Sheet Date and JAMtv or any of its subsidiaries
has not and will not incur any Tax liability in excess of the amount
reflected on the JAMtv Unaudited Balance Sheet with respect to such periods,
and (ii) properly accrues in accordance with GAAP all liabilities for Taxes
payable following the Balance Sheet Date with respect to all transactions and
events that occurred on or prior to such date. All information set forth in
the notes to the JAMtv Financial Statements relating to Tax matters is true,
complete and accurate in all material respects.
(b) No material Tax liability has been incurred since the
Balance Sheet Date other than in the ordinary course of business and adequate
provision has been or will be made for all Tax liability incurred since that
date in accordance with GAAP on at least a quarterly basis. JAMtv has
withheld and paid to the applicable financial institution or Taxing Authority
all amounts required to be withheld.
(c) There is no material claim, audit, action, suit,
proceeding, or investigation now pending or, to the knowledge of JAMtv,
threatened against or with respect to JAMtv in respect of any Tax or
assessment. No notice of deficiency or similar document of any Tax Authority
has been received by JAMtv, and there are no liabilities for Taxes (including
liabilities for interest, additions to Tax and penalties thereon and related
expenses) with respect to the issues that have been raised (and are currently
pending) by any Tax authority that could, if determined adversely to JAMtv,
materially and adversely affect the liability of JAMtv for Taxes. Neither
JAMtv, nor any person on
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behalf of JAMtv, has entered into nor will it enter into any agreement or
consent pursuant to Section 341(f) of the Code. There are no liens for Taxes
upon the assets of JAMtv except liens for current Taxes not yet due. Except
as may be required as a result of the Merger, JAMtv has not been or will be
required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) ending on or after the Closing pursuant to
Section 481 or 263A of the Code or any comparable provision under state or
foreign tax laws as a result of transactions, events or accounting methods
employed prior to the closing.
4.12 INTELLECTUAL PROPERTY ASSETS.
(a) INTELLECTUAL PROPERTY ASSETS. "JAMtv Intellectual Property
Assets" means all of the following, whether owned, used, or licensed (as
licensee or licensor) by JAMtv, and all rights corresponding thereto
throughout the world, in any form and on any medium now known or hereafter
developed and all embodiments thereof, whether tangible, intangible, printed,
recorded, digitized, fixed, stored, electronic, or otherwise:
(1) JAMtv's corporate name, all fictitious business names,
trade names, brand names, trade dress, logos, trademarks, service marks,
trademark registrations, service mark registrations, applications for
registration and the goodwill symbolized by the foregoing and connected
therewith;
(2) (A) all copyrights, whether or not published, protected
or registered under the Copyright Act of 1909 or the Copyright Act of 1976
(as either shall be amended from time to time, and any predecessor or
successor statute thereto), applications for registration of copyrights,
all works of authorship, and all secondary and subsidiary rights therein;
(B) art, audiovisual works, animations, compilations, collective works,
computer software and programs, data, databases, designs, emblems, films,
film clips, graphics, images, illustrations, likenesses, literary works,
logos, motion pictures, musical compositions, music videos, performances,
photographs, pictorial works, song lyrics, sound clips, sound recordings,
scripts, screenplays, video recordings, and all other copyrightable
subject matter; (C) all renewals, derivative works, enhancements,
improvements, modifications, updates, new releases or other revisions
thereof; and (D) publication rights, display rights, attribution rights,
integrity rights, performance rights (including digital performance
rights), mechanical rights, synchronization rights, publishing rights,
approval rights, reproduction rights, rights to create derivative works,
distribution rights, or moral rights;
(3) all publicity rights or privacy rights (or waivers or
quitclaims thereof) of any person or entity related thereto;
(4) patents, patent applications and extensions,
continuations, counter-parts and renewals thereof and inventions and
discoveries that may be patentable; and
(5) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints.
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(b) INTELLECTUAL PROPERTY ASSETS NECESSARY FOR THE BUSINESS.
JAMtv owns, or is licensed or otherwise entitled to exercise, all rights in
JAMtv Intellectual Property Assets employed in the operation of the business
of JAMtv as currently conducted or as currently proposed to be conducted.
(c) COMPLIANCE WITH LEGAL AND CONTRACTUAL REQUIREMENTS. JAMtv
owns or holds valid licenses to all JAMtv Intellectual Property Assets, and
with respect to each such license has paid all royalties and fees with
respect thereto required to be paid prior to the date of this Agreement,
necessary to operate its business in compliance with all laws, rules and
regulations, and all material contractual requirements to which it or its
properties is subject. Except as disclosed on SCHEDULE 4.12 hereto, JAMtv has
not been subject to a computer software audit and, to JAMtv's knowledge no
software audit of JAMtv is pending.
(d) CLAIMS AGAINST INTELLECTUAL PROPERTY ASSETS. Except as
disclosed on SCHEDULE 4.12, no claims with respect to the JAMtv Intellectual
Property Assets have been asserted or, to the knowledge of JAMtv, threatened,
by any person or entity: (i) to the effect that any business of JAMtv as
currently conducted or proposed to be conducted infringes on or
misappropriates any intellectual property rights or (ii) challenging the
ownership, validity or effectiveness of any of the JAMtv Intellectual
Property Assets. All JAMtv Intellectual Property Assets are valid and
subsisting assets of JAMtv. To JAMtv's knowledge, no officer of JAMtv is in
violation of any term of any employment contract, patent disclosure agreement
or any other contract, agreement, arrangement, or understanding (whether
written or oral) relating to the relationship of any such officer with JAMtv
or any other party (including prior employers) because of the nature of the
business conducted or proposed to be conducted by JAMtv.
4.13 GOVERNMENTAL AUTHORIZATIONS AND LICENSES. JAMtv is the holder of
all material licenses, authorizations, permits, concessions, certificates and
other franchises of any Governmental Entity required to operate its business
(collectively, the "JAMtv Licenses") and in compliance in all material
respects with the terms, conditions, limitations, restrictions, standards,
prohibitions, requirements and obligations of such JAMtv Licenses. The JAMtv
Licenses are in full force and effect. There is not now pending, nor to
JAMtv's knowledge is there threatened in writing, any action, suite,
investigation or proceeding against JAMtv before any Governmental Entity with
respect to the JAMtv Licenses, nor is there any issued or outstanding notice,
order to complaint with respect to the violation by JAMtv of the terms of any
JAMtv License or any rule or regulation applicable thereto.
4.14 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no material
agreement, judgment, injunction, order or decree binding upon JAMtv which has
or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of JAMtv, any acquisition of
property by JAMtv or the conduct of business of JAMtv as currently conducted
or as currently proposed to be conducted.
4.15 INFORMATION STATEMENT. The information supplied or to be
supplied by JAMtv for inclusion in the Information Statement, on the date on
which Tunes mails such materials to its
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shareholders and at all times from such date up to and including the
Effective Time will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they will be made, not
misleading; PROVIDED, HOWEVER, that JAMtv makes no representation or warranty
with respect to any information that Tunes may supply expressly for use in
the Information Statement.
4.16 DISCLOSURE. To JAMtv's knowledge, no representation or warranty
made by JAMtv in this Agreement, nor any financial statement, certificate,
schedule or exhibit prepared and furnished or to be prepared and furnished by
Tunes or its representatives pursuant hereto contains or will contain any
untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under which they were
furnished. To JAMtv's knowledge, there is no event, fact or condition that
has caused a Material Adverse Effect with respect to JAMtv, that has not been
set forth in this Agreement or on the Schedules hereto, other than general
economic or competitive conditions.
4.17 BROKERS; FINDERS. Each of JAMtv and Merger Sub represents, as to
itself and, to the extent applicable, its subsidiaries, that no agent,
broker, investment banker or other firm or person is, or will be, entitled to
any broker's or finder's fee or any similar commission or fee in connection
with any of the transactions contemplated by this Agreement or the Merger
Certificate.
SECTION 5
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE
TIME; ADDITIONAL AGREEMENTS
5.1 CONDUCT OF BUSINESS OF TUNES. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, Tunes shall carry on its business in the
usual, regular and ordinary course in substantially the same manner as
conducted prior to the date of this Agreement and, to the extent consistent
with such business, use all commercially reasonable efforts consistent with
past practice and policies to preserve intact its present business
organization, keep available the services of its present officers and
employees (except as otherwise contemplated by this Agreement) and preserve
its relationships with customers, suppliers, distributors, licensors,
licenses, and others having business dealings with it, with the objective
that its goodwill and ongoing business shall be unimpaired at the Effective
Time. Tunes shall promptly notify JAMtv of any event or occurrence not in
the ordinary course of business of Tunes which comes to Tunes's attention and
which has had, or could reasonably be expected to have, a Material Adverse
Effect. Except as expressly contemplated by this Agreement or disclosed in
the Tunes Disclosure Schedule, Tunes shall not, without the prior written
consent of JAMtv:
(a) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants
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in accordance with written agreements providing for the repurchase of shares
in connection with any termination of service to Tunes;
(b) Issue, deliver or sell, authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of
its capital stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities or authorize or propose any change in its equity capitalization;
(c) Accelerate, amend or change the period of exercisability of
options and warrants (except as would happen automatically pursuant to the
terms of Tunes's stock option plan and related agreements existing on the
date of this Agreement);
(d) Solicit approval for or effect any amendments to Tunes's
Articles of Incorporation or Bylaws;
(e) Acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to Tunes;
(f) Sell, lease, license, pledge or otherwise dispose of or
encumber any of its properties or assets except in the ordinary course of
business consistent with past practice (including without limitation any
indebtedness owed to it or any claims held by it);
(g) Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or guarantee, endorse
or otherwise become responsible for the obligations of others, or make loans
or advances, other than in the ordinary course of business consistent with
past practice;
(h) Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice of liabilities reflected or
reserved against in Tunes's Financial Statements or those incurred after the
Balance Sheet Date in the ordinary course of business;
(i) Adopt or amend any Plan; enter into or amend any
employment, severance or termination contract with or pay any special bonus
or special renumeration, including without limitation, any severance or
termination pay to, any director, employee or consultant, or increase the
salaries or wage rates of its employees;
(j) Commence a lawsuit other than for the routine collection
from account debtors;
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(k) Transfer to any person or entitle any rights to the
Intellectual Property Assets except in the ordinary course of business, or
enter into or amend any agreements pursuant to which any other party is
granted marketing or other similar rights of any type or scope with respect
to any products or palindrome except in the ordinary course of business;
(l) Except in the ordinary course of business with prior notice
to JAMtv, violate, amend or otherwise modify the terms of any of Tunes's
material contracts binding on Tunes set forth on the Tunes Disclosure
Schedule;
(m) Revalue any of its assets, including without limitation,
writing down the value of inventory or writing off notes of accounts
receivable other than in the ordinary course of business and consistent with
past practice;
(n) Make any material Tax election other than in the ordinary
course of business and consistent with past practice, change any material Tax
election, adopt any material Tax accounting method other than in the ordinary
course of business and consistent with past practice, change any material tax
accounting method, file any material Tax return (other than any estimated tax
returns, payroll tax returns or sales tax returns) or any amendment to a
material Tax return, enter into any closing agreement, settle any Tax claim
or assessment, or consent to any Tax claim or assessment, without the prior
written or unwritten consent of JAMtv, which consent will not be reasonably
withheld;
(o) Engage in any activities or transactions that are outside
the ordinary course of its business consistent with past practice;
(p) Fail to pay or otherwise satisfy its monetary obligations
as they become due, except as such as are being contested in good faith; or
waive or commit to waive any rights of substantial value or cancel or
materially amend any insurance policy; or
(q) Take, or agree (in writing or otherwise) to take, any of
the actions described in Sections 5.1(a) through (p) hereof, or any action
which would make any of the representations or warranties of Tunes contained
in this Agreement untrue or incorporate or result in any of the conditions to
the Merger set forth in Section 6 hereof not being satisfied.
5.2 ACCESS TO INFORMATION. Each of Tunes and JAMtv shall afford the
other and its respective accountants, counsel and other representatives,
reasonable access during normal business hours and upon reasonable prior
notice during the period from the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement to (i) all of its
respective properties, books, contracts, commitments and records, and (ii)
all other information concerning its business, properties and personnel as
the other party may reasonably request. Each of Tunes and JAMtv will provide
to the other and its respective accountants, counsel and other
representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant
to this Section 5.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
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5.3 TUNES SHAREHOLDERS' APPROVAL. Tunes shall solicit shareholder
approval by written consent in accordance with applicable law, for the
purpose of obtaining the shareholder approval required in connection with the
transactions contemplated hereby and by the Merger Agreement, and shall use
commercially reasonable efforts to obtain such approval. As soon as
practicable after the execution of this Agreement, Tunes shall prepare and
distribute to its shareholders and holders of Tunes Options and Convertible
Debt Instruments the written consent and the Information Statement for
purposes of soliciting the approval of the shareholders of Tunes of this
Agreement, the Merger Agreement and the transactions contemplated hereby and
thereby. Tunes shall cause the Information Statement to comply with
applicable federal and state securities laws requirements, and the
Information Statement shall be subject to prior review and approval by JAMtv.
The Information Statement shall contain the unanimous recommendation of the
Board of Directors of Tunes that the Tunes shareholders approve the Merger
and this Agreement and the conclusion of the Board of Directors that the
terms and conditions of the Merger are fair and reasonable to the
shareholders of Tunes.
5.4 SUPPORT OF MERGER BY CERTAIN SHAREHOLDERS. Tunes shall use its
best efforts to cause all of its officers and directors to support the Merger
and to take all actions and execute all documents reasonably requested by
JAMtv to carry out the foregoing matters. Concurrently with the execution of
this Agreement, Kamran Mohsenin, David Anderson, Jacob Maizel, and Pete
DiMaria (the "Principal Shareholders") shall have entered into Shareholder
Agreements with JAMtv in substantially the form attached as EXHIBIT D
(collectively, the "Shareholder Agreements").
5.5 EXCLUSIVITY; ACQUISITION PROPOSALS. Unless and until this
Agreement shall have been terminated by either party pursuant to Section 8.1
hereof, and except (but only to the extent) required to comply with fiduciary
duties under applicable law, Tunes shall not, directly or indirectly, through
any officer, director, shareholder, employee, representative, agent or
otherwise, (i) solicit, initiate or encourage submission of proposals or
offers from any person relating to (x) any acquisition of Tunes, or any
equity securities or ten percent (10%) or more of the assets of Tunes, or any
merger, consolidation, business combination or similar transaction with
Tunes, or (y) any other material joint venture or other similar transaction
or (ii) participate in any discussions or negotiations regarding, furnish to
any other person any confidential information with respect to, or otherwise
cooperate in any way with, or participate in, facilitate or encourage, any
effort or attempt by any other person to do or seek any of the foregoing. In
the event Tunes receives from any third party any offer or indication of
interest regarding any of the transactions referred to in the foregoing
sentence, or any request for information about Tunes with respect to any of
the foregoing, then Tunes shall promptly communicate to JAMtv the material
terms of each such offer, indication of interest, or request, including the
identity of the third party.
5.6 NOTIFICATION OF CERTAIN MATTERS. Tunes shall give prompt notice
to JAMtv, and JAMtv and Merger Sub shall give prompt notice to Tunes, of the
occurrence, or pending or threatened occurrence or failure to occur, of any
event, which occurrence or failure to occur would be likely to cause (a) any
representation or warranty contained in this agreement to be untrue or
inaccurate at any time from the date of this Agreement to the Effective Time,
or (b) any material failure of Tunes or JAMtv and Merger Sub (as the case may
be), or of any officer, director, employee
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or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement. Each
party shall use all reasonable efforts to prevent or promptly remedy such
breach or inaccuracy.
5.7 CONSENTS. Each of JAMtv and Tunes shall promptly apply for or
otherwise seek, and use all reasonable efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger
and the transactions contemplated by this Agreement and to enable the
Surviving Corporation to conduct and operate the business of Tunes
substantially as presently conducted and as contemplated to be conducted.
Tunes shall use its best efforts to obtain all Tunes Third Party Consents.
5.8 REASONABLE EFFORTS.
(a) JAMtv, Merger Sub and Tunes shall each use its reasonable
efforts to effect the transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to Closing under this Agreement. Tunes
shall take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on Tunes with respect to the Merger and
will promptly cooperate with and furnish information to JAMtv in connection
with any such requirements imposed upon JAMtv, Merger Sub or any other
subsidiary of JAMtv in connection with the Merger. Tunes shall take all
reasonable actions to obtain (and to cooperate with JAMtv and its
subsidiaries in obtaining) any consent, authorization, order or approval of,
or any exemption by, any governmental entity, required to be obtained or made
by Tunes (or by JAMtv or its subsidiaries) in connection with the Merger or
the taking of any action contemplated thereby, by this Agreement or by the
Merger Agreement, and to defend all lawsuits or other legal proceedings
challenging this Agreement or the Merger Agreement or the consummation of the
transactions contemplated hereby and thereby, to lift or rescind any
injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated hereby and
thereby, and to effect all necessary registrations and filings and
submissions or information required by any Governmental Entity, and to
fulfill all conditions to this Agreement.
(b) Each of JAMtv and Merger Sub shall take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on them with respect to the Merger and will promptly cooperate with
and furnish information to Tunes in connection with any such requirement
imposed upon Tunes in connection with the Merger. JAMtv and Merger Sub shall
take all reasonable actions to obtain (and to cooperate with Tunes in
obtaining) and consent, authorization, order or approval of, or exemption by,
any Governmental Entity required to be obtained or made by JAMtv or any of
its subsidiaries (or by Tunes) in connection with the Merger or the taking of
any action contemplated by this Agreement or by the Merger Agreement,
consummation of the transactions contemplated hereby and by the Merger
Agreement, to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transaction contemplated hereby and by the Merger Agreement, and to effect
all necessary registrations and filings and submissions of information
requested by any Governmental Entity, and to fulfill all conditions to this
Agreement.
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5.9 PUBLIC ANNOUNCEMENTS. Each party will consult in advance with
the other concerning the timing and content of any announcements, press
releases and public statements concerning the Merger and will not make any
such announcement, release or statement without the other's consent.
5.10 EMPLOYEE HEALTH INSURANCE BENEFITS. Employees of Tunes who
become employees of JAMtv following the Merger shall continue to participate
in the group health insurance plan of Tunes and shall be entitled to
participate in any successor coverage which may be implemented by JAMtv.
5.11 POST-CLOSING EXECUTION OF PROPRIETARY RIGHTS AGREEMENTS.
Promptly following the Effective Time, the shareholders of Tunes who are
employed by JAMtv or Merger Sub shall exert their best efforts to cause all
employees of Tunes and Merger Sub to execute in favor of Merger Sub
proprietary rights agreements substantially similar to JAMtv's existing
employee proprietary rights agreement.
5.12 JAMTV CAPITALIZATION. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, JAMtv shall not, without the prior written
consent of Tunes, issue, sell, or authorize the issuance or sale of any
shares of its capital stock or securities convertible into its capital stock
at a price per share less than $10.00 per share (or an equivalent price per
share after giving effect to any stock split or combination of JAMtv's
capital stock occurring during such period) other than pursuant to its
employee stock option plans.
5.13 SECURITIES AND BLUE SKY LAWS. JAMtv and Tunes acknowledge that
the JAMtv Common Stock to be issued pursuant to this Agreement will not be
registered under the Securities Act and will be issued pursuant to Section 5
of the Securities Act. Tunes and JAMtv shall use reasonable efforts to make
appropriate filings in accordance with Section 5 of the Securities Act.
Tunes and JAMtv shall use reasonable efforts to make appropriate filings and
to obtain appropriate clearances under the securities and "Blue Sky" laws of
the states of residence of the holders of Tunes Common Stock, Vested Tunes
Options, and Convertible Debt listed on SCHEDULE 3.2 hereto.
5.14 TAX FREE REORGANIZATION. JAMtv's sole obligation with respect to
the tax treatment of the Merger shall be to take such actions as are
reasonably requested of Tunes so that the Merger is treated as a
"reorganization" within the meaning of Section 368(a) of the Code and in
compliance with the record-keeping and filing requirements of Treasury
Regulation Section 1.368-3. No party shall knowingly take any action which
would cause the Merger to fail to qualify as a reorganization.
5.15 EMPLOYEE BONUS PAYMENT. On the dates and subject to the terms
and conditions precedent set forth on SCHEDULE 5.15 hereto, JAMtv shall pay
to each of the Principal Shareholders his respective pro rata share of an
employment bonus up to an aggregate amount of $250,000 (the "Employee Bonus
Payment").
SECTION 6
CONDITIONS PRECEDENT
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6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing of the following conditions:
(a) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation
of the Merger or the transactions contemplated by this Agreement shall have
been issued by any Governmental Entity and remain in effect, and no
litigation seeking the issuance of such an order or injunction, or seeking
relief against Tunes, the Surviving Corporation or JAMtv if the Merger is
consummated, shall be pending which, in the good faith judgment of Tunes's or
JAMtv's Board of Directors (acting upon the written opinion of their
respective outside counsel) has a reasonable probability of resulting in such
order, injunction or relief and such relief would have a Material Adverse
Effect on such party. In the event any such order or injunction shall have
been issued, each party agrees to use commercially reasonable efforts to have
any such order or injunction lifted.
(b) STATUTES. No action shall have been taken, and no statute,
rule, resolution or order shall have been enacted, promulgated or issued or
deemed applicable to the Merger by any Governmental Entity which would (i)
make the consummation of the Merger illegal, (ii) prohibit JAMtv's or Merger
Sub's ownership or operation of all or a material portion of the business or
assets of Tunes, or JAMtv and its subsidiaries taken as a whole, or compel
JAMtv or Tunes to dispose of or hold separate all or a material portion of
the business of assets of Tunes or JAMtv and its subsidiaries taken as a
whole, as a result of the Merger, or (iii) render JAMtv, Merger Sub or Tunes
unable to consummate the Merger.
(c) SECURITIES LAWS. JAMtv shall have received the filings and
clearances required for the issuance of the JAMtv Common Stock hereunder with
respect to the securities and "Blue Sky" laws of the states of residence of
the holders of Tunes Common Stock, Vested Tunes Options, and Convertible Debt
listed on SCHEDULE 3.2 hereto, including, without limitation, the approval of
the California Commissioner of Corporations with respect thereto pursuant to
Section 25121 of the California Corporate Securities Law of 1968, as amended,
without the imposition of any conditions adverse to JAMtv or to the Tunes
shareholders or which would require JAMtv to amend its Certificate of
Incorporation or Bylaws.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF JAMTV AND MERGER SUB.
The obligations of JAMtv and Merger Sub to effect the Merger are subject to
the satisfaction of the following conditions, unless waived by JAMtv and
Merger Sub:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Tunes set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date. JAMtv shall have received a certificate signed by the chief executive
officer and the chief financial officer of Tunes to such effect on the
Closing Date.
(b) NO MATERIAL ADVERSE EFFECT. There shall have been no
Material Adverse Effect with respect to Tunes from the date of this Agreement
through the Closing Date and JAMtv
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shall have received a certificate signed by the chief executive officer and
the chief financial officer of Tunes to such effect on the Closing Date.
(c) OPINION OF COUNSEL TO TUNES. JAMtv shall have received a
written opinion dated as of the Closing Date of Pillsbury Madison & Sutro
LLP, counsel to Tunes, substantially to the effect set forth in EXHIBIT E.
(d) PERFORMANCE OF OBLIGATIONS OF TUNES. Tunes shall have
performed all obligations and covenants required to be performed by it under
this Agreement and the Merger Agreement prior to the Closing Date, and JAMtv
shall have received a certificate signed by the chief executive officer and
the chief financial officer of Tunes to such effect on the Closing Date.
(e) APPROVALS AND CONSENTS. All authorizations, consents,
orders or approvals of, or declarations or filings with, any Governmental
Entity necessary for the consummation of the transactions contemplated by
this Agreement shall have been filed, occurred or been obtained, and JAMtv
shall have received duly executed copies of all Tunes Third Party Consents in
form and substance reasonably satisfactory to JAMtv.
(f) RESIGNATION OF DIRECTORS AND OFFICERS. The directors of
Tunes in office immediately prior to the Effective Time shall have resigned
as directors of Tunes effective as of the Effective Time and the officers of
Tunes in office immediately prior to the Effective Time, other than the
officers named in Section 1.5 hereof, shall have resigned as officers of
Tunes effective as of the Effective Time.
(g) EMPLOYEE RETENTION. JAMtv shall be reasonably satisfied
that a sufficient number of Tunes employees are ready, willing and able to
remain with Tunes and JAMtv following the transaction to enable the continued
operation of Tunes's business.
(h) ESCROW AGREEMENT. JAMtv, Tunes, the Shareholders' Agent
(as defined in Section 7.7 hereof) and American National Bank and Trust
Company of Chicago as escrow agent (the "Escrow Agent") shall have executed
the Escrow Agreement.
(i) SHAREHOLDER AGREEMENTS. JAMtv shall have received an
executed Shareholder Agreement from each of the Principal Shareholders and
Tunes and such agreement shall not have been breached by any Principal
Shareholder or Tunes.
(j) JOINDER TO STOCKHOLDERS' AGREEMENT. JAMtv shall have
received an executed Joinder to Stockholders' Agreement in the form attached
hereto as EXHIBIT F from each of the holders of Tunes Common Stock, Tunes
Options, and Convertible Debt receiving shares of capital stock of JAMtv in
connection with the Merger.
(k) TUNES SHAREHOLDER APPROVAL. Holders of at least two-thirds
(2/3) of the outstanding capital stock of Tunes shall have voted in favor of
approving this Agreement and the Merger Agreement and the transactions
contemplated hereby and thereby.
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6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TUNES. The obligation of
Tunes to effect the Merger is subject to the satisfaction of the following
conditions unless waived by Tunes:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of JAMtv and Merger Sub set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and as
of the Closing Date. Tunes shall have received a certificate signed by an
officer of JAMtv and Merger Sub to such effect.
(b) NO MATERIAL ADVERSE EFFECT. There shall have been no
Material Adverse Effect with respect to JAMtv from the date of this Agreement
through the Closing Date and Tunes shall have received a certificate signed
by the chief executive officer of JAMtv to such effect on the Closing Date.
(c) PERFORMANCE OF OBLIGATIONS OF JAMTV AND MERGER SUB. JAMtv
and Merger Sub shall have performed all obligations and covenants required to
be performed by them under this Agreement and the Merger Agreement prior to
the Closing Date, and Tunes shall have received a certificate signed by an
officer of JAMtv and Merger Sub to such effect.
(d) OPINION OF COUNSEL TO JAMTV. Tunes shall have received a
written opinion dated as of the Closing Date of Freeborn & Peters, counsel to
JAMtv, substantially to the effect set forth in EXHIBIT G.
(e) APPROVALS AND CONSENTS. All authorizations, consents,
orders or approvals of, or declarations or filings with, any Governmental
Entity necessary for the consummation of the transactions contemplated by
this Agreement shall have been filed, occurred or been obtained.
(f) ESCROW AGREEMENT. JAMtv, Tunes, the Shareholders' Agent
(as defined in Section 7.7 hereof) and the Escrow Agent shall have executed
the Escrow Agreement.
SECTION 7
INDEMNIFICATION; SET-OFF
7.1 INDEMNIFICATION.
(a) Each of the Former Shareholders and Tunes jointly and
severally shall indemnify and hold harmless JAMtv and the Surviving
Corporation, and the respective officers, directors, employees, shareholders,
assigns and successors and the affiliates of the foregoing persons and
entities (individually, a "JAMtv Indemnified Person" and collectively, the
"JAMtv Indemnified Persons;" PROVIDED, HOWEVER, that the term "JAMtv
Indemnified Persons" or "JAMtv Indemnified Person" does not refer to, and
shall be exclusive of, respectively, the Former Shareholders and any Former
Shareholder), from and against and in respect of, and shall pay to the
Indemnified Persons the amount of, any and all claims, demands, lawsuits,
actions, causes of actions, administrative proceedings (including informal
proceedings), losses, diminution in value, assessments, costs, damages,
punitive damages, judgments, liabilities (including sums paid and costs and
expenses including, without limitation, reasonable legal fees and
disbursements) of every kind, nature and
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description, whether or not involving a third party claim (collectively,
"Damages") that arise or result from or relate to, directly or indirectly,
(i) any breach of any of the representations, warranties, and covenants given
or made by Tunes in this Agreement or any certificate, document, or
instrument delivered by or on behalf of Tunes pursuant to this Agreement,
(ii) any Excess Liability Amount to the extent not otherwise reflected in the
Aggregate Closing Consideration, and (iii) any claim by Charlene Steele
Vaughn, including, without limitation, the claims set forth in the complaint
filed with the Superior Court of the State of California in and for the
County of Alameda by Charlene Steele Vaughn, as plaintiff, against Tunes,
Kamran Mohsenin and the Does described therein, as defendants (the "Steele
Vaughn Claim").
(b) JAMtv shall indemnify and hold harmless the Former
Shareholders and their respective assigns (individually, a "Tunes Indemnified
Person" and collectively, the "Tunes Indemnified Persons"), from and against
and in respect of any and all Damages that arise or result from or relate to,
directly or indirectly, any breach of any of the representations, warranties,
and covenants given or made by JAMtv in this Agreement or any certificate,
document, or instrument delivered by or on behalf of JAMtv pursuant hereto.
7.2 LIMITATIONS AND EXPIRATION. Notwithstanding the above:
(a) There shall be no liability for indemnification under this
Section 7 for any breach of a representation, warranty or covenant made by
Tunes in this Agreement unless and until the aggregate amount of all Damages
exceeds $10,000; provided, however, that if the aggregate amount of such
Damages exceeds $10,000, liability for Damages under this Section 7 shall be
for the full amount of such Damages, subject to the limitations set forth in
this Section 7.2.
(b) From and after the Effective Time, the indemnification and
set-off rights provided in this Section 7 shall be the exclusive remedy of
JAMtv and the Surviving Corporation and the other JAMtv Indemnified Persons
for any breach of a representation, warranty or covenant made by Tunes in
this Agreement, EXCEPT (i) in the case of any breach of a representation or
warranty set forth in Sections 3.2 (capitalization), 3.18(a) (title), 3.34
(CDDB), and 3.35 (AMG) hereof, (ii) in the case of fraud by Tunes with
respect to any statement made by Tunes in this Agreement or in any
certificate delivered by Tunes pursuant to this Agreement, (iii) with respect
to the Steele Vaughn Claim, and (iv) for any Excess Liability Amount, and in
each such case, all of the Former Shareholders will be liable for all Damages
with respect thereto.
(c) From and after the Effective Time, the total amount payable
under Section 7.1(b) hereof by JAMtv shall not exceed $500,000, except in the
case of fraud by JAMtv with respect to any statement made by JAMtv in this
Agreement or in any certificate delivered by JAMtv pursuant to this
Agreement, and in each such case, JAMtv will be liable for all Damages with
respect thereto; and
(d) The indemnification obligations under this Section 7 shall
terminate on the later of (i) twelve (12) months after the Effective Time
(the "Indemnification Deadline Date"), provided, however, that the
Indemnification Deadline Date shall be extended indefinitely with respect to
the representations and warranties set forth in Sections 3.2 (Tunes
capitalization), 3.17(a)
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(title), and 4.2 (JAMtv capitalization) hereof, the Excess Liability Amount,
as provided in Section 7.1(a)(ii) hereof, and the Steele Vaughn Claim; or
(ii) the final resolution of any and all JAMtv Claims and Shareholder Claims
(as defined in Sections 7.4 and 7.5 hereof; hereafter, a "Claim" or "Claims")
under this Agreement pending as of the Indemnification Deadline Date
("Pending Claims"), provided, however, that with respect to the
representations and warranties set forth in Section 3.32 hereof (Microsoft
Deluxe CD Player), the indemnification obligations shall terminate on the
later of four (4) years after the Effective Time or the final resolution of
any and all Claims pending with respect thereto as of such time, and provided
further, that from and after the Indemnification Deadline Date (or such later
date with respect to Section 3.32 hereof), such indemnification obligations
shall survive only to the extent of such Pending Claims and all remaining
cash and other property in the Escrow Fund (except as otherwise provided in
the Escrow Agreement) shall be released to the Shareholders' Agent and/or
JAMtv pursuant to the terms of the Escrow Agreement and Section 7.9 hereof.
7.3 JAMTV'S SET-OFF RIGHTS. In order to satisfy any indemnification
obligations to the JAMtv Indemnified Persons pursuant to this Agreement, each
of the Former Shareholders hereby grants to JAMtv the right of set-off
against the Retention Amount contained in the Escrow Fund. Notwithstanding
the provisions of Section 7.1 hereof, JAMtv, Merger Sub, Tunes, and the
Former Shareholders hereby agree that the sole and exclusive remedy for the
JAMtv Indemnified Persons hereunder for a breach of the warranty set forth in
Section 3.32 (Microsoft Deluxe CD Player) hereof shall be (i) the reduction
of the Performance Share Calculation in accordance with Section 2.7(d) hereof
and (ii) a set-off of $250,000 in immediately available funds against the
Retention Amount and that JAMtv shall be entitled to exercise such set-off
rights on behalf of the JAMtv Indemnified Persons if the warranty under
Section 3.32 is breached.
7.4 CLAIMS BY JAMTV.
(a) Upon receipt by the Shareholders' Agent at any time prior
to the Indemnification Deadline Date of a certificate signed by an officer of
JAMtv (a "JAMtv Certificate") providing notice of any claim (a "JAMtv Claim")
for Damages and specifying in reasonable detail the date such Damages were
paid, incurred or otherwise arose, and, if applicable, the nature of the
breach to which such Damages are related, JAMtv shall be entitled to exercise
its set-off rights as provided in Section 7.3 hereof.
(b) At the time of delivery of any JAMtv Certificate to the
Shareholders' Agent, a duplicate copy of such JAMtv Certificate shall be
delivered to the Escrow Agent, and for a period of thirty (30) days after
such delivery, the Escrow Agent shall make no delivery of the cash or shares
from the Escrow Fund in satisfaction of JAMtv's set-off rights unless the
Escrow Agent shall have received written authorization from the Shareholders'
Agent to make such delivery. After the expiration of such thirty (30) day
period, the Escrow Agent shall make delivery of the amount of Damages from
the Escrow Fund in accordance with Section 7.3 hereof, unless the
Shareholders' Agent shall have given notice to the Escrow Agent and to JAMtv
prior to the expiration of such thirty (30) day period that the Shareholders'
Agent disputes the JAMtv Claim set forth in the JAMtv Certificate, with the
basis for such dispute set forth in writing in reasonable detail. The deemed
value at all times of the shares of JAMtv Common Stock which are subject to
the indemnity and set-off
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provisions of this Section 7 shall be $10.00 per share, including for
purposes of set-off as provided in Section 7.3 and disbursement to the Former
Shareholders of any remaining shares as provided in Section 7.9, subject to
proportionate adjustment as a result of any JAMtv stock split, reverse stock
split, recapitalization, or similar event (provided that there shall be no
adjuctment upon the issuance of shares subject to warrants or options or upon
the conversion of any covertible seucrities of JAMtv).
7.5 CLAIMS BY FORMER SHAREHOLDERS. Upon receipt by JAMtv at any time
prior to the Indemnification Deadline Date of a certificate signed by the
Shareholders' Agent (a "Shareholders' Agent Certificate") providing notice of
any claim (a "Shareholders' Claim") for Damages and specifying in reasonable
detail the date such Damages were paid, incurred or otherwise arose, and the
nature of the breach to which such Damages are related, JAMtv shall deliver
to the Shareholders' Agent, as promptly as practicable, an amount equal to
such Damages as indemnity, unless, within thirty (30) days of the delivery of
such Shareholders' Agent Certificate, JAMtv disputes the Shareholders' Claim
set forth in such certificate, with the basis for such dispute set forth in
writing in reasonable detail.
7.6 CLAIMS BY THIRD PARTIES. JAMtv will give notice to the
Shareholders' Agent and, prior to the Effective Time, Tunes promptly after
JAMtv has actual knowledge of any claim from a third party, as to which
indemnity may be sought, and will permit the Former Shareholders and Tunes
(at their expense) to assume the defense of any claim or any litigation
resulting therefrom; PROVIDED that (i) counsel for any Former Shareholder or
Tunes who shall conduct the defense of such claim or litigation shall be
satisfactory to JAMtv and (ii) the omission by JAMtv or any JAMtv Indemnified
Person to give notice as provided herein will not relieve any Former
Shareholder or Tunes of his or its indemnification obligations under this
Agreement. Neither JAMtv, the Surviving Corporation, nor any other JAMtv
Indemnified Person shall be required to commence litigation or to take any
action against any third party prior to making a claim for indemnification
hereunder. The Former Shareholders and Tunes, in the defense of any such
claim or litigation, will not, except with the written consent of JAMtv,
consent to the entry of any judgment or enter into any settlement. If the
Former Shareholders or Tunes assume the defense of such claim or litigation,
(i) it will be conclusively established for purposes of this Agreement that
such claim is within the scope of and subject to indemnification; and (ii) no
compromise or settlement of such claims may be effected by the Former
Shareholders or Tunes without JAMtv's consent. Notwithstanding the foregoing,
a JAMtv Indemnified Person will have the right at all times to take over and
assume control of the defense, settlement, negotiations or lawsuit relating
to any claim or demand, including, without limitation, in the event that (i)
a Former Shareholder is also a party to such claim or litigation and JAMtv
determines in good faith that joint representation would be inappropriate or
(ii) a Former Shareholder fails to provide reasonable assurance to JAMtv of
its financial capacity to defend such claim or litigation and to provide
indemnification with respect to such claim or litigation. In the event that
the Former Shareholders or Tunes do not accept the defense of any matter as
above provided, a JAMtv Indemnified Person will have the full right to defend
against any such claim or demand, and will be entitled to settle or agree to
pay in full such claim or demand, in its sole discretion. In any event, the
Former Shareholders and Tunes will cooperate in the defense of such action
and the records of each Former Shareholder and Tunes shall be available to
JAMtv and the other JAMtv Indemnified Persons with respect to such defense.
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7.7 RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Shareholders' Agent or JAMtv, as applicable, shall
object in writing to any Claim made in any JAMtv Officer's Certificate as
described in Section 7.5 hereof, or in any Former Shareholders' Agent
Certificate as described in Section 7.6 hereof, JAMtv or the Shareholders'
Agent, as applicable, shall have thirty (30) days to respond in a written
statement to such objection. If after such thirty (30)-day period there remains
a dispute as to any claims, the Shareholders' Agent and JAMtv shall attempt in
good faith for sixty (60) days thereafter to agree upon the rights of the
respective parties with respect to each of such claims. If the Shareholders'
Agent and JAMtv should so agree, a memorandum setting forth such agreement shall
be prepared and signed by both parties and, if in settlement of a JAMtv Claim,
shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to
rely on any such memorandum and shall make the distributions from the Escrow
Fund only in accordance with the terms hereof or of the Escrow Agreement.
(b) If no such agreement can be reached after good faith
negotiation, either JAMtv or the Shareholders' Agent may, by written notice to
the other, demand arbitration of the matter in accordance with Section 9.3
hereof, unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration. The
decision of the arbitrators as to the validity and amount of any Claim in such
JAMtv Officer's Certificate or Former Shareholders' Agent Certificate shall be
binding and conclusive upon the parties to this Agreement, and, notwithstanding
anything in Section 7.7 hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith.
7.8 SHAREHOLDERS' AGENT.
(a) One person appointed by the holders of capital stock of Tunes
outstanding immediately prior to the Effective Time (including stock issuable
upon the exercise of Vested Tunes Options and Convertible Debt) (the "Former
Shareholders") shall be constituted and appointed as agent (the "Shareholders'
Agent") for and on behalf of the Former Shareholders to give and receive notices
and communications, to authorize delivery to any Indemnified Person of amounts
in the Escrow Fund in satisfaction of claims, to object to such deliveries, to
agree to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to, such claims, and to take all actions necessary or appropriate in the
judgment of the Shareholders' Agent for the accomplishment of the foregoing.
Such agency may be changed by the holders of a majority in interest of the
Escrow Fund from time to time upon not less than ten (10) days' prior written
notice to JAMtv. No bond shall be required of the Shareholders' Agent, and the
Shareholders' Agent shall receive no compensation for its services, except for
payment of expenses, including fees of counsel, reasonably incurred by the
Shareholders' Agent in connection with the performance of its duties under the
Escrow Agreement (the "Shareholders' Agent Expenses"). The Shareholders' Agent
Expenses may be satisfied from the Escrow Fund, but only to the extent of funds
remaining in the Escrow Fund following the satisfaction of all Claims and any
and all Pending Claims and the payment of all fees and related
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expenses of the Escrow Agent, all pursuant to the terms and provisions of the
Escrow Agreement. Notices or communications to or from the Shareholders'
Agent shall constitute notice to or from each of the Former Shareholders.
(b) The Shareholders' Agent shall not be liable for any act
done or omitted hereunder as Shareholders' Agent while acting in good faith,
and any act done or omitted pursuant to the advise of counsel shall be
conclusive evidence of such good faith. The Former Shareholders shall
severally indemnify the Shareholders' Agent and hold such agent harmless
against any loss, liability or expense incurred without bad faith on the part
of the Shareholders' Agent and arising out of or in connection with the
acceptance or administration of such agents' duties hereunder.
(c) The Shareholders' Agent shall have reasonable access to
information about Tunes and the reasonable assistance of Tunes's officers and
employees of Tunes for purposes of performing its duties and exercising its
rights hereunder, provided that the Shareholders' Agent shall treat
confidentially and not disclose any non-public information from or about
Tunes to anyone other than JAMtv and its officers, directors, employees and
agents (and except on a need-to-know basis to individuals who agree to treat
such information confidentially).
(d) The Shareholders' Agent or its representatives shall be
entitled to participate in any proceeding, or objection or defense thereto,
involving a claim by a third party for which indemnification could be sought
under Section 7.1(a) hereof; provided, however, that nothing herein shall
entitle the Shareholders' Agent to control the defense of any such third
party claim; and provided further that the settlement of any claim that would
result in a Claim upon the Escrow Fund shall be subject to the approval of
the Shareholders' Agent, which approval shall not be unreasonably withheld.
(e) A decision, act, consent or instruction of the
Shareholders' Agent, taken in the manner set forth in the Escrow Agreement,
shall constitute a decision of all Former Shareholders and shall be final,
binding and conclusive upon each such Former Shareholders, and the Escrow
Agent and JAMtv may rely upon any decision, act, consent or instruction of
the Shareholders' Agent taken in such manner as being the decision, act,
consent or instruction of each and every such Former Shareholders. The
Escrow Agent and JAMtv are hereby relieved from any liability to any person
for any acts done by them in accordance with such decision, act, consent or
instruction of the Shareholders' Agent taken in such manner.
7.9 DISTRIBUTION OF THE RETENTION AMOUNT. The Retention Amount (or
such lesser amount as shall remain after payment of any Claims) shall be
disbursed as provided pursuant to this Section 7.9 and the Escrow Agreement,
as follows:
(i) Upon the final resolution of the Steele Vaughn Claim, but no
earlier than the Closing Date, the Escrow Agent (or JAMtv if such resolution
occurs on or prior to the Closing) shall disburse $250,000 of the Retention
Amount together with accrued interest, if any, as provided in the Escrow
Agreement, to the Shareholders' Agent (or the Exchange Agent, as applicable)
for the benefit of the Former Shareholders (or the holders of the
Certificates, Vested Tunes Options, and Convertible Debt, as applicable);
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(ii) If, on the later of the Indemnification Deadline Date or such
date as any Pending Claims are finally resolved (the "Release Date"), the
Steele Vaughn Claim has been finally resolved and the Microsoft Deluxe CD
Player has become generally available to Consumers as part of the Windows 98
Plus Pack!, then the Escrow Agent shall disburse the Retention Amount (or
such lesser amount as shall remain after payment of any Claims hereunder or
other permitted disbursements), together with accrued interest as provided in
the Escrow Agreement, to the Shareholders' Agent for the benefit of the
Former Shareholders;
(iii) If, on the Release Date, the Steele Vaughn Claim has been finally
resolved but the Microsoft Deluxe CD Player has not become generally
available to consumers as part of the Windows 98 Plus Pack!, then the Escrow
Agent shall disburse: (x) all but $250,000 of the Retention Amount, together
with accrued interest as provided in the Escrow Agreement, to the
Shareholders' Agent for the benefit of the Former Shareholders; and (y) the
remaining $250,000 to JAMtv, unless $250,000 or less remains after payment
of any Claims hereunder, in which case the Escrow Agent shall disburse to
JAMtv all of the remaining Retention Amount;
(iv) If, on the Release Date, the Steele Vaughn Claim has not been
finally resolved, then the Escrow Agent shall not disburse the Retention
Amount (or any portion of such amount) until such date as the Steele Vaughn
Claim has been finally resolved.
Any disbursement to the Former Shareholders of cash constituting the
Retention Amount shall be made by the Shareholders' Agent, together with
accrued interest as provided in the Escrow Agreement, to each of the Former
Shareholders as follows: each Former Shareholder shall be entitled to receive
an amount equal to the product of the cash portion of the Retention Amount
(plus accrued interest as provided in the Escrow Agreement) minus the
aggregate amount of cash payable in satisfaction of Claims hereunder
(including, without limitation, the Microsoft Set-Off, if any), multiplied by
the applicable pro rata share of the cash portion of the Retention Amount
which is attributable to such Former Shareholder. Any disbursement to the
Fomer Shareholders of shares constituting the Retention Amoutn shall be made
by the Shareholders' Agent to each of the Former Shareholders as provided in
the Escrow Agreement.
7.10 SURVIVAL OF REPRESENTATIONS, WARRANTIES. For the purposes of
asserting Claims under this Section 7, all representations and warranties
made by Tunes or JAMtv in, or pursuant to this Agreement or in any document
delivered on behalf of Tunes or JAMtv pursuant hereto, will survive the
Closing and will remain in effect until the later of (i) the Indemnification
Deadline Date or (ii) the resolution of any and all Pending Claims, provided
that from and after the Indemnification Deadline Date, such indemnification
obligations shall survive only to the extent of such Pending Claims, except
that the representations and warranties contained in Sections 3.2 (Tunes
capitalization), 3.17(a) (title), and 4.2 (JAMtv capitalization) hereof shall
survive indefinitely, and the representations and warranties contained in
Section 3.32 (Microsoft Deluxe CD Player) shall survive for four (4) years
from the Effective Date.
7.11 SPECIAL HOLDBACK SHARES. The Special Holdback Shares shall
secure the indemnity obligations of Tunes and the Former Shareholders as
provided in this Section 7. In order to satisfy any such obligations, the
Former Shareholders hereby grant to JAMtv the right of set-off against the
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Special Holdback Shares. JAMtv shall have until June 30, 1999 (the "Speical
Release Date") in order to make a JAMtv Claim with respect to the Special
Holdback Shares. On the Special Release Date or such later date as any
pending JAMtv Claim is finally resolved, JAMtv shall issue certificates
evidencing the Speical Holdback Shares to the Form Shareholders (such
issuance to be pro rata, consistent with the terms of this Agreement), and
deliver such certificates to the Shareholder's Agent for an on behalf of the
Former Shareholders.
SECTION 8
TERMINATION
8.1 TERMINATION.
(a) This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
shareholders of Tunes:
(1) by mutual agreement of the Boards of Directors of JAMtv
and Tunes;
(2) by JAMtv on or after the sixth (6th) business day
following delivery of notice thereof to Tunes, if there has been a breach
by Tunes of any representation, warranty, covenant or agreement set forth
in this Agreement on the part of Tunes that remains uncured as of such
sixth (6th) business day;
(3) by Tunes on or after the sixth (6th) business day
following delivery of notice thereof to JAMtv, if there has been a breach
by JAMtv or Merger Sub of any representation, warranty, covenant or
agreement set forth in this Agreement on the part of JAMtv or Merger Sub
that remains uncured as of such sixth (6th) business day;
(4) by JAMtv or Tunes, if the Merger shall not have been
consummated on or before September 30, 1998;
(5) by JAMtv or Tunes if the required approval of the
shareholders of Tunes contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote in
accordance with applicable law; or
(6) by JAMtv or Tunes if any permanent injunction or other
order of a court or other competent authority preventing the Merger shall
have become final and nonappealable.
(b) Where action is taken to terminate this Agreement pursuant
to this Section 8.1, it shall be sufficient for such action to be authorized
by the Board of Directors of the party taking such action.
8.2 EXPENSES. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement, the Merger
Certificate and the transactions contemplated hereby and thereby shall be
paid, in the case of costs and expenses incurred by JAMtv,
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by JAMtv, and in the case of costs and expenses incurred by Tunes, by the
Tunes shareholders or Former Shareholders, as applicable.
8.3 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination
of this Agreement as provided in this Section 8, the terminating party shall
provide written notice of such termination to the other party and the
provisions of this Agreement shall forthwith become void, except that the
agreements contained or referred to in Sections 3.30 (brokers, finders),
4.15 (brokers, finders), 5.9 (public announcements), 8 (termination) and 9
(general provisions) hereof shall survive. Notwithstanding the foregoing,
the event of termination of this Agreement by any party hereto, nothing
herein shall limit the remedies at law or in equity of any party with respect
to any breaches hereof by any other party. Upon termination of this
Agreement, Tunes shall return all of the Earnest Money to JAMtv in
immediately available funds. Notwithstanding the foregoing and Section 8.2
hereof, if this Agreement shall be terminated by reason other than under
paragraphs (2) or (5) of Section 8.1(a) hereof, then Tunes shall be entitled
to retain a portion of the Earnest Money equal to the amount of reasonable
costs and expenses incurred by Tunes in connection with this Agreement, up to
a maximum of $20,000.
SECTION 9
GENERAL PROVISIONS
9.1 AMENDMENT. This Agreement may be amended by the parties hereto
at any time prior to the Effective Time, by action taken by their respective
Boards of Directors, at any time before or after approval of the Merger by
the shareholders of Tunes; provided that following approval of the Merger by
the shareholders of Tunes, no amendment shall be made which by law requires
the further approval of such shareholders without first obtaining such
further approval. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
9.2 EXTENSION; WAIVER. At any time prior to the Effective Time, each
of Tunes and JAMtv, by action taken by its Board of Directors, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other, (ii) waive any inaccuracies in the
representations and warranties made to it contained herein or in any document
delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions for the benefit of it contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of
such party.
9.3 ARBITRATION. All disputes or controversies (whether of law or
fact) of any nature whatsoever arising from or relating to this Agreement and
the transactions contemplated hereby shall be decided by arbitration by the
American Arbitration Association (the "AAA") in accordance with the rules and
regulations of the AAA.
The arbitrators shall be selected as follows: JAMtv and the
Shareholders' Agent shall, within 60 days of the date of demand by either
party for arbitration, each select one independent, qualified arbitrator and
the two arbitrators so selected shall select the third arbitrator within
sixty (60) days after their appointment as party arbitrators. Each party
reserves the right to object to any
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individual arbitrator who shall be employed by or affiliated with a competing
organization. In the event objection is made, the AAA shall resolve any
dispute regarding the propriety of an individual arbitrator acting in that
capacity. The parties shall each bear the expenses of the arbitrator chosen
by it, and shall bear one-half the expenses of the independent arbitrator.
Hearings in the proceeding shall commence within one hundred twenty (120)
days of the selection of the neutral arbitrator.
Arbitration shall take place in Cook County, Illinois. At the
request of either party, arbitration proceedings will be conducted
confidentially; in such case all documents, testimony and records shall be
received, heard and maintained by the arbitrators in confidence under seal,
available for the inspection only by the Association, the Shareholders' Agent
and JAMtv and their respective attorneys and their respective experts who
shall agree in advance and in writing to receive all such information
confidentially and to maintain such information in confidence. The
arbitrators, who shall act by majority vote, shall be able to decree any and
all relief of an equitable and legal nature, including but not limited to,
such relief as a temporary restraining order, a temporary and/or a permanent
injunction, and shall also be able to award damages, with or without an
accounting and costs. The decree or award rendered by the arbitrators may be
entered as a final and binding judgment in any court having jurisdiction
thereof.
Reasonable notice of time and place of arbitration shall be given
to all persons, other than the parties, as shall be required by law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as
the law shall require.
9.4 NOTICES. All notices and other communications hereunder shall be
in writing and all be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) or set by facsimile,
confirmation received, to the parties at the following addresses and
facsimile numbers (or at such other address or number for a party as shall be
specified by like notice):
(a) If to JAMtv or Merger Sub, to:
JAMtv Corporation
640 North LaSalle Street, Suite 560
Chicago, Illinois 60610
Attn: Howard A. Tullman
Facsimile No.: (312) 642-0616
Telephone No.: (312) 642-7560
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with a copy to:
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, Illinois 60606-6677
Attn: Michael E. Shabat
Facsimile No.: (312) 360-6520
Telephone No.: (312) 360-6559
(b) if to Tunes, to:
Tunes Network, Inc.
1802 Fifth Street
Berkeley, California 94710
Attn: Kamran Mohsenin
Facsimile No.: (510) 649-4706
Telephone No.: (510) 649-4700
with copies to (but only up until the Effective Time):
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, California 94304
Attn: Katharine A. Martin
Facsimile No.: (650) 233-4545
Telephone No.: (650 ) 233-4586
9.5 PUBLIC ANNOUNCEMENTS. Each party will consult in advance with
the other concerning the timing and content of any announcements, press
releases and public statements concerning the Merger and will not make any
such announcement, release or statement without the other's consent.
9.6 INTERPRETATION. When a reference is made in this Agreement to
Sections, Schedules or Exhibits, such references shall be to a Section of or
Schedule or Exhibit to this Agreement unless otherwise indicated. The words
"include," "includes" and "including" when used herein shall be deemed in
each case to be followed by the words "without limitation." The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
9.7 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 party.
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9.8 ENTIRE AGREEMENT. This Agreement (including the Exhibits and the
Schedules attached hereto) and the documents and instruments and other
agreements among the parties delivered pursuant hereto constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof (including the
letter dated March 21, 1998 from Tunes to JAMtv and the Outline of
Transaction attached thereto) and are not intended to confer upon any other
person any rights or remedies hereunder except as otherwise expressly
provided herein.
9.9 NO TRANSFER. This Agreement and the rights and obligations set
forth herein may not be transferred or assigned by operation of law or
otherwise without the consent of each party hereto, PROVIDED that Merger Sub
may assign all or any portion of its rights hereunder to any other
newly-formed, wholly-owned subsidiary of JAMtv. This Agreement is binding
upon and will inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
9.10 SEVERABILITY. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with
a valid and enforceable provision that will achieve, to the extent possible,
the economic, business and other purposes of the void or unenforceable
provision.
9.11 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law or
equity on such party; and the exercise of any one remedy will not preclude
the exercise of any other.
9.12 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurance as may be reasonably
requested by any other party to evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
9.13 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. Except as set forth
in Section 7 hereof, no provision of this Agreement is intended, nor will be
interpreted, to provide or to create any third party beneficiary rights or
any other rights of any kind in any client, customer, affiliate, shareholder,
employee, partner or any party hereto or any other person or entity, and all
provisions hereof will be personal solely between the parties to this
Agreement.
9.14 MUTUAL DRAFTING. This Agreement is the joint product of JAMtv
and Tunes, and each provision of this Agreement has been subject to the
mutual consultation, negotiation and agreement of JAMtv and Tunes, and shall
not be construed for or against any party hereto.
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9.15 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS,
INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF
ILLINOIS (WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW PRINCIPLES).
9.16 JURISDICTION; VENUE. Each of the parties hereto hereby
irrevocably submits to the exclusive jurisdiction of any Illinois state court
or federal court sitting in the State of Illinois over any action or
proceeding arising out of or relating to this Agreement and the transactions
contemplated hereby and each of the parties hereto hereby irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in such Illinois state or federal court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent legally possible, the
defense of an inconvenient forum to the maintenance of such action or
proceeding. Each of the parties hereto irrevocably consents to the service
of any and all process in any such action or proceeding by the mailing of
copies of such process to such party at his, her or its address set forth in
this Agreement. Each of the parties hereto agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided
by law.
((Signature Page of Agreement of Merger Immediately Follows))
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((Signature Page of Agreement of Merger))
IN WITNESS WHEREOF, JAMtv, Merger Sub and Tunes have caused this
Agreement to be signed by their respective officers, thereunto duly
authorized, all as of the date first written above.
JAMtv CORPORATION
By: /s/ Howard A. Tullman
----------------------------------
Name: Howard A. Tullman
Title: Chief Executive Officer
TUNES ACQUISITION CORP.
By: /s/ Howard A. Tullman
----------------------------------
Name: Howard A. Tullman
Title: Chief Executive Officer
TUNES NETWORK, INC.
By: /s/ Kamran Mohsenin
----------------------------------
Name: Kamran Mohsenin
Title: Chief Executive Officer
68
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EXECUTION COPY
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
DATED AS OF MAY 4, 1999
AMONG
TUNES.COM INC.
AND
THE STOCKHOLDERS
NAMED ON THE SIGNATURE PAGES HERETO
AND THE SCHEDULES ATTACHED HERETO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I CERTAIN DEFINITIONS 2
ARTICLE II BOARD OF DIRECTORS 5
Section 1 Number of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2 Identity of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3 Board Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.4 Significant Business Decisions . . . . . . . . . . . . . . . . . . . . 6
Section 2.5 Reimbursement of Certain Expenses. . . . . . . . . . . . . . . . . . . 9
Section 2.6 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III CERTIFICATE OF INCORPORATION 10
ARTICLE IV TRANSFER OF SHARES 10
Section 4.1 Restriction on Transfers; Permitted Transferees. . . . . . . . . . . .10
Section 4.2 Right of First Offer . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 4.3 Bring Along Rights; Tag Along Rights . . . . . . . . . . . . . . . . .14
Section 4.4 Merger Transactions. . . . . . . . . . . . . . . . . . . . . . . . . .15
Section 4.5 Legend on Certificate. . . . . . . . . . . . . . . . . . . . . . . . .15
Section 4.6 Involuntary Transfers. . . . . . . . . . . . . . . . . . . . . . . . .15
Section 4.7 Holdback Agreements. . . . . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE V ADDITIONAL AGREEMENTS 16
Section 5.1 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 5.2 Financial Reports. . . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 5.3 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 5.4 System of Accounting . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 5.5 Prompt Payment of Taxes; Consolidated Return . . . . . . . . . . . . .19
Section 5.6 Maintenance of Corporate Existence, etc. . . . . . . . . . . . . . . .19
Section 5.7 Maintenance of Properties. . . . . . . . . . . . . . . . . . . . . . .19
Section 5.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 5.9 Compliance with Laws; Obligations. . . . . . . . . . . . . . . . . . .20
Section 5.10 Key Person Life Insurance . . . . . . . . . . . . . . . . . . . . . .20
Section 5.11 Availability of Common Stock for Conversion . . . . . . . . . . . . .20
ARTICLE VI MISCELLANEOUS 20
Section 6.1 Survival of Agreement; Term. . . . . . . . . . . . . . . . . . . . . .20
Section 6.2 By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 6.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 6.4 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 6.5 Complete Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 6.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 6.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 6.8. Governing Law; Consent to Jurisdiction and Service of Process. . . . .23
Section 6.9 Injunctive Relief. . . . . . . . . . . . . . . . . . . . . . . . . . .24
Section 6.10 New Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . .24
Section 6.11 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Section 6.12 Recapitalization, etc . . . . . . . . . . . . . . . . . . . . . . . .24
</TABLE>
<PAGE>
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
This AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (the
"AGREEMENT"), dated as of May 4, 1999, among Tunes.com Inc., a Delaware
corporation (the "COMPANY"), and the Stockholders (as defined herein).
W I T N E S S E T H
WHEREAS, the Company and the Stockholders named on Schedule 1
hereto entered into a certain Stockholders' Agreement dated as of June 2,
1997 (as amended by that certain Amendment No. 1 thereto dated as of October
31, 1997 ("AMENDMENT NO. 1") and as otherwise heretofore amended or modified,
the "ORIGINAL STOCKHOLDERS' AGREEMENT") in connection with the execution and
delivery of the Series A Purchase Agreement;
WHEREAS, in accordance with Section 6.10 of the Original
Stockholders' Agreement and subsequent to June 2, 1997, the additional
Stockholders named on Schedule 2 hereto have become parties to the Original
Stockholders Agreement pursuant to Amendment No. 1, certain Joinders, and
certain Joinder Agreements to the Original Stockholders' Agreement;
WHEREAS, simultaneously herewith, the Company is issuing and
selling, and certain of the Stockholders are purchasing from the Company,
shares of Series E Stock and, if applicable, shares of Series A-IV
Convertible Preferred Stock, pursuant to the terms and conditions of the
Series E Purchase Agreement (defined below);
WHEREAS, it is a condition precedent to the consummation of
the transactions contemplated by the Series E Purchase Agreement that the
Company and the Stockholders that are parties to the Original Stockholders'
Agreement amend and restate the Original Stockholders' Agreement on the terms
and subject to the conditions set forth herein; and
WHEREAS, in accordance with Section 6.1 of the Original
Stockholders' Agreement, a majority of the entire Board, with the concurrence
of at least one GSCP Director, and Stockholders holding Shares representing
at least eighty percent (80%) of the Shares issued and outstanding on the
date hereof, do hereby amend and restate the Original Stockholders' Agreement
on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements, covenants and provisions contained herein, and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
The following terms shall have the definitions set forth below:
"AFFILIATE" has the meaning given such term in Rule 12b-2 under the
Exchange Act.
"BOARD" means the Board of Directors of the Company.
"BUDGET" means the operating plan contemplated by SECTION 5.3 which
has been approved by a majority of the members of the Board and by at least
one (1) GSCP Director (so long as the GSCP Stockholders are entitled to
nominate a director under Section 2.2) and the netWorth Director (so long as
the netWorth Stockholders are entitled to nominate a director under Section
2.2).
"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.
"CERTIFICATE OF INCORPORATION" means the Restated Certificate of
Incorporation of the Company, as amended or restated.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of
the Company.
"CONVERTIBLE SECURITIES" means any warrants, options or other
rights to acquire Shares or securities convertible into or exercisable or
exchangeable for Shares.
"COURT ORDER" means any judgment, order, award or decree of any
foreign, federal, state, local or other court or tribunal and any award in
any arbitration proceeding.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"FAIR VALUE", with respect to any security, assets or property
means that value determined in good faith by the Board, in its reasonable
discretion, to be the fair value of such security, assets or property;
PROVIDED, HOWEVER, that, if requested by any Stockholder who, alone or
together with one or more other Stockholders, holds Shares that at the date
of this Agreement constituted at least fifteen percent (15%) of the sum of
(i) the issued and outstanding shares of Common Stock and (ii) the shares of
Common Stock issuable upon conversion of the Preferred Stock, the Fair Value
of a security, assets or property shall be determined by a
nationally-recognized investment banking or business valuation firm,
unaffiliated with the Company or any Stockholder, selected by the Board and
approved by at least one (1) GSCP Director (so long as the GSCP Stockholders
are entitled to nominate a director under Section 2.2) and the netWorth
Director (so long as the netWorth Stockholders are entitled to nominate a
director under Section 2.2).
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<PAGE>
"GOVERNMENTAL BODY" means any foreign, federal, state, local or
other governmental authority or regulatory body.
"GSCP" means GS Capital Partners II, L.P., a Delaware limited
partnership.
"GSCP DIRECTOR" means any director of the Company nominated by the
GSCP Stockholders in accordance with SECTION 2.2.
"GSCP STOCKHOLDERS" means GSCP and such other Affiliates of GSCP
who from time to time hold Shares and their Permitted Transferees.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, assets, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company.
"NETWORTH" means netWorth Partners I, LLC, a Delaware limited
partnership.
"NETWORTH DIRECTOR" means the director of the Company nominated by
the netWorth Stockholders in accordance with SECTION 2.2.
"NETWORTH STOCKHOLDERS" means netWorth and such other Affiliates of
netWorth who from time to time hold Shares and their Permitted Transferees.
"ORIGINAL STOCKHOLDERS' AGREEMENT" has the meaning set forth in the
preamble.
"PERMITTED TRANSFEREES" has the meaning set forth in SECTION 4.1(d).
"PERSON" means any natural person, corporation, general
partnership, limited liability company, limited partnership, proprietorship,
other business organization, trust, union or association.
"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 Stock and
any other preferred stock of the Company issued and outstanding.
"REGISTRATION RIGHTS AGREEMENT" means the Amended and Restated
Registration Rights Agreement, dated as of the date hereof, between the
Company and the persons named on the signature pages thereof, as amended from
time to time in accordance with its terms.
"REQUIREMENTS OF LAWS" means any foreign, federal, state and local
laws, statutes, regulations, rules, codes or ordinances enacted, adopted,
issued or promulgated by any Governmental Body or common law.
"RULE 144" means Rule 144 promulgated by the Securities and
Exchange Commission under the Securities Act, and any successor provision
thereto.
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"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"SERIES A PURCHASE AGREEMENT" means that certain Preferred Stock
Purchase Agreement, dated as of June 2, 1997, between the Company and the
persons named on the signature pages thereof, as amended from time to time in
accordance with its terms.
"SERIES E PURCHASE AGREEMENT" means that certain Series E
Convertible Preferred Stock Purchase Agreement, dated as of even date
herewith, between the Company and the persons named on the signature pages
thereof, as amended from time to time in accordance with its terms.
"SERIES E STOCK" means the Company's Series E Convertible Preferred
Stock.
"SHARES" means shares of Common Stock or Preferred Stock.
"STOCKHOLDERS" means the "Stockholders" under and as defined in the
Original Stockholders' Agreement, the GSCP Stockholders, the "Existing
Investors" under and as defined in the Original Stockholders' Agreement
(including, without limitation, the Persons so named in the Joinders and
Joinder Agreements to the Original Stockholders' Agreement), the other
stockholders designated on Schedule 1 and Schedule 2 hereto, the Persons so
designated on the signature pages hereto (certain of which are also set forth
on Schedule 1 and Schedule 2 hereto), the Transferees of Shares, whether from
another Stockholder or from the Company, who are required by this Agreement
to agree to be bound by the terms and conditions of this Agreement, and the
Persons who become Stockholders after the date hereof who are required by
Section 6.10 to agree to be bound by the terms and conditions of this
Agreement. The term "STOCKHOLDER" means any one of the Stockholders and, in
the case of a Stockholder who is a natural person, the term "STOCKHOLDER"
shall also include such Stockholder's legal representatives, executors or
administrators when the context so requires.
"STOCK OPTION PLAN" means, collectively, the Company's (i) 1997
Stock Option Plan providing for the issuance of options to purchase up to
1,550,000 shares of Common Stock to employees, officers, directors, and
consultants of the Company, and (ii) 1999 Stock Option Plan providing for the
issuance of options to purchase up to 500,000 shares of Common Stock to
employees, officers, directors, and consultants of the Company.
"TAX" means any federal, state, local or foreign net income,
alternative or add-on minimum, gross income, gross receipts, property, sales,
use, transfer, gains, license, excise, employment, payroll, withholding or
minimum tax, or any other tax custom, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or
any penalty, addition to tax or additional amount imposed by any Governmental
Body.
"TRANSFEREE" has the meaning set forth in SECTION 4.1(b).
"WENNER MEDIA" means Straight Arrow Publishers Company, L.P., a New
York limited partnership.
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<PAGE>
"WENNER MEDIA AFFILIATION AGREEMENT" means that certain Affiliation
Agreement dated as of November 10, 1997 by and between the Company and Wenner
Media.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 NUMBER OF DIRECTORS. The Stockholders agree that, except
as otherwise provided herein or in the governing instruments and agreements
relating to the rights of the Preferred Stock, the Board shall consist of
seven (7) directors, except for any vacancies which may arise prior to the
annual meeting of the stockholders of the Company or any special meeting held
for the election of directors.
Section 2.2 IDENTITY OF DIRECTORS. The Stockholders agree that (i) so
long as the GSCP Stockholders hold outstanding shares of Preferred Stock, the
GSCP Stockholders shall be entitled to nominate all of the directors
constituting the "Series A Directors" pursuant to the Certificate of
Incorporation, (ii) so long as the netWorth Stockholders hold the power to
vote (or cause to be voted), whether by proxy, voting trust, stockholders'
agreement or otherwise, at least Seven Hundred and Fifty Thousand (750,000)
shares of Series E Stock (subject to adjustment by way of stock split,
reverse stock split, stock dividend, stock distribution, merger, combination,
consolidation, reclassification, recapitalization, reorganization or
otherwise), the netWorth Stockholders shall be entitled to nominate the
director constituting the "Series E Director" pursuant to the Certificate of
Incorporation, (iii) during the initial term and any renewal term of the
Wenner Media Affiliation Agreement, Wenner Media shall be entitled to
nominate one (1) of the directors constituting the "Common Directors"
pursuant to the Certificate of Incorporation, and (iv) so long as Howard A.
Tullman is an executive officer of the Company, (a) he shall be nominated as
one (1) of the directors constituting the "Common Directors" pursuant to the
Certificate of Incorporation and (b) he shall be entitled to nominate one (1)
of the directors constituting the "Common Directors" pursuant to the
Certificate of Incorporation. Nominations for all other Common Directors
(exclusive of the Common Directors nominated in accordance with the preceding
sentence) shall be made by the Board. Each of the Stockholders agrees to
vote all Shares held by such Stockholder in favor of the directors nominated
by the GSCP Stockholders, the netWorth Stockholders, Wenner Media and Howard
A. Tullman, respectively, and in favor of Howard A. Tullman, for election to
the Board, so long as each such person is required to be nominated to the
Board pursuant to the preceding sentence hereof. Should the individuals
elected as directors pursuant to this SECTION 2.2 be unwilling or unable to
serve, or otherwise cease to serve (including by means of removal in
accordance with the following sentence), vacancies on the Board shall be
filled by the Board, except that the GSCP Stockholders, the netWorth
Stockholders, Wenner Media and Howard A. Tullman shall be entitled to
nominate or designate any replacement for a director originally nominated by
each of them pursuant to this SECTION 2.2. If any of the GSCP Stockholders,
the netWorth Stockholders, Wenner Media or Howard A. Tullman propose to
remove any director nominated by such Stockholder(s) pursuant to this SECTION
2.2, all of the Stockholders agree to cooperate in such removal, and any
resulting vacancy shall be filled in accordance with the preceding sentence.
Any action to be taken by the GSCP Stockholders or the netWorth Stockholders
under this SECTION 2.2 shall be taken by (i) the GSCP Stockholders who own at
least seventy-five percent (75%) of all Shares owned by the
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<PAGE>
GSCP Stockholders, and (ii) the netWorth Stockholders who own at least
two-thirds (2/3) of all Shares owned by the netWorth Stockholders.
Section 2.3 BOARD ACTION. Directors comprising at least a majority of
the Board (including at least one (1) GSCP Director (so long as the GSCP
Stockholders are entitled to nominate a director under Section 2.2) and the
netWorth Director (so long as the netWorth Stockholders are entitled to
nominate a director under Section 2.2)) must be present, in person or by
telephone, at every meeting of the Board to constitute a quorum. The Board
shall call, and use its best efforts to have, regular meetings not less often
than quarterly.
Section 2.4 SIGNIFICANT BUSINESS DECISIONS. Notwithstanding that no
vote may be required, or that a lesser percentage vote may be specified by
law, by the Certificate of Incorporation or By-Laws of the Company, or
otherwise, the Company and the Stockholders agree that the Company shall not
take, and shall not cause or permit any subsidiary of the Company to take,
any of the following actions, in a single transaction or a series of related
transactions, without the approval of at least one (1) GSCP Director (so long
as the GSCP Stockholders are entitled to nominate a director under Section
2.2) and the netWorth Director (so long as the netWorth Stockholders are
entitled to nominate a director under Section 2.2):
(a) amend the Certificate of Incorporation or Bylaws of the
Company or take any action or enter into any other agreement prohibited by or
in contravention of the Certificate of Incorporation or Bylaws of the
Company;
(b) increase or decrease the total number of its authorized shares
of capital stock or authorize shares of any class or series, or alter or
change the rights, preferences or privileges of any class or series;
(c) authorize or issue, or obligate itself to authorize or issue,
any equity security or any Convertible Security, except for (i) sales or
issuances of shares of capital stock of a wholly-owned subsidiary of the
Company to the Company or to another wholly-owned subsidiary of the Company,
(ii) issuances of shares of Common Stock upon conversion of the Preferred
Stock, and (iii) issuances of shares of Common Stock upon the exercise of any
options or similar rights granted pursuant to any employee benefit plan
adopted and approved by the Board in accordance with the terms of this
Agreement;
(d) redeem, retire, purchase or otherwise acquire, directly or
indirectly, through any of its subsidiaries or otherwise, shares of its
capital stock or warrants or options with respect to such capital stock,
except as provided in the Certificate of Incorporation of the Company;
(e) declare or pay any cash or other dividend or make any other
distribution of any kind on, or purchase or set aside any sums for the
purchase or payment of, its capital stock other than dividends and
distributions from a wholly-owned subsidiary of the Company to the Company or
to any other wholly-owned subsidiary of the Company;
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(f) enter into any agreement with respect to any merger,
reorganization or consolidation (other than a merger of a wholly-owned
subsidiary of the Company into or consolidation with the Company or any of
its wholly-owned subsidiaries);
(g) sell, lease, exchange, transfer or otherwise dispose of, any
assets (including the capital stock of subsidiaries) having an aggregate Fair
Value of greater than $2,500,000; PROVIDED, HOWEVER, that this limitation
shall not apply to transfers to the Company or any of the Company's
wholly-owned subsidiaries;
(h) enter into or permit to exist any agreement or undertaking
(other than this Agreement) which prohibits, restricts or limits the ability
of any of its subsidiaries to pay dividends or distributions to the Company
or otherwise to transfer assets or engage in transactions with the Company;
(i) recapitalize or otherwise change its capital structure in such
a manner as will result in a change in control from one person to another
person, either directly or indirectly, of the power to vote 50 percent or
more of the securities or other interests of the Company having voting power
for the election of directors of the Company or otherwise having voting power
to direct or cause the direction of management policies of the Company;
(j) voluntarily dissolve or liquidate;
(k) have a subsidiary which is not wholly-owned by the Company
either directly or indirectly through one or more other wholly-owned
subsidiaries;
(l) discontinue or withdraw from a line of business presently
engaged in, or expand into or enter a line of business not presently engaged
in, by the Company and its subsidiaries taken as a whole;
(m) subject its assets (including the capital stock of
subsidiaries) to liens or encumbrances in excess of $1,250,000 in the
aggregate;
(n) purchase, lease, exchange or otherwise acquire any securities
or assets of any other Person for an amount in excess of $2,500,000 in the
aggregate, except for acquisitions of supplies and equipment in the ordinary
course of business and acquisitions of assets pursuant to the Budget;
(o) make capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets which individually
are in an amount greater than $200,000 or in the aggregate are in an amount
greater than $1,250,000 in any twelve (12) month period, other than in
accordance with the Budget;
(p) enter into any joint venture or partnership with any other
Person involving a cash investment by the Company or any of its subsidiaries
in an amount in excess of $1,000,000, or
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resulting in any sharing of revenues or profits between the Company or any of
its subsidiaries and any other Person in an amount in excess of $1,000,000 in
cash in the aggregate;
(q) enter into or engage in, or amend or modify the terms of, any
material transaction or arrangement between the Company or any of its
subsidiaries and any director or officer of the Company, any Stockholder of
the Company, or any partner or family member of any such Person, or any
Affiliate of any of the foregoing Persons;
(r) incur, create, assume, become or be liable in any manner with
respect to, or permit to exist, any indebtedness (including, without
limitation, capitalized leases) or for the deferred purchase price for the
acquisition of property, other than (i) accounts payable incurred in the
ordinary course of business or (ii) indebtedness for borrowed money not to
exceed in the aggregate at any one time $1,250,000; voluntarily purchase,
cancel, prepay or otherwise provide for a complete or partial discharge in
advance of a scheduled payment date with respect to, or waive any material
right under or modify any material term of, any such indebtedness, except in
accordance with the Budget;
(s) adopt, enter into or become bound by any employee benefit or
incentive plan, program or arrangement (including, without limitation, any
stock option plan) or any collective bargaining agreement, or amend, modify
or terminate (partially or completely) any employee benefit, incentive plan,
program or arrangement (including, without limitation, any stock option plan)
or any collective bargaining agreement, in each case other than pursuant to
the Stock Option Plan or as contemplated in the Budget;
(t) hire, appoint or enter into an employment contract with, or
increase or otherwise materially modify the salary, wages or other
compensation of, or any material terms of the employment of, any (i)
executive officer of the Company or (ii) other officer, employee or
consultant of the Company or any of its subsidiaries whose annual
compensation is $200,000 or more or is required to be more than $200,000 in
any year during the term of the contract (excluding any stock options issued
thereunder);
(u) commence any proceeding or file any petition seeking relief
under Title 11 of the United States Code, as now constituted or hereafter
amended, or any other federal or state bankruptcy, insolvency or receivership
or similar law; consent to the institution of or fail to contest in a timely
and appropriate manner any such proceeding or filing; apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator, conservator
or similar official for the Company or any of its subsidiaries; file an
answer admitting the material allegations of a petition filed against it in
any such proceeding; make a general assignment for the benefit of creditors;
become unable, admit in writing its inability or fail generally to pay its
debts as they become due; or take any action for the purpose of effecting any
of the foregoing;
(v) become a party to or permit any of its subsidiaries to become
a party to any agreement which by its terms or otherwise could reasonably be
expected to materially and adversely affect the Company's performance of or
compliance with this Agreement, the Registration Rights Agreement or the
Certificate of Incorporation of the Company;
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(w) enter into or amend any contract so as to create a financial
obligation of the Company or any of its subsidiaries in excess of $1,000,000,
whether payable at one time or in a series of payments;
(x) except as required or permitted by the terms of the
Registration Rights Agreement, register any security pursuant to the
Securities Act, grant registration rights to any Person, or withdraw, reduce,
expand or otherwise modify the registration rights granted to any Person;
(y) approve or adopt, or materially modify or amend, the Budget;
(z) select the independent auditors of the Company and its
subsidiaries; or
(aa) change the number of members of the Board from seven (7)
(exclusive of any vacancies which may arise from time to time).
Section 2.5 REIMBURSEMENT OF CERTAIN EXPENSES. To the fullest extent
permitted by applicable law, the Company shall from time to time upon request
therefor, promptly reimburse the directors of the Company for the reasonable
out-of-pocket expenses incurred by them in connection with their attendance
of meetings of the Board and any other activities undertaken by them in their
capacity as directors of the Company. The foregoing shall be in addition to,
and not in lieu of, any indemnification or reimbursement obligations of the
Company under the Certificate of Incorporation or By-laws of the Company.
Section 2.6 FURTHER ASSURANCES. Each of the Stockholders agrees to
vote, in person or by proxy, all of the shares of Common Stock or Preferred
Stock owned by such Stockholder, at any annual or special meeting of
Stockholders of the Company called for the purpose of voting on the election
of directors or by consensual action of Stockholders without a meeting with
respect to the election of directors, in favor of the election of the
directors nominated in accordance with SECTION 2.2. Each Stockholder shall
vote the Shares owned by such Stockholder and shall take all other actions
necessary to ensure that the Certificate of Incorporation and By-laws of the
Company do not at any time conflict with the provisions of this Agreement.
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ARTICLE III
CERTIFICATE OF INCORPORATION
The Stockholders acknowledge and agree that the Restated Certificate of
Incorporation of the Company, as amended as of the date hereof, is set forth
as EXHIBIT A.
ARTICLE IV
TRANSFER OF SHARES
Section 4.1 RESTRICTION ON TRANSFERS; PERMITTED TRANSFEREES.
(a) Each Stockholder, severally and not jointly, agrees and
acknowledges that such Stockholder will not directly or indirectly, offer,
sell, assign, pledge, encumber or otherwise transfer any Shares or solicit
any offers to purchase or otherwise acquire or make a pledge of any Shares
unless such offer, sale, assignment, pledge, encumbrance, or other transfer
complies with the provisions of this Agreement, and either (i) such offer,
sale, assignment, pledge or other transfer is pursuant to an effective
registration statement under the Securities Act and has been registered under
all applicable state securities or "blue sky" laws or (ii) unless waived by
the Company in writing, such Stockholder shall have furnished the Company
with an opinion of counsel, which opinion of counsel shall be reasonably
satisfactory to the Company, to the effect that no such registration is
required because of the availability of an exemption from registration under
the Securities Act and all applicable state securities or "blue sky" laws.
(b) Except in the case of a sale of Shares pursuant to an
effective registration statement under the Securities Act or a sale of Shares
pursuant to a transaction complying with Rule 144, no Stockholder shall sell,
assign, pledge, encumber or otherwise transfer any Shares to any Person
(regardless of the manner in which such Stockholder initially acquired such
Shares) nor shall the Company issue, sell or otherwise transfer any Shares to
any Person (all Persons acquiring Shares from a Stockholder or from the
Company, regardless of the method of transfer, shall be referred to
collectively as "TRANSFEREES" and individually as a "TRANSFEREE") unless (i)
such Shares bear legends as provided in SECTION 4.5 and (ii) such Transferee
shall have executed and delivered to the Company, as a condition precedent to
any acquisition of Shares, an instrument in form and substance satisfactory
to the Company confirming that such Transferee takes such Shares subject to
all the terms and conditions of this Agreement, and agrees to be bound by the
terms of this Agreement. The Company shall not transfer upon its books any
Shares purporting to be transferred by a Stockholder to any Person except in
accordance with this Agreement.
(c) Except as specifically contemplated hereby, no Stockholder
shall grant any proxy or enter into or agree to be bound by any voting trust
with respect to any Shares nor shall any Stockholder enter into any
Stockholder agreements or arrangements of any kind with any Person with
respect to any Shares inconsistent with the provisions of this Agreement,
including but not limited to, agreements or arrangements with respect to the
acquisition, disposition or voting of Shares, nor shall any Stockholder act,
for any reason, as a member of a group or in concert with any
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other Persons (other than Permitted Transferees) in connection with the
acquisition, disposition or voting of Shares in any manner which is
inconsistent with the provisions of this Agreement. Notwithstanding the
foregoing or anything in this Agreement to the contrary, the Stockholders
shall have the right to grant proxies, enter into or agree to be bound by
voting trusts, or enter into stockholder agreements or arrangements with
netWorth with respect to up to two hundred and fifty thousand (250,000)
Shares in the aggregate for all Stockholders; PROVIDED, HOWEVER, that any
such proxy, voting trust, or stockholder agreement or arrangement shall not
conflict with the terms of this Agreement.
(d) None of the restrictions contained in this Agreement with
respect to transfers of Shares (other than those set forth in SECTIONS
4.1(a), 4.1(b) and 4.5) shall apply:
(i) to any transfer or assignment for consideration or to any
gift by any Stockholder to any spouse, child, parent, sibling or
grandchild of such Stockholder, or by any of such relatives to such
Stockholder or to any one or more of such relatives, or by any
Stockholder or any such relatives to a trust of which there are no
principal beneficiaries other than such Stockholder or one or more of
such relatives;
(ii) to any gift by any Stockholder to a bona fide charity or
foundation approved by the Board (such approval not to be unreasonably
withheld);
(iii) to any transfer to a legal representative in the event
any Stockholder becomes mentally incompetent;
(iv) to any transfer by will or the laws of descent; and
(v) with respect to a Stockholder which is a corporation,
partnership or limited liability company, (a) to any transfer by such
Stockholder to any Affiliate thereof, or (b) to any transfer by such
Stockholder in connection with the consolidation, merger or sale of all
or substantially all of the assets of such Stockholder;
PROVIDED that in each of cases (i) through (vi) each Transferee, donee or
distributee (a "PERMITTED TRANSFEREE") agrees to take subject to and to
comply with the provisions of this SECTION 4.1. For purposes hereof, the
Permitted Transferees of a Stockholder shall include the Permitted
Transferees of such Stockholder's Permitted Transferees.
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Section 4.2 RIGHT OF FIRST OFFER.
(a) Except as provided in SECTIONS 4.1(d), 4.3 and 4.4, any
Stockholder who desires to sell, assign or otherwise transfer any Shares (the
"SELLING STOCKHOLDER") shall first give written notice (a "SELLER'S NOTICE")
to the Company and all other Stockholders (the "OFFEREE STOCKHOLDERS")
stating the Selling Stockholder's desire to make such transfer, the number of
Shares to be transferred (the "OFFERED SHARES") and the cash price which the
Selling Stockholder proposes to be paid for the Offered Shares by the Company
or the other Stockholders (the "FIRST OFFER PRICE").
(b) Upon receipt of the Seller's Notice (the "FIRST OFFER"), the
Company shall have the irrevocable and exclusive option to purchase up to all
of the Offered Shares at the First Offer Price; PROVIDED that the Company
shall not have the right to purchase any of the Offered Shares unless either:
(i) the Company purchases all such Offered Shares; (ii) if the Company elects
to purchase less than all the Offered Shares, the Offeree Stockholders elect
to purchase all the remaining Offered Shares pursuant to SECTION 4.2(c); or
(iii) the Selling Stockholder consents to the purchase of less than all of
the Offered Shares. The Company's option under this SECTION 4.2(b) shall be
exercisable by a written notice to the Selling Stockholder, with copies to
the Offeree Stockholders, given within 15 days from the date of the Seller's
Notice.
(c) If the Company does not exercise its option to purchase
Offered Shares or if the Company elects to purchase less than all the Offered
Shares, then each of the Offeree Stockholders shall have the irrevocable and
exclusive option to purchase up to that percentage of the Offered Shares not
purchased by the Company determined by dividing the number of Shares owned by
such Stockholder by the total number of Shares owned by all Stockholders who
elect to purchase Offered Shares hereunder, without reference to either the
Offered Shares or the number of Shares held by any Offeree Stockholder who
elects not to purchase any Offered Shares (the "PROPORTIONATE SHARE"). To
the extent that any Offeree Stockholder does not fully subscribe for its
Proportionate Share of the Offered Shares, each other fully participating
Offeree Stockholder shall have an option to purchase that percentage of the
Offered Shares not purchased by partially participating Offeree Stockholders
determined by dividing the number of Shares owned by such fully participating
Offeree Stockholder by the total number of shares owned by all fully
participating Offeree Stockholders. Unless the Selling Stockholder shall
have consented to the purchase of less than all the Offered Shares, no
Stockholder may purchase any Shares (irrespective of whether it is prepared
to subscribe fully for its Proportionate Share) unless all Shares offered are
to be purchased. The option of each of the Offeree Stockholders
participating in the purchase under this SECTION 4.2(c) shall be exercisable
by written notice to the Selling Stockholder, with copies to the Company,
given within 30 days from the date of the Seller's Notice.
(d) If the Seller's Notice shall be duly given, and if the Company
and all the Offeree Stockholders shall not exercise their options to purchase
the Offered Shares at the First Offer Price or do not purchase all Shares
offered by the Selling Stockholder, then the Selling Stockholder shall be
free, for a period of 90 days from the earlier of (i) the 30th day following
the date of the Seller's Notice or (ii) the date the Selling Stockholder
shall have received written notice from the Company and the Offeree
Stockholders stating their intention not to exercise the options granted
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under SECTIONS 4.2(b) and (c), to sell the Offered Shares to any third party
Transferee at the same price and on the same material terms as the First
Offer Price; PROVIDED that such sale complies with the provisions of SECTION
4.1.
(e) If the proposed purchase price of a Transferee for the Offered
Shares is less than the First Offer Price, the Selling Stockholder shall not
sell or otherwise transfer any of the Offered Shares unless the Selling
Stockholder shall first reoffer the Offered Shares at such lesser price to
the Company and each of the Offeree Stockholders by giving written notice
(the "REOFFER NOTICE") thereof, stating the Selling Stockholder's intention
to make such transfer at such lower price (the "REOFFER PRICE"). The Company
and each of the Offeree Stockholders shall then have the irrevocable and
exclusive option to purchase all of the Offered Shares at the Reoffer Price,
exercisable in the same order of priority, proportions and manner as provided
in SECTIONS 4.2(b) and (c). If the Company or any of the Offeree
Stockholders do not then purchase all the Offered Shares, such Offered Shares
may be sold by the Selling Stockholder within 60 days following the earlier
of (i) the 30th day from the date of the Reoffer Notice or (ii) the date on
which the Selling Stockholder shall have received written notice from the
Company and the Offeree Stockholders stating their intention not to exercise
the option granted in this SECTION 4.2(e), at a cash price equal to or
greater than the Reoffer Price; PROVIDED that such sale complies with the
provisions of SECTION 4.1.
(f) If the Company and the Offeree Stockholders do not exercise
their option to purchase the Offered Shares at the First Offer Price or at
the Reoffer Price, and the Selling Stockholder shall not have sold the
Offered Shares to any Transferee for any reason before the expiration of the
60-day period described in SECTION 4.2(e) in the event of a Reoffer or, if no
Reoffer Notice is given, the 90-day period described in SECTION 4.2(d), then
the Selling Stockholder shall not give a Seller's Notice with respect to a
transaction which would require compliance with this SECTION 4.2 for a period
of three months from the last day of such 60-day or 90-day period, as the
case may be.
(g) The closing of all purchases pursuant to the first offer
rights granted under this SECTION 4.2 shall take place at the principal
offices of the Company at 10 a.m. on the later of (x) the tenth Business Day
following the delivery to the Selling Stockholder of all notices exercising
such first offer rights with respect to all of the Offered Shares to be sold
by the Selling Stockholder or (y) the fifth Business Day following the
expiration or termination of all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, applicable to such purchases,
or at such other time and/or place as the parties to such purchases may
agree. At such closing, (i) the Selling Stockholder shall assign and
transfer to the Company and each Stockholder purchasing Shares good and valid
title to the Shares being purchased by them, by delivery of the certificates
representing the Shares to be sold and transferred, duly endorsed in blank,
with the requisite stock transfer tax stamps attached, together with such
stock powers, certificates, legal opinions and other instruments of transfer
as the Company or the accepting Stockholder(s) shall reasonably request; and
(ii) the Company and each Stockholder purchasing Shares shall pay to the
Selling Stockholder the purchase price for the Shares being purchased by them
in cash, by delivery of a certified or bank check or by wire transfer of
immediately available funds to such account as the Selling Stockholder shall
direct by written notice delivered to the Company and each such Stockholder
not later than two (2) Business Days before such closing.
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(h) Notwithstanding anything in this Agreement to the contrary,
the provisions set forth in Section 4.2 shall not apply to the GSCP
Stockholders or the netWorth Stockholders after the second anniversary of the
date of this Agreement.
Section 4.3 BRING ALONG RIGHTS; TAG ALONG RIGHTS.
(a) In the event that, following compliance with the provisions of
SECTION 4.2, any Stockholder or any group of Stockholders acting together or
pursuant to a common plan or arrangement propose to sell or otherwise dispose
of to a party unaffiliated with such Stockholder(s) (a "PURCHASER") Shares
that as of the date of this Agreement constitute at least eighty percent
(80%) of the sum of (i) the issued and outstanding shares of Common Stock,
(ii) the shares of Common Stock issuable upon conversion of the Preferred
Stock and (iii) the Shares of Common Stock issuable upon conversion of any
Convertible Securities (a "DISPOSITION"), such Stockholder(s) (the "PROPOSING
STOCKHOLDERS") shall provide notice of such proposed Disposition to each of
the other Stockholders (a "PROPOSAL NOTICE") no later than twenty (20) days
prior to the proposed closing of such Disposition, and the Proposing
Stockholders shall have the right (a "BRING ALONG RIGHT") to require such
other Stockholders to sell the Shares owned by them to the Purchaser at the
same price and upon the same terms as are applicable to the sale of Shares by
the Proposing Stockholders. SECTION 4.2 shall not apply to sales of Shares
by Stockholders pursuant to the exercise of a Bring Along Right in accordance
with this SECTION 4.3.
(b) In the event that (i) the Company and the Offeree Stockholders
do not elect to exercise their right of first refusal to purchase all Shares
offered by the Selling Stockholder under SECTION 4.2, and (ii) any Selling
Stockholder proposes to sell or otherwise dispose of Shares to a Purchaser,
such Offeree Stockholders shall have the right (a "TAG ALONG RIGHT") to
participate in such sale as set forth in this paragraph (b). Within thirty
(30) days of the date of the Seller's Notice, the Offeree Stockholders may
elect (an "ELECTING STOCKHOLDER"), by providing such Selling Stockholder with
written notice, to offer for sale some or all of their Shares to the
Purchaser at the price set forth in the Seller's Notice. In the event the
Purchaser agrees to purchase less than all of the Shares that the Selling
Stockholder and the Electing Stockholders offer for sale, the Selling
Stockholder and each Electing Stockholder shall be entitled to sell to the
Purchaser its pro rata share of the Shares (in the proportion that the number
of Shares offered to be sold by the Selling Stockholder or Electing
Stockholder bears to the sum of all Shares offered to be sold by the Selling
Stockholder and the Electing Stockholders, or in such other proportion as may
be agreed to by the Selling Stockholder and the Electing Stockholders).
Section 4.2 shall not apply to sales of Shares by an Electing Stockholder
pursuant to the exercise of a Tag Along Right in accordance with this Section
4.3.
An Electing Stockholder shall effect its participation in the sale by
promptly delivering to the Selling Stockholder for transfer to the Purchaser
one or more certificates, properly endorsed for transfer, which represent at
least the number of Shares that such Electing Stockholder elects to sell.
The stock certificate(s) that the Electing Stockholder delivers to the
Selling Stockholder shall be transferred to the Purchaser in consummation of
the Tag Along Right in accordance with the Seller's Notice, and the Selling
Stockholder (or Purchaser) shall concurrently remit to such Electing
Stockholder that portion of the sales proceeds to which such Electing
Stockholder is entitled by
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reason of its participation in such sale.
Notwithstanding anything in this paragraph (b) to the contrary, each
Selling Stockholder may sell or otherwise transfer a cumulative, aggregate of
200,000 Shares (subject to adjustment) without triggering any right of
co-sale to the other Stockholders under this paragraph (b).
Section 4.4 MERGER TRANSACTIONS. Notwithstanding any other provision
of this Agreement to the contrary, the Company may enter into an agreement to
consolidate with or merge with or into any other corporation if such
agreement is approved by the Board, by at least one (1) GSCP Director (so
long as the GSCP Stockholders are entitled to nominate a director under
Section 2.2) and the netWorth Director (so long as the netWorth Stockholders
are entitled to nominate a director under Section 2.2) and by the requisite
vote of the holders of Common Stock and Preferred Stock in accordance with
the Certificate of Incorporation and the Business Corporation Act and any
other applicable laws of the State of Delaware. In such event, SECTIONS 4.2
AND 4.3 shall not be applicable and all Shares may be transferred pursuant to
such merger or consolidation for such consideration as is so approved by the
Board at least one (1) GSCP Director (so long as the GSCP Stockholders are
entitled to nominate a director under Section 2.2), the netWorth Director (so
long as the netWorth Stockholders are entitled to nominate a director under
Section 2.2), and the holders of Common Stock and Preferred Stock.
Section 4.5 LEGEND ON CERTIFICATE. Each outstanding certificate
representing Shares that are subject to this Agreement shall bear an
endorsement reading substantially as follows:
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.
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 Stockholders' Agreement, dated as of May 4,
1999, among the Company and the Stockholders named
therein, a copy of which is on file at the principal
executive office of the Company.
Section 4.6 INVOLUNTARY TRANSFERS. If a Stockholder involuntarily
transfers directly or indirectly any or all of its Shares for any reason and
such transfer is not to a Permitted Transferee, the Transferee of such Shares
and its Permitted Transferees shall be required to offer all of the Shares
held by such Transferee and its Permitted Transferees to the Company and the
other Stockholders in accordance with the procedures set forth in SECTION
4.2. For purposes of such offer, the First Offer Price for such Shares shall
be the Fair Value of such Shares as of the date of the
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involuntary transfer of such Shares to such Transferee (appropriately
adjusted to reflect the Fair Value of any dividends or distributions received
or to be received by the holder of such Shares subsequent to the date of such
involuntary transfer). The Board shall make or obtain a determination of the
Fair Value of such Shares no later than ninety (90) days following the date
of any such involuntary transfer, and the Seller's Notice with respect to
such Shares shall be given by such Stockholder or by the Company on behalf of
such Stockholder as promptly as practicable following such determination.
Section 4.7 HOLDBACK AGREEMENTS. Unless the lead managing
underwriter (the "MANAGING UNDERWRITER") for an offering of Shares to the
public (a "PUBLIC OFFERING") pursuant to an effective registration statement
under the Securities Act (or, in the case of a non-underwritten Public
Offering, the Company) otherwise agrees, no Stockholder shall effect any
public sale or distribution (including a sale under Rule 144) of any Shares,
or any securities convertible into or exchangeable or exercisable for Shares,
during the fourteen (14) days prior to and (i) the one hundred eighty (180)
days after the effective date of any registration statement filed by the
Company 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) or (ii) the ninety (90) days after the effective date of any
registration statement filed by the Company in connection with a secondary or
later 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),
except as part of such registration statement, whether or not such
Stockholder participates in such registration. The provisions set forth in
this Section 4.7 shall remain in full force and effect for a period of two
(2) years after the termination of this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 INSPECTION RIGHTS. The Company shall permit authorized
representatives of the Stockholders to visit and inspect the properties of
the Company, including its books and records (and to make extracts therefrom)
and to discuss the Company's affairs, finances and accounts with the
officers, employees and auditors of the Company, all at such reasonable times
and as often as such Stockholders may reasonably request and upon reasonable
notice to the Company.
Section 5.2 FINANCIAL REPORTS. The Company will deliver to the GSCP
Stockholders and the netWorth Stockholders, so long as each holds Shares:
(a) as soon as available after the end of each fiscal month of the
Company, and in any event within 30 days thereafter, (i) an unaudited
consolidated statement of financial position of the Company and its
subsidiaries as at the end of such month, (ii) an unaudited consolidated
statement of income of the Company and its subsidiaries for such month and
for the fiscal year of the Company to the end of such month, (iii) an
unaudited consolidated statement of stockholders' equity of the Company and
its subsidiaries for such month and for the fiscal year of the Company
16
<PAGE>
to the end of such month, (iv) an unaudited consolidated statement of cash
flow of the Company and its subsidiaries for such month and for the fiscal
year to the end of such month, and (v) a comparison between the actual
financial figures for such month and the comparable figures included in the
Budget, with an explanation of any material differences between them, all in
reasonable detail, subject to changes resulting from normal year-end audit
adjustments, certified by the chief executive officer of the Company;
(b) as soon as available after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, an audited consolidated
statement of financial position of the Company and its subsidiaries, and the
related audited consolidated statements of income, stockholders' equity and
cash flows of the Company and its subsidiaries for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal
year, all in reasonable detail, accompanied by (i) an unqualified opinion on
such financial statements of a firm of independent public accountants of
nationally recognized standing selected by the Board and approved by at least
one (1) GSCP Director (so long as the GSCP Stockholders are entitled to
nominate a director under Section 2.2) and the netWorth Director (so long as
the netWorth Stockholders are entitled to nominate a director under Section
2.2) that such financial statements fairly present the financial position of
the companies being reported upon at the end of such fiscal year and the
results of their operations and cash flows for such fiscal year in conformity
with generally accepted accounting principles, and (ii) a comparison by the
Company between the actual financial figures for such fiscal year, the
comparable figures for the prior fiscal year and the comparable figures
included in the Budget for such fiscal year, with an explanation of any
material differences between them;
(c) as soon as available all monthly, quarterly, annual and other
statements, certificates or notices to any lenders to the Company;
(d) promptly upon receipt of a written request from a GSCP
Stockholder or a netWorth Stockholder therefor, copies of all other reports,
if any, submitted to the Company by independent public accountants in
connection with any annual or interim audit of the books of the Company and
its subsidiaries made by such accountants;
(e) promptly upon receipt of a written request from a GSCP
Stockholder or a netWorth Stockholder therefor, a copy of each financial
statement, report and return that the Company or any of its subsidiaries
shall file with the Securities and Exchange Commission or (if requested by a
GSCP Stockholder or a netWorth Stockholder) with any other Governmental Body
and each such report that the Company or any of its subsidiaries shall file
with any stock exchange;
(f) promptly upon the occurrence thereof, notice of any material
disputes with any customer or the occurrence of any other event which has
had, or could reasonably be expected to have, a Material Adverse Effect;
(g) promptly upon the Company's learning thereof, written notice
of (i) any pending litigation affecting the Company or any of its
subsidiaries, whether or not the claim is considered by the Company to be
covered by insurance, and (ii) any pending administrative or
17
<PAGE>
arbitration proceeding or investigation, or the receipt by the Company or any
of its subsidiaries of any notice or order from any Governmental Body having
jurisdiction over the Company or any of its subsidiaries, which litigation,
proceeding, investigation, notice or order has had, or could reasonably be
expected to have, a Material Adverse Effect;
(h) promptly upon the occurrence thereof, notice of (i) any change
in the business or affairs of the Company or any of its subsidiaries which
the Company reasonably determines has had, or could reasonably be expected to
have, a Material Adverse Effect, (ii) any material breach of any of its
covenants, representations or warranties set forth in the Series A Purchase
Agreement, the Series E Purchase Agreement, the Registration Rights Agreement
or this Agreement, (iii) any material labor dispute to which the Company or
any of its subsidiaries may become a party, any strikes or walkouts relating
to any of the Company's or any such subsidiary's facilities, and the
expiration or termination of any labor contract to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or of any negotiations with respect thereto, (iv) a
default by the Company or any of its subsidiaries under any indenture, loan
agreement or mortgage or any material note, lease, deed or other material
agreement to which the Company or such subsidiary is a party or by which the
Company or any such subsidiary is bound, (v) the Company's or any of its
subsidiaries' learning that any of its assets is (A) the subject of any
"Superfund" evaluation or investigation or (B) the subject of any federal,
state or local investigation evaluating whether any remedial action is needed
to respond to a release of any hazardous substance into the environment, (vi)
the receipt by the Company or any of its subsidiaries of a notice of
violation with respect to any of its permits (environmental or otherwise) or
a notice of an enforcement action relating to any such permits, or (vii)
receipt by the Company or any of its subsidiaries of notice of any event
described in Section 4043 of the Employee Retirement Income Security Act and
the regulations thereunder for which the reporting requirement is not thereby
waived; and
(i) with reasonable promptness, such other data, reports and
information as from time to time a GSCP Stockholder or a netWorth Stockholder
may reasonably request and such data, press releases, reports and information
as the Company or any of its subsidiaries may from time to time furnish to
holders of its securities.
Section 5.3 BUDGET. With respect to each fiscal year of the Company,
the Company shall prepare and submit to the Board a budget (the "BUDGET") for
such fiscal year, which shall set forth in reasonable detail the Company's
operating and financial plan for such fiscal year and the related capital and
headcount requirements to fulfill the plan. The Budget shall be submitted to
the Board no later than sixty (60) days before the commencement of each such
fiscal year. The Budget shall be accepted as the Budget for such fiscal year
when it has been approved by a majority of the members of the Board and by at
least one (1) GSCP Director (so long as the GSCP Stockholders are entitled to
nominate a director under Section 2.2) and the netWorth Director (so long as
the netWorth Stockholders are entitled to nominate a director under Section
2.2). The Budget shall be reviewed by the Company periodically and all
changes therein and all material deviations therefrom shall be resubmitted to
the Board in advance and shall be accepted when approved by, and the Company
shall not make any such changes or material deviations to or from the Budget
without such prior approval of, a majority of the Board and by at least one
(1) GSCP Director (so long as the GSCP Stockholders
18
<PAGE>
are entitled to nominate a director under Section 2.2) and the netWorth
Director (so long as the netWorth Stockholders are entitled to nominate a
director under Section 2.2). With respect to the fiscal period of the
Company ending on December 31, 1999, the Company has prepared and delivered
to the Board the Budget for such fiscal period.
Section 5.4 SYSTEM OF ACCOUNTING. The Company shall maintain a system
of accounting established and administered in accordance with generally
accepted accounting principles, and will set aside on its books and cause
each of its subsidiaries, if any, to set aside on its books all such proper
reserves as shall be required by generally accepted accounting principles.
Section 5.5 PROMPT PAYMENT OF TAXES; CONSOLIDATED RETURN. The Company
will, and will cause each of its subsidiaries to, pay or cause to be paid all
Taxes levied upon any of its properties or assets or those of its
subsidiaries or in respect of its or their respective franchises, businesses,
income or profits before the same become delinquent, except that (unless and
until foreclosure, sale or other similar proceedings shall have been
commenced) no such charge need be paid if being contested in good faith and
by appropriate proceedings promptly initiated and diligently conducted if (i)
such reserve or other appropriate provision, if any, as shall be required by
sound accounting practice shall have been made therefor and (ii) no property
or assets are in imminent danger of forfeiture. The Company will withhold
all amounts for Taxes required to be withheld by it under applicable
Requirements of Laws. The Company will not consent to joining into a
consolidated return with any Person by filing Internal Revenue Service Form
1122 or by taking any action deemed to be a consent pursuant to Section 1502
of the Internal Revenue Code of 1986 or Treasury Regulations Section
1.1502-75.
Section 5.6 MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Company shall
maintain in full force and effect its corporate existence, rights,
governmental approvals and franchises and all licenses and other rights to
use patents, processes, licenses, trademarks, trade names or copyrights owned
or possessed by it and deemed by the Company to be material to the conduct of
its business.
Section 5.7 MAINTENANCE OF PROPERTIES. The Company will, and will
cause each of its subsidiaries to, keep its properties in good repair,
working order and condition, reasonable wear and tear excepted, and from time
to time make all needful and proper, or legally required, repairs, renewals,
replacements, additions and improvements thereto.
Section 5.8 INSURANCE. The Company shall maintain or cause to be
maintained, and shall cause each of its subsidiaries to maintain, with
financially sound and reputable insurers, insurance with respect to its
properties and businesses and the properties and businesses of its
subsidiaries against loss or damage as may be required by law or as is
customary for companies similarly situated and which reflects the Company's
best business judgment as to the types and amounts of insurance that should
be carried in light of conditions in the insurance industry, and at the
request of a Stockholder shall furnish such Stockholder with evidence of the
same. The insurance coverage of the Company and its subsidiaries shall be
evaluated annually by the Board and by the management of the Company.
19
<PAGE>
Section 5.9 COMPLIANCE WITH LAWS; OBLIGATIONS. The Company shall, and
shall cause each of its subsidiaries to, comply with all Requirements of Laws
and Court Orders applicable to it and its respective assets and properties,
and with all contracts and agreements to which it is a party or shall become
a party, the violation of which could reasonably be expected to have a
Material Adverse Effect, and the Company shall perform, and shall cause each
of its subsidiaries to perform, all obligations which it has or shall incur,
the violation or lack of performance of which could reasonably be expected to
have a Material Adverse Effect. Notwithstanding the foregoing, nothing in
this Section shall prohibit the Company from contesting in good faith the
validity or applicability of any law by appropriate proceedings, promptly
initiated and diligently conducted, if such reserve or other appropriate
provision, if any, as shall be required by sound accounting practices, shall
have been made therefor.
Section 5.10 KEY PERSON LIFE INSURANCE. Unless otherwise agreed to in
writing by GSCP and netWorth, the Company will use its best efforts to obtain
and maintain or cause to be maintained, with financially sound and reputable
insurers, term life insurance in a minimum aggregate amount of $1,000,000 on
the life of Howard A. Tullman. Such policy shall be owned by the Company and
all benefits thereunder shall be payable to the Company.
Section 5.11 AVAILABILITY OF COMMON STOCK FOR CONVERSION. The Company
will at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, for the purpose of effecting the conversion
of the Preferred Stock, such number of its duly authorized shares of Common
Stock as shall be sufficient to effect the conversion of the Preferred Stock
from time to time outstanding. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Stock, the Company will forthwith take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for
such purposes. The Company will obtain any authorization, consent, approval
or other action by or make any filing with any Governmental Body that may be
required under applicable state securities laws in connection with the
issuance of shares of Common Stock upon conversion of the Preferred Stock.
ARTICLE VI
MISCELLANEOUS
Section 6.1 SURVIVAL OF AGREEMENT; TERM. This Agreement shall not be
terminated, modified or amended unless a resolution approving and adopting
such termination, modification or amendment has been adopted by a majority of
the entire Board, with the concurrence of at least one (1) GSCP Director (so
long as the GSCP Stockholders are entitled to nominate a director under
Section 2.2) and the netWorth Director (so long as the netWorth Stockholders
are entitled to nominate a director under Section 2.2), and Stockholders
holding Shares representing at least sixty-six and two-thirds percent
(66-2/3%) of the Shares then issued and outstanding agree in writing to such
termination, modification or amendment. This Agreement shall terminate:
(i) on June 2, 2007 or, if sooner,
20
<PAGE>
(ii) upon the merger of the Company with or into, or its
consolidation with, another corporation if, immediately after such
merger or consolidation, the Stockholders immediately prior thereto own,
in the aggregate, capital stock of the surviving or resulting
corporation representing less than a majority of the total voting power
of such corporation, or
(iii)immediately prior to the consummation of a primary or
secondary sale of shares of Common Stock to the public pursuant to a
registered public offering under the Securities Act where the proposed
aggregate public offering price of the shares of Common Stock so
registered is at least $30,000,000 (based on the fair value estimated by
the underwriters) and the proposed offering price reflects a preoffering
valuation of the Common Stock of at least $20.00 per share (giving
effect to the conversion into or exercise in exchange for shares of
Common Stock of any outstanding securities of the Company that are at
such time convertible into or exercisable in exchange for shares of
Common Stock);
PROVIDED, HOWEVER, that any provision of this Agreement which specifically
provides for termination of such provision on another date shall terminate on
such other date, and PROVIDED FURTHER, that the provisions of SECTIONS 4.1(a)
and (b) and SECTION 4.5 shall remain in full force and effect notwithstanding
a termination of this Agreement pursuant to the preceding clause (i) or (iii).
Section 6.2 BY-LAWS. If and to the extent that any provision of this
Agreement conflicts with or is inconsistent with any provision of the By-Laws
of the Company, such provision of this Agreement shall be controlling and, to
the extent practicable, the conflicting or inconsistent provision of the
By-Laws shall be construed in a manner consistent with such provision of this
Agreement.
Section 6.3 NOTICES. All notices to be given by any party hereunder
shall be in writing and shall be deemed to have been duly given if mailed, by
first class or registered mail, three (3) Business Days after deposit in the
United States Mail, or if telexed or telecopied, sent by telegram, or
delivered by hand or reputable overnight courier, when confirmation is
received, in each case as follows:
(i) in the case of any Stockholder (other than a GSCP
Stockholder or a netWorth Stockholder), to such Stockholder at its
address set forth in the stock ledger of the Company;
(ii) in the case of the Company, to:
Tunes.com Inc.
640 North LaSalle Street
Suite 560
Chicago, IL 60610
Facsimile: (312) 642-0616
Attention: Howard A. Tullman
21
<PAGE>
with a copy to:
Freeborn & Peters
311 South Wacker Drive
Suite 2000
Chicago, IL 60606
Facsimile: (312) 360-6575
Attention: Michael E. Shabat
(iii) in the case of the GSCP Stockholders (or any of them), to:
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Facsimile: (212) 357-5505
Attention: Ms. Kaca Enquist
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Facsimile: (312) 853-7036
Attention: Dennis V. Osimitz
(iv) in the case of the netWorth Stockholders (or any of them), to:
netWorth Partners, L.P.
One Buckhead Plaza
Suite 780
3060 Peachtree Road
Atlanta, Georgia 30305
Facsimile: (404) 264-9305
Attention: Burton B. Goldstein, Jr.
with a copy to:
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Facsimile: (404) 881-7777
Attention: B. Lynn Walsh
22
<PAGE>
The parties may change their respective addresses for purposes of notice
hereunder by giving notice of such change to all other parties in the manner
provided in this SECTION 6.3.
Section 6.4 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the respective successors and permitted assigns of
the parties hereto. If any Transferee of any Stockholder shall acquire any
Shares in any manner, whether by operation of law or otherwise, such Shares
shall be held subject to all of the terms of this Agreement, and by taking
and holding such Shares such person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement, PROVIDED, HOWEVER, that Shares which have been distributed in a
registered public offering under the Securities Act or sold in a transaction
complying with Rule 144 shall no longer be subject to this Agreement.
Section 6.5 COMPLETE AGREEMENT. This Agreement amends and restates the
Original Stockholders' Agreement in its entirety and supersedes all prior
negotiations, statements and agreements of the parties hereto with respect to
the subject matter of this Agreement and the Original Stockholders'
Agreement. This Agreement represents the entire agreement among the
Stockholders and the Company with respect to the matters set forth herein,
and the parties hereto acknowledge that there have been no representations,
warranties, covenants or agreements made by any party hereto with respect to
the subject matter hereof other than those contained in this Agreement (as
amended and restated), the consents and resolutions executed and delivered in
accordance with the Original Stockholders' Agreement, the Registration Rights
Agreement, the Series A Purchase Agreement, the agreements, documents, and
instruments executed and delivered pursuant to the Series A Purchase
Agreement, the Series E Purchase Agreement, and the agreements, documents,
and instruments executed and delivered pursuant to the Series E Purchase
Agreement.
Section 6.6 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be signed by the Company and one or more
Stockholders, and all of which are deemed to be one and the same agreement
binding upon the Company and each of the Stockholders.
Section 6.7 HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not
be deemed to be a part of this Agreement.
Section 6.8. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE OF
PROCESS. This Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois, without regard to its conflicts of
law doctrine. By execution and delivery of this Agreement, the Original
Stockholders Agreement, or any Joinder hereto or thereto, each of the
Stockholders accepts and/or reaffirms, generally and unconditionally, the
nonexclusive jurisdiction of the state or federal courts in Illinois in any
action or proceeding concerning this Agreement. Each Stockholder (other than
the GSCP Stockholders and the netWorth Stockholders) hereby irrevocably
appoints (and/or reaffirms such Stockholder's appointment pursuant to the
Original Stockholders' Agreement or any Joinder thereto) the person under
whose name such Stockholder's name is listed on EXHIBIT B hereto at such
person's office listed on such exhibit, its lawful agent and attorney to
accept and acknowledge service of any and all process against it in any
action, suit or proceeding arising out of or relating to this Agreement or
any of the transactions contemplated hereby and upon whom such process may be
served, PROVIDED that in the case of any service upon such agent and
attorney, the party effecting
23
<PAGE>
such service shall also deliver a copy thereof to the other party at the
address and in the manner specified in SECTION 6.3. A Stockholder who is not
listed on EXHIBIT B shall be served (i) at such Stockholder's residence or
principal place of business in the State of Illinois if such Stockholder
resides in Illinois, (ii) by service upon such Stockholder's registered agent
in the State of Illinois if such Stockholder is qualified to do business in
Illinois, or (iii) by service upon such agent for service of process as
specified in this Agreement (or in the document reflecting such Stockholder's
agreement to be bound by this Agreement) if such Stockholder does not reside
or do business in Illinois. The Stockholders (other than the GSCP
Stockholders and the netWorth Stockholders) will enter into such agreements
with such agents as may be necessary to constitute and continue the
appointment of such agents hereunder. Each party hereby irrevocably waives,
to the fullest extent permitted by law, any objection that it may now or
hereafter have to the laying of the venue of any such action, suit or
proceeding brought in such a court and any claim that any such action, suit
or proceeding brought in such a court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any party to serve process
in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the other in any other jurisdiction.
Section 6.9 INJUNCTIVE RELIEF. It is hereby agreed and acknowledged
that it will be impossible to measure in money the damages that would be
suffered if the parties to this Agreement fail to comply with any of the
obligations imposed on them by this Agreement and that in the event of any
such failure, an aggrieved person will be irreparably damaged and will not
have an adequate remedy at law. Any such person shall, therefore, be
entitled to injunctive relief, including specific performance, to enforce
such obligations, and if any action should be brought in equity to enforce
any of the provisions of this Agreement, none of the parties hereto shall
raise the defense that there is an adequate remedy at law.
Section 6.10 NEW STOCKHOLDERS. As a condition to the issuance by the
Company of any authorized but unissued Shares or Shares held in treasury, or
any Convertible Securities to any person other than pursuant to a registered
public offering, the Company shall require such person to enter into this
Agreement and to agree to be bound by the terms and conditions hereof (by
executing an additional counterpart signature page to this Agreement, a
joinder, or such other document evidencing such person's agreement to be
bound hereby).
Section 6.11 SEVERABILITY. The invalidity or unenforceability of any
provisions of this Agreement in any jurisdiction shall not affect the
validity, legality or enforceability of the remainder of this Agreement in
such jurisdiction or the validity, legality or enforceability of any
provision of this Agreement in any other jurisdiction, it being intended that
all rights and obligations of the parties hereunder shall be enforceable to
the fullest extent permitted by law.
Section 6.12 RECAPITALIZATION, ETC. In the event that any capital
stock or other securities are issued in respect of, in exchange for, or in
substitution of, any shares of Common Stock by reason of any reorganization,
recapitalization, reclassification, merger, consolidation, spin-off, partial
or complete liquidation, stock dividend, split-up, sale of assets,
distribution to stockholders or combination of the shares of Common Stock or
any other change in the Company's capital structure, appropriate adjustments
shall be made to the provisions of this Agreement so as to fairly and
24
<PAGE>
equitably preserve, as far as practicable, the original rights and
obligations of the parties hereto under this Agreement.
[SIGNATURES ON FOLLOWING PAGES]
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Stockholders' Agreement as of the day and year first above written.
THE COMPANY:
TUNES.COM INC.
By: /s/ Stuart B. Frankel
------------------------------------
Name: Stuart B. Frankel
------------------------------------
Title: Chief Financial Officer
------------------------------------
STOCKHOLDERS:
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/ Joseph H. Gleberman
---------------------------------
Its: Vice President
---------------------------------
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/ Joseph H. Gleberman
---------------------------------
Its: Vice President
---------------------------------
S-1
<PAGE>
[SIGNATURE PAGE TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT]
GOLDMAN SACHS & CO. VERWALTUNGS GmbH, a
company organized under the laws of Germany
By: /s/ Joseph H. Gleberman
------------------------------------
Its: Joseph H. Gleberman
------------------------------------
By: /s/ Eve M. Gerriets
------------------------------------
Its: Registered Agent
------------------------------------
STONE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., General
Partner
By: /s/ Joseph H. Gleberman
----------------------------------
Its: Authorized Signatory
-----------------------------------
BRIDGE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., Managing
General Partner
By: /s/ Joseph H. Gleberman
---------------------------------
Its: Authorized Signatory
---------------------------------
S-2
<PAGE>
Schedule 1
to
Amended and Restated Stockholders' Agreement
Dated as of May 4, 1999
STOCKHOLDERS, AS OF JUNE 2, 1997, UNDER THE ORIGINAL STOCKHOLDERS' 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
Mark E. Carr
David S. Connelly
Joseph P. Davies
Doerge-Internet, L.P.
Patrick C. Dowd
Francis X. Egan
Edwin M. Furey II
James G. Gendelman
Greg D. Glyman
Golan Productions, Inc.
Thomas A. Herman
Jam Enterprises Corp.
Patrick William Joyce
Matthew S. Kaplan
Thomas J. Kigin
Roland N. Livney
John Meyer
Steven B. Nakovich
Louis Portnoy
Red 5 Management, Inc.
Rosy Partnership
Michael D. Searle
Hugo Sonnenschein III
Virginia B. Sonnenschein
Craig A. Stern
Craig Stern Revocable Trust
Kelly A. Thomson
Howard A. Tullman
Schedule 1
(Page 1 of 1)
<PAGE>
Schedule 2
to
Amended and Restated Stockholders' Agreement
Dated as of May 4, 1999
STOCKHOLDERS, SUBSEQUENT TO JUNE 2, 1997, UNDER THE ORIGINAL STOCKHOLDERS'
AGREEMENT:
Marc F. Adler
David Anderson
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
John S. Childs
Stephen T. Coates
Delbert W. Coleman
Neil S. Coleman
Paul R. Davies
Peter DiMaria
Enterprise Law Group, Inc.
FDP Music, L.L.C.
Lisa Gansky
Suzanne M. Gray
James C. Harris
The Hazel Family Trust dated 2/3/81
Heartland Internet Music, L.L.C.
Tim Hodges
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
Karen Jo Lee
Jeanne Louise Leventhal
Margret Leventhal
Schedule 2
(Page 1 of 2)
<PAGE>
SCHEDULE 2 (CONT.):
Mark Liebman
Jacob Maizel
Donald R. McGarrah
Darius Mohsenin
Kamran Mohsenin
Nuri Mohsenin
Music Convergence, L.L.C.
Music Funding L.L.C.
Music Infusion, L.L.C.
Marla H. Polk
Ronald S. Posner
Kevin Power
Renrel V Investments Limited Partnership
Resolute Partners, L.P.
Robert Ritchey
William Romans
Cliff Samaniego
Richard T. Santulli
Nicholas M. Scharf
Richard D. Shivers
Hugo Sonnenshein, IRA R/O
Robert C. Staley
Steven F. Stratton
Charlene Steele Vaughn
WNC Corporation
Michael M. Wadden
Harvey M. Walken
A "Stockholder" under and as defined in this Agreement shall include, without
limitation, the following Persons holding Shares and any other Person holding
Shares; provided that such Person has agreed to be bound by the terms and
conditions of this Agreement (by executing an additional counterpart
signature page to this 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
Lawrence R. Morgenthal
John S. Bank
The Mednick Living Trust
Music Funding II, L.L.C.
Schedule 2
(Page 2 of 2)
\<PAGE>
EXECUTION COPY
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
Dated as of May 4, 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 . . . . . . . . . . . . . . . . . . . 5
(a) Demands for Registration. . . . . . . . . . . . . . . . . . . . . . . 5
(b) Limitations on Demand Registrations . . . . . . . . . . . . . . . . . 6
(c) Registration Statement Form . . . . . . . . . . . . . . . . . . . . . 7
(d) Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . 7
(e) Priority in Cutback Registrations . . . . . . . . . . . . . . . . . . 7
(f) Preemption of Demand Registration . . . . . . . . . . . . . . . . . . 7
Section 3. Piggyback Registration . . . . . . . . . . . . . . . . . . . . . 7
(a) Right to Include Registrable Securities . . . . . . . . . . . . . . . 7
(b) Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . 8
(c) Priority in Cutback Registrations . . . . . . . . . . . . . . . . . . 8
Section 4. Registration Procedures. . . . . . . . . . . . . . . . . . . . . 8
Section 5. Underwritten Offerings . . . . . . . . . . . . . . . . . . . . . 12
(a) Underwritten Offerings in Connection with Demand Registrations. . . . 12
(b) Underwritten Piggyback Offerings. . . . . . . . . . . . . . . . . . . 13
Section 6. Holdback Agreements. . . . . . . . . . . . . . . . . . . . . . . 13
(a) By the Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) By the Company and Other Securityholders. . . . . . . . . . . . . . . 13
Section 7. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Indemnification by the Company. . . . . . . . . . . . . . . . . . . . 14
(b) Indemnification by the Sellers. . . . . . . . . . . . . . . . . . . . 15
(c) Notices of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(d) Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(e) Other Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 17
(f) Indemnification Payments. . . . . . . . . . . . . . . . . . . . . . . 17
(g) Underwriting Agreement. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8. Covenants Relating to Rule 144 . . . . . . . . . . . . . . . . . 17
Section 9. Other Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) No Existing Agreements. . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Future Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 10. Selection of Underwriters . . . . . . . . . . . . . . . . . . . 18
Section 11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 18
(a) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(b) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(c) Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(d) Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(e) Consents and Waivers by Holders . . . . . . . . . . . . . . . . . . . 20
(f) No Third Party Beneficiary. . . . . . . . . . . . . . . . . . . . . . 20
(g) Successors or Assigns . . . . . . . . . . . . . . . . . . . . . . . . 20
(h) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(i) Invalid Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 21
(j) Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(k) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
(l) Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(M) Termination of Registration Rights. . . . . . . . . . . . . . . . . . 21
(n) Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
-ii-
<PAGE>
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of
May 4, 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, simultaneously herewith the Company is issuing and
selling, and certain of the Investors are purchasing 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 the date hereof (the "Stock Purchase Agreement") among
the Company and certain of the Investors;
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 Original Registration
Rights Agreement amend and restate the Original Registration Rights Agreement
on the terms and subject to the conditions set forth herein; and
WHEREAS, pursuant to paragraph (c) of Section 11 of the Original
Registration Rights Agreement, 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 Original
Registration Rights Agreement in its entirety on the terms and subject to the
conditions set forth herein.
<PAGE>
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 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.
"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.
2
<PAGE>
"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, provided that
all references in this Agreement to the Holders shall be deemed to include
holders of shares of the Company's Preferred Stock and each such Holder shall be
deemed to hold the number of Shares that are at the time issuable upon the
conversion of the shares of Preferred Stock into Shares pursuant to the terms of
the Certificate of Incorporation of the Company, as amended.
"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 (including, without limitation, the
Persons so named in the Joinder and Joinder Agreements to the Original
Registration Rights Agreement), the other investors designated on Schedule 1 and
Schedule 2 hereto, and the Persons so designated on the signature pages hereto
(certain of which may also be set forth on Schedule 1 and Schedule 2 hereto).
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.
"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.
3
<PAGE>
"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 thirty percent (30%) of the issued and outstanding Registrable
Securities.
"RECORDS" has the meaning ascribed to it in SECTION 4(j).
"REGISTRABLE SECURITIES" means the Shares at any time
outstanding or subject to issuance 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). As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (x) a 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
4
<PAGE>
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 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. 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
5
<PAGE>
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, 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.
(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 Registrable Securities to be so registered
represent less than thirty percent (30%) of the issued and
outstanding Registrable Securities;
(ii) the proposed aggregate Public Offering price for
the Registrable Securities included in the Demand for
Registration is less than (a) Thirty Million dollars
($30,000,000) 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
6
<PAGE>
(iii) 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 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.
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
7
<PAGE>
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 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:
8
<PAGE>
(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:
(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
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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
(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
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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
(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.
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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.
(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.
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(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.
(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 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 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 (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
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<PAGE>
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, 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.
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<PAGE>
(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 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
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<PAGE>
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 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.
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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.
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
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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 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:
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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.
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
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
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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.
(b) ENTIRE AGREEMENT. This Agreement amends and restates the
Original 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 Original Registration Rights Agreement, and contains
the sole and entire agreement between the parties hereto with respect to the
subject matter hereof and of the Original 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.
20
<PAGE>
(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 (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
21
<PAGE>
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.
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.
SIGNATURES ON FOLLOWING PAGES
22
<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/ Stuart B. Frankel
----------------------------------
Name: Stuart B. Frankel
---------------------------------
Title: Chief Financial Officer
--------------------------------
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/ Joseph H. Gleberman
-------------------------------
Its: Vice President
-------------------------------
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/ Joseph H. Gleberman
-------------------------------
Its: Vice President
-------------------------------
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/ Joseph H. Gleberman
--------------------------------
Its: Managing Director
--------------------------------
By: /s/ Eve M. Gerriets
--------------------------------
Its: Registered Agent
--------------------------------
STONE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., General
Partner
By: /s/ Joseph H. Gleberman
-------------------------------
Its: Authorized Signatory
-------------------------------
BRIDGE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., Managing
General Partner
By: /s/ Joseph H. Gleberman
-------------------------------
Its: Authorized Signatory
-------------------------------
S-2
<PAGE>
Schedule 1
to
Amended and Restated Registration Rights Agreement
Dated as of May 4, 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
Amended and Restated Registration Rights Agreement
Dated as of May 4, 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 this 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.
Schedule 2
(Page 2 of 2)
<PAGE>
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
JAMTV CORPORATION
NOVEMBER 10, 1997
This certifies that, for value received, Straight Arrow Publishers
Company, L.P. (the "Holder"), is entitled to purchase, subject to the provisions
of this Warrant, from JAMtv Corporation, a Delaware corporation (the "Issuer"),
up to Four Hundred Nineteen Thousand Two Hundred Twenty-Four (419,224) fully
paid and nonassessable shares of common stock, $.01 par value (the "Common
Stock"), of the Issuer at an exercise price equal to Three Dollars ($3.00) 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"). This Warrant was originally issued in connection with the execution
and delivery of an Affiliation Agreement, dated as of November 10, 1997, by and
between the Issuer and the Holder. Terms used herein and not otherwise defined
shall have the meaning ascribed to them in the Affiliation Agreement.
Section 1. EXERCISE OF WARRANT.
(a) Subject to the provisions hereof, this Warrant may be
exercised, in whole or in part, but not as to a fractional share, at
any time and from time to time on or after the earlier of a Qualified
Public Offering, a Qualified Private Offering or a Control Event (each
as defined below) and on or before the earlier of (i) the date on which
the Affiliation Agreement terminates, if such termination occurs during
the Initial Term (as such term is defined therein), or (ii) November
10, 2007, by presentation and surrender hereof to the Issuer at the
address which, in accordance with the provisions of Section 9 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
1
<PAGE>
Price for the number of Warrant Shares 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 (if applicable) by (i) cash, (ii) a certified
check payable to the order of the Issuer, (iii) shares of the
Issuer's common stock duly endorsed over to the Issuer (which shares
shall be valued at the Fair Market Value (as defined below)), (iv)
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 (v) 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.
As used herein, a "Control Event" shall mean any event which
results in an adjustment to the Exercise Price or the number of Warrant
Shares issuable hereunder pursuant to Section 5(e).
As used herein, "Qualified Public Offering" shall mean a
primary or secondary sale of shares of Common Stock to the public
pursuant to a public offering registered under the Securities Act of
1933, as amended, where the aggregate net proceeds to the Issuer (after
deducting underwriting discounts and commissions and expenses of the
offering) from the offering of the shares of Common Stock so registered
are at least $15,000,000.
As used herein, "Qualified Private Offering" shall mean a
private offering of equity securities where the aggregate net proceeds
to the Issuer from the offering of such securities are at least
$15,000,000.
(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 NASDAQ
National 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
2
<PAGE>
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
Company, 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.
(c) Notwithstanding any provisions herein to the contrary, if
the Fair Market Value (hereinafter defined) of one share of Common
Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the
Holder may elect to receive shares equal to the value (as determined
below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Issuer
together with the properly endorsed Election to Purchase and notice of
such election in which event the Issuer shall issue to the Holder (the
date thereof, the "Exercise Date") a number of shares of Common Stock
computed using the following formula:
Y (A-B)
X = -------
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y= the total number of shares of Common
Stock purchasable under the Warrant
or, if only a portion of the Warrant
is being exercised, the portion of the
Warrant being canceled (at the date of
such calculation)
A = the Fair Market Value of one share of the
Issuer's Common Stock (at the date of such
calculation)
B = Exercise Price (as adjusted to the date of
such calculation)
3
<PAGE>
(i) For purposes of the above calculation, if the Common
Stock is listed or quoted on a national securities
exchange, the NASDAQ National Market, the NASDAQ
system, or another nationally recognized exchange or
trading system as of the Exercise Date, the Fair
Market Value per share of the Common Stock shall be
deemed to be the last reported sale price per share
of Common Stock thereon on the Exercise Date or, if
no such price is reported on such date, such price
on the next preceding business day; provided,
however, that if no such price is reported on the
next preceding business day, or if the Common Stock
is not listed or quoted on a national securities
exchange, the NASDAQ National Market, the NASDAQ
system or another nationally recognized exchange or
trading system as of the Exercise Date, the Fair
Market Value per share of Common Stock shall be
deemed to be the amount most recently determined in
good faith by the Board of Directors, using
commercially accepted valuation methods, to
represent the Fair Market Value per share of the
Common Stock (including without limitation a
determination for purposes of granting Common Stock
options or issuing Common Stock under an employee
benefit plan of the Issuer); and upon request of the
Holder, the Board of Directors (or a representative
thereof) shall promptly notify the Holder of the
Fair Market Value per share of Common Stock.
(ii) Notwithstanding the foregoing, if the Board of
Directors has not made such a determination within
the three-month period prior to the Exercise Date,
then (A) the Fair Market Value per share of Common
Stock shall be the amount next determined in good
faith by the Board of Directors, using commercially
accepted valuation methods, to represent the fair
market value per share of the Common Stock
(including without limitation a determination for
purposes of granting Common Stock options or issuing
Common Stock under an employee benefit plan of the
Issuer), (B) the Board of Directors shall make such
a determination within 10 days of a request by the
Holder that it do so and promptly notify the Holder
of such determination, and (C) the exercise of this
Warrant pursuant to subsection 1(c) shall be delayed
until such determination is made.
(iii) If the Fair Market Value per share of Common Stock
is determined by the Board of Directors pursuant to
paragraph (i) or (ii) above, this Warrant shall not
be exercised until the Holder notifies the Issuer
that such determination is acceptable; provided
that, should the Holder notify the Issuer that such
determination is unacceptable, the Issuer shall
appoint a firm of independent certified public
accountants of recognized national standing, which
shall, using commercially accepted valuation
methods, determine the Fair Market Value per share
of Common Stock as of the determination date used by
the Board of Directors, and the exercise of the
4
<PAGE>
this Warrant pursuant to subsection 1(c) shall be
delayed until such determination is made
(provided that such firm shall use its best
efforts to make such determination no later than
thirty (30) days from notification of the Issuer
by the Holder). The fees of such firm shall be
paid by the Issuer, unless the Fair Market Value
determined by such firm differs from that
determined by the Issuer by ten percent (10%) or
less, in which case the fees shall be paid by the
Holder.
Section 2. RESERVATION OF SHARES; PRESERVATION OF RIGHTS OF HOLDER. The
Issuer hereby agrees to reserve and keep available at all times, free from
preemptive rights, out of the aggregate authorized but unissued Common Stock,
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, upon issuance in
accordance with the terms hereof, be fully paid and nonassessable and free and
clear of all documentary, stamp or similar issue or transfer taxes, liens,
charges, security interests or other encumbrances. 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 Section 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.
5
<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 in accordance with the provisions
of Section 1(a) of this Warrant.
Section 5. ADJUSTMENTS IN EXERCISE PRICE AND WARRANT SHARES. The
Exercise Price and Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 5.
(a) 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.
(b) 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.
(c) In case the Issuer at any time or from time to time after
the date hereof shall issue or sell additional shares of Common Stock
(including additional shares deemed to be issued pursuant to paragraph
(o) of this Section 5) without consideration or for a consideration per
share less than the Exercise Price in effect immediately prior to
6
<PAGE>
such issue or sale, then, and in each such case, such Exercise Price
shall be reduced to an amount equal to the aggregate consideration
received by the Issuer for the total number of such additional
shares of Common Stock so issued or sold divided by the number of
such additional shares; provided, however, that no adjustment to the
exercise price pursuant to this paragraph (c) shall occur in the
case of an issuance of equity to a Strategic Partner (as defined
below).
(d) 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, using commercially
accepted valuation methods, provided funds (i) shall be available to be
allocated to such purpose and (ii) shall have been specifically and
solely allocated for such purpose by the Issuer prior to any
distribution of assets to stockholders) 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.
(e) 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 hereof 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, either of the following, as shall be elected by the
Holder (such election to be made within one year after the date of the
consummation of such transaction by written notice to the Acquiring
Person (as defined below) or its Parent (as defined below), as the case
may be, and, in the absence of such notice, the provisions of clause
(ii) below shall be deemed to have been elected by the Holder):
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<PAGE>
(i) 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 5, or
(ii) the number of shares of common stock of the
Acquiring Person or its Parent, whichever meets the
requirements set forth below (subject to adjustments,
subsequent to such corporate action, as nearly equivalent as
possible to the adjustments provided for in this Section 5),
determined by dividing (A) the amount equal to the product
obtained by multiplying (1) the number of shares of Common
Stock (or Other Securities) to which the Holder would have
been entitled had the Holder exercised this Warrant
immediately prior to such consummation, times (2) the greater
of the Fair Market Value per share of the Common Stock and the
Exercise Price in effect on the date immediately preceding the
date of such consummation, by (B) the Fair Market Value
(determined by the Acquiring Person in the manner set forth in
Section 1(c)) per share of the common stock of the Acquiring
Person or its Parent, as the case may be, on the date
immediately preceding the date of such consummation;
PROVIDED that 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, and in each
of its three fiscal years immediately preceding the date of the
consummation of such transaction has filed, reports with the Securities
and Exchange Commission pursuant to section 13 or section 15(d) of the
Exchange Act. In the event that the Acquiring Person fulfills the
requirements contained in the immediately preceding sentence, then, if
the Holder shall elect (or shall be deemed to elect) to receive common
stock pursuant to clause (ii) above, the Holder shall be entitled to
receive, upon the basis stated in such clause (ii), only the common
stock of the Acquiring Person.
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 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 5.
8
<PAGE>
The above provisions of this paragraph (e) 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 is 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 5 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 statements 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.
(f) 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
9
<PAGE>
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.
(g) The term "Common Stock" shall mean the Common Stock, $.001
par value, of the Issuer as the same exists at the Closing Date (as
defined in the Affiliation 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.
(h) 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 each
Holder hereof, a certificate setting forth in reasonable detail the
circumstances requiring the adjustments.
(i) Notwithstanding any other provision, this Warrant shall be
binding upon and inure to the benefit of any successors and assigns of
the Issuer.
(j) 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 (j) shall be carried forward and
taken into account at the time of any subsequent adjustment in the
Exercise Price.
(k) 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.
(l) In case any event shall occur as to which the provisions
of this Section 5 are not strictly applicable but the failure to make
any adjustment would not fairly protect the purchase rights represented
by this Warrant in accordance with the essential intent and principles
of this Section 5, then, in each such case, the Board of Directors of
the Issuer shall in good faith, using commercially accepted valuation
methods, make or arrange for an equitable adjustment to the number of
Warrant Shares and the Exercise Price, provided that such adjustment is
acceptable to the Holder. Should the Holder not accept such adjustment,
then the Issuer shall appoint a firm of independent certified public
10
<PAGE>
accountants of recognized national standing, which shall give their
opinion on the adjustment, if any, on a basis consistent with the
essential intent and principles established in this Section, necessary
to preserve, without dilution, the purchase rights represented by this
Warrant. Upon receipt of such opinion, the Issuer will promptly mail a
copy thereof to the Holder and shall make the adjustments described
therein. The fees of such firm shall be paid by the Issuer, unless the
adjusted number of Warrant Shares and the Exercise Price determined by
such firm each differ from those determined by the Issuer by ten
percent (10%) or less, in which case the fees shall be paid by the
Holder.
(m) In the event that prior to the date of a Qualified Public
Offering, equity is issued pursuant to a private financing to a
Strategic Partner (as defined below) such that the percentage equity
ownership, on a fully diluted basis, held by such Strategic Partner in
the Issuer exceeds the then current percentage equity ownership
interest, on a fully diluted basis, held in the Issuer by the Holder,
the Holder shall be entitled to purchase such number of additional
Warrants ("Adjustment Warrants") as shall be necessary to entitle the
Holder to have the same percentage equity ownership interest, on a
fully diluted basis, in the Issuer as the Strategic Partner upon
completion of the private financing. The Issuer shall, within 30 days
following the consummation of the purchase of the equity interest by
the Strategic Partner, notify the Holder of such sale and offer to sell
Adjustment Warrants to the Holder. The Holder shall have a period of 30
days to agree to accept all or any portion of the Adjustment Warrants
offered by the Issuer. The purchase price for such Adjustment Warrants
shall be paid by the Holder to the Issuer at such time, if any, as the
Adjustment Warrants become exercisable, and shall be the fair market
value of the Adjustment Warrants as determined by the Issuer upon its
receipt of notice of acceptance from the Holder in accordance with this
paragraph (m); provided that, should the Holder notify the Issuer that
such determination is unacceptable, the Issuer shall appoint a firm of
independent certified public accountants of recognized national
standing, which shall, using commercially accepted valuation methods,
determine the fair market value of such Adjustment Warrants. The fees
of such firm shall be paid by the Issuer, unless the fair market value
determined by such firm differs from that determined by the Issuer by
ten percent (10%) or less, in which case the fees shall be paid by the
Holder. The Issuer shall, within 10 days of receipt of notice of
acceptance from the Holder, issue to the Holder a warrant certificate
representing such number of Adjustment Warrants as the Holder shall
have elected to purchase pursuant to this paragraph (m). Such
certificate shall, except for the provisions contained in this
paragraph (m) and paragraph (n) of this Section 5, be subject to the
same terms and conditions as are contained in this Warrant. The
exercise price set forth in the warrant certificate, at which the
Holder shall be entitled to purchase Common Stock pursuant to its
exercise of the Adjustment Warrant, shall be the lesser of (i) the
Exercise Price in effect on the date of issuance of the warrant
certificate, (ii) in the case where either Options or Convertible
Securities (each as defined below) are the form of equity issued to the
Strategic Partner, the exercise price at which the Strategic Partner
may purchase Common Stock pursuant to such Option or Convertible
Security or (iii) in the case where
11
<PAGE>
Common Stock is the form of equity issued to the Strategic Partner,
the price per share of Common Stock paid by the Strategic Partner to
acquire such Common Stock; provided, however, that the exercise
price of each Adjustment Warrant determined pursuant to this
paragraph (m) shall in no event be less than $1.00.
As used herein, the term "Strategic Partner" shall mean any
group, person, corporation, partnership, limited liability company or
other business entity which, in addition to making an equity investment
in the Issuer, has entered into a strategic business relationship with
the Issuer for the purpose of enhancing the business prospects of the
Issuer.
(n) Notwithstanding the application of an adjustment pursuant
to any other paragraph of this Section 5, but provided that the Holder
is not entitled to any Adjustment Warrants pursuant to paragraph (m) of
this Section 5, if the Issuer at any time prior to the date of a
Qualified Public Offering issues additional equity which, as a result
of such issuance and after taking into account the application of any
and all adjustment provisions contained in this Section 5 applicable to
such issuance, has the effect of reducing the Holder's equity ownership
percentage interest in the Issuer, on a fully diluted basis, to an
amount which is less than ten percent (10%), the Holder shall, as the
circumstance dictates, be entitled to the following adjustment:
(i) if the issuance is to a Strategic Partner and the
Exercise Price immediately preceding such issuance is greater
than either (A) the exercise price at which the Strategic
Partner may purchase Common Stock, if the equity issuance is
in the form of Options or Convertible Securities, or (B) the
price per share of Common Stock paid by the Strategic Partner,
if Common Stock is the form of equity issued to the Strategic
Partner, then the issuer shall issue to the Holder a separate
warrant certificate representing such number of warrants to
purchase additional shares of Common Stock as shall be
necessary to cause the Holder's equity ownership percentage
interest in the Issuer, on a fully diluted basis, following
such issuance of equity to the Strategic Partner to be no less
than ten percent (10%). Such certificate shall, except for the
provisions contained in this paragraph (n) and paragraph (m)
of this Section 5, be subject to the same terms and conditions
as are contained in this Warrant. The exercise price set forth
in the warrant certificate, at which the Holder shall be
entitled to purchase Common Stock pursuant to its exercise
thereof, shall be (i) in the case where either Options or
Convertible Securities are the form of equity issued to the
Strategic Partner, the exercise price at which the Strategic
Partner may purchase Common Stock pursuant to such Option or
Convertible Security or (ii) in the case where Common Stock is
the form of equity issued to the Strategic Partner, the price
per share of Common Stock paid by the Strategic Partner to
acquire such Common Stock; provided, however, that the
exercise price of each warrant determined pursuant to this
clause (i) shall in no event be less than $1.00.
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<PAGE>
(ii) if the issuance is not to a Strategic Partner in
the circumstance described in the preceding clause (i), this
Warrant shall be adjusted such that the number of shares of
Common Stock for which this Warrant may be exercised is
increased by such amount as shall be necessary to cause the
Holder's equity ownership percentage interest in the Issuer
following such issuance of Common Stock, on a fully diluted
basis, to be no less than ten percent (10%).
(o) In case the Issuer at any time or from time to time after
the date hereof shall issue, sell, grant or assume, or shall fix a
record date for the determination of holders of any class of securities
entitled to receive, any Options or Convertible Securities (each as
defined below), then, and in each such case, the maximum number of
shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a
subsequent adjustment of such number) issuable upon the exercise of
such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities,
shall be deemed for purposes of this Section 5 to be additional shares
of Common Stock issued as of the time of such issue, sale, grant or
assumption or, in case such a record date shall have been fixed, as of
the close of business on such record date (or, if the Common Stock
trades on an ex-dividend basis, on the date prior to the commencement
of ex-dividend trading), and this Warrant shall be subject to
adjustment pursuant to paragraphs (c) and (n) of this Section 5;
PROVIDED, HOWEVER, that in any such case in which additional shares of
Common Stock are deemed to be issued:
(i) no further adjustment of the Exercise Price or
the number of Warrant Shares shall be made upon the subsequent
issue or sale of Convertible Securities or shares of Common
Stock upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, except in the case of
any such Options or Convertible Securities which contain
provisions requiring an adjustment, subsequent to the date of
the issue or sale thereof, of the number of shares of Common
Stock issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, each
such adjustment shall be deemed hereunder to involve a
separate issuance of shares of Common Stock, Options or
Convertible Securities, as the case may be;
(ii) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise,
for any increase in the consideration payable to the Issuer,
or decrease in the number of additional shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof
(by change of rate or otherwise), the adjustment to the number
of Warrant Shares pursuant to paragraph (n) of this Section 5
and the Exercise Price computed upon the original issue, sale,
grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend
trading, as the case may be,
13
<PAGE>
with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options, or the rights
of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
(iii) upon the expiration (or purchase by the Issuer
and cancellation or retirement) of any such Options which
shall not have been exercised or the expiration of any rights
of conversion or exchange under any such Convertible
Securities which (or purchase by the Issuer and cancellation
or retirement of any such Convertible Securities the rights of
conversion or exchange under which) shall not have been
exercised, the adjustment to the number of Warrant Shares
pursuant to paragraph (n) of this Section 5 and the Exercise
Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date,
or date prior to the commencement of ex-dividend trading, as
the case may be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration (or
such cancellation or retirement, as the case may be), be
recomputed as if:
(A) in the case of Options for Common Stock or
Convertible Securities, the only additional shares of
Common Stock issued or sold were the additional
shares of Common Stock, if any, actually issued or
sold upon the exercise of such Options or the
conversion or exchange of such Convertible Securities
and the consideration received therefor was the
consideration actually received by the Issuer for the
issue, sale, grant or assumption of all such Options,
whether or not exercised, plus the consideration
actually received by the Issuer upon such exercise,
or for the issue or sale of all such Convertible
Securities which were actually converted or
exchanged, plus the additional consideration, if any,
actually received by the Issuer upon such conversion
or exchange, and
(B) in the case of Options for Convertible
Securities, only the Convertible Securities, if any,
actually issued or sold upon the exercise of such
Options were issued at the time of the issue, sale,
grant or assumption of such Options, and the
consideration received by the Issuer for the
additional shares of Common Stock deemed to have then
been issued was the consideration actually received
by the Issuer for the issue, sale, grant or
assumption of all such Options, whether or not
exercised, plus the consideration deemed to have been
received by the Issuer upon the issue or sale of such
Convertible Securities with respect to which such
Options were actually exercised;
14
<PAGE>
(iv) no readjustment pursuant to subdivision (ii) or
(iii) above shall have the effect of (A) increasing the
Exercise Price by an amount in excess of the amount of the
adjustment thereof originally made in respect of the issue,
sale, grant or assumption of such Options or Convertible
Securities, or (B) increasing the number of Warrant Shares by
an amount in excess of the amount of the adjustment thereof
originally made in respect of the issue, sale, grant or
assumption of such Options or Convertible Securities; and
(v) in the case of any such Options which expire by
their terms not more than 30 days after the date of issue,
sale, grant or assumption thereof, no adjustment to the number
of Warrant Shares or the Exercise Price shall be made until
the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in subdivision
(c) above.
As used herein, the term "Convertible Securities" shall mean
any evidences of indebtedness, shares of stock (other than Common
Stock) or other securities directly or indirectly convertible into or
exchangeable for shares of Common Stock.
As used herein, the term "Options" shall mean any rights,
options or warrants to subscribe for, purchase or otherwise acquire
either shares of Common Stock or Convertible Securities.
For the purposes of making adjustments to the Exercise Price
pursuant to paragraph (c) of this Section 5, the consideration per
share of Common Stock deemed to have been issued by the Issuer pursuant
to this paragraph (o) shall be determined by dividing:
(i) the total amount, if any, received and receivable
by the Issuer as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect
against dilution) payable to the Issuer upon the exercise in
full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities; by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities.
15
<PAGE>
(p) Notwithstanding the provisions of any other paragraph of
this Section 5, (i) up to Thirty-Five Thousand Six Hundred Fifty
(35,650) shares of Common Stock issued by the Issuer pursuant to
certain options granted to employees of the Issuer at an exercise price
of Five Dollars ($5.00) per share shall be exempt from all adjustment
requirements contained in this Section 5, (ii) in the event of a
Qualified Public Offering, adjustment to this Warrant shall be made
pursuant to paragraph (o) of this Section 5 for certain options to
purchase up to One Hundred Thirty-Seven Thousand One Hundred Eighty
(137,180) shares of Common Stock granted to Howard Tullman and Jerry
Mickelson as of the date hereof, to the extent such options thereafter
become exercisable, as if such options had been granted prior to the
date of such Qualified Public Offering, and (iii) all calculations of
the number of shares of Common Stock on a fully diluted basis shall not
include the shares referred to in this paragraph except to the extent
such options become exercisable pursuant to clause (ii) hereof.
Section 6. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS. In each case of any
adjustment or readjustment in the shares of Common Stock issuable upon the
exercise of this Warrant, the Issuer at its expense will promptly compute such
adjustment or readjustment in accordance with the terms of this Warrant. Upon
the Holder's request, the Issuer shall cause independent certified public
accountants of recognized national standing to verify such computation and
prepare a report setting forth such adjustment or readjustment and show in
reasonable detail the method of calculation thereof and the facts upon which
such adjustment or readjustment is based, including a statement of (i) the
consideration received or to be received by the Issuer for any additional shares
of Common Stock issued or sold or deemed to have been issued, (ii) the number of
shares of Common Stock outstanding or deemed to be outstanding, and (iii) the
Exercise Price in effect immediately prior to such issue or sale and as adjusted
and readjusted (if required by Section 5) on account thereof, and will forthwith
mail a copy of each such report to the Holder.
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 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.
16
<PAGE>
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 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 twenty (20) 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:
Straight Arrow Publishers Company, L.P.
1290 Avenue of the Americas
New York, New York 10104
Attention: CFO
(b) if to the Company, to:
JAMtv Corporation
640 North LaSalle Street
Suite 560
Chicago, Illinois 60610
Attention: CEO
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<PAGE>
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.
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.
Dated: November 10, 1997
JAMTV CORPORATION
By: /s/ Howard A. Tullman
-----------------------------------
Name: Howard A. Tullman
----------------------------------
Title:
--------------------------------
ATTEST:
, Secretary
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SCHEDULE I
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant and
to purchase ______ shares of JAMtv Corporation 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: _______________________, 19___
Name of Registered Owner:______________________________________________________
______________________________________________________________________________
Address:______________________________________________________________________
______________________________________________________________________________
Signature:____________________________________________________________________
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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
JAMTV CORPORATION
JANUARY 1, 1999
This certifies that, for value received, Source Enterprises, Inc. (the
"Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from JAMtv Corporation, a Delaware corporation (the "Issuer"), subject to
adjustment pursuant to the terms hereunder, up to Seventy Five Thousand (75,000)
fully paid and nonassessable shares of common stock, $.01 par value (the "Common
Stock"), of the Issuer at an exercise price equal to Ten Dollars ($10.00) per
share (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"). This Warrant was originally issued in
connection with the execution and delivery of an Affiliation Agreement, dated as
of January 1, 1999, by and between the Issuer and the Holder (the "Affiliation
Agreement"). Terms used herein and not otherwise defined shall have the meaning
ascribed to them in the Affiliation Agreement.
Section 1. EXERCISE OF WARRANT.
(a) Subject to the provisions hereof, this Warrant may be
exercised, in whole or in part (but not as to a fractional share), at
any time and from time to time before the Cancellation Date, as defined
below, and on or after the earliest to occur of the following events
(each, a "Trigger Event"): (i) the date on which the Affiliation
Agreement has been in full force and effect for a period of five
continuous years from the date hereof, or (ii) a Qualified Public
Offering, as defined below, or (iii) a Qualified Private Offering, as
defined below. The "Cancellation Date" shall be the earliest to occur
of the following dates: (x) the date on which the Affiliation Agreement
terminates if such termination occurs during the Initial Term, as
defined in the Affiliation Agreement, or (y) the expiration of the
Initial Term if the Affiliation Agreement is not renewed beyond the
Initial Term and a Trigger Event has not then occurred, PROVIDED,
HOWEVER, that if a Qualified Public Offering or a Qualified Private
Offering occurs within six months after
<PAGE>
such expiration date, then the Cancellation Date described in this
subsection (y) shall be extended automatically and without further
action of the Holder or the Issuer until December 31, 2008, or (z)
December 31, 2008. If then currently exercisable, 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 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 (if applicable) by (i) cash, (ii) a certified
check payable to the order of the Issuer, (iii) shares of the
Issuer's common stock duly endorsed over to the Issuer (which shares
shall be valued at the Fair Market Value (as defined below)), (iv)
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 (v) 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.
As used herein, "Qualified Public Offering" shall mean a
primary or secondary sale of shares of Common Stock to the public
pursuant to a public offering registered under the Securities Act of
1933, as amended (the "Securities Act"), where the aggregate net
proceeds to the Issuer (after deducting underwriting discounts and
commissions and expenses of the offering) from the offering of the
shares of Common Stock so registered are at least $15,000,000.
As used herein, "Qualified Private Offering" shall mean a
private offering of equity securities where the aggregate net proceeds
to the Issuer from the offering of such securities are at least
$15,000,000.
(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:
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<PAGE>
"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.
(c) Notwithstanding any provisions herein to the contrary, if
the Fair Market Value (hereinafter defined) of one share of Common
Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the
Holder may elect to receive shares equal to the value (as determined
below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Issuer
together with the properly endorsed Election to Purchase and notice of
such election in which event the Issuer shall issue to the Holder (the
date thereof being the "Exercise Date") a number of shares of Common
Stock computed using the following formula:
Y (A-B)
X = ------
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the total number of shares of
Common Stock purchasable under the
Warrant or, if only a portion of the
Warrant is being exercised, the
portion of the Warrant being
canceled (at the date of such
calculation)
A = the Fair Market Value of one share
of the Issuer's Common Stock (at the
date of such calculation)
3
<PAGE>
B = Exercise Price (as adjusted to the date
of such calculation)
For purposes of the above calculation, if the Common Stock is listed
or quoted on a national securities exchange, the NASDAQ Stock
Market, or another nationally recognized exchange or trading system
as of the Exercise Date, the Fair Market Value per share of the
Common Stock shall be deemed to be the last reported sale price per
share of Common Stock thereon on the Exercise Date or, if no such
price is reported on such date, such price on the next preceding
business day; provided, however, that if no such price is reported
on the next preceding business day, or if the Common Stock is not
listed or quoted on a national securities exchange, the NASDAQ Stock
Market or another nationally recognized exchange or trading system
as of the Exercise Date, the Fair Market Value per share of Common
Stock shall be deemed to be the amount most recently determined in
good faith by the Board of Directors to represent the Fair Market
Value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or
issuing Common Stock under an employee benefit plan of the Issuer);
and upon request of the Holder, the Board of Directors (or a
representative thereof) shall promptly notify the Holder of the Fair
Market Value per share of Common Stock. Notwithstanding the
foregoing, if the Board of Directors has not made such a
determination within the three-month period prior to the Exercise
Date, then (A) the Fair Market Value per share of Common Stock shall
be the amount next determined in good faith by the Board of
Directors to represent the fair market value per share of the Common
Stock (including without limitation a determination for purposes of
granting Common Stock options or issuing Common Stock under an
employee benefit plan of the Issuer), (B) the Board of Directors
shall make such a determination within 10 days of a request by the
Holder that it do so, and (C) the exercise of this Warrant pursuant
to subsection 1(c) shall be delayed until such determination is made.
(d) 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.
4
<PAGE>
(e) No Warrant Shares shall be issued upon exercise of this
Warrant until the Holder (or its transferees) executes and delivers
to the Issuer its agreement to be bound by the terms and conditions
of the Stockholders' Agreement, dated as of June 2, 1997, as
amended, by and between the Issuer and its stockholders, as the same
may be amended from time to time (the "Stockholders' Agreement"),
unless at the time of exercise, such agreement has terminated in
accordance with its terms. The Holder (and its transferees) shall be
bound by, and deemed to be a party to, the Stockholders' Agreement
even if the Issuer issues Warrant Shares without the Holder (or its
transferees) executing and agreeing to be bound by the terms of such
agreement.
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 Cancellation 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
5
<PAGE>
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.
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 certificates representing such Warrant Shares
shall have been issued and delivered thereto. Issuer shall issue Warrant Shares
in accordance with the terms of this Warrant.
Section 5. ADJUSTMENTS IN EXERCISE PRICE AND WARRANT SHARES. The
Exercise Price and Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 5.
(a) 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.
(b) 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.
(c) 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
6
<PAGE>
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.
(d) In case of any consolidation of the Issuer with, or merger
of the Issuer into, any other corporation (other than a consolidation
or merger in which the Issuer is the continuing corporation and in
which no change occurs in its outstanding Common Stock), or in case of
any sale or transfer of all or substantially all of the assets of the
Issuer, or in the case of any statutory exchange of securities with
another corporation (including any exchange effected in connection with
a merger of a third corporation into the Issuer, except where the
Issuer is the surviving entity and no change occurs in its outstanding
Common Stock), the corporation formed by such consolidation or the
corporation resulting from such merger or the corporation which shall
have acquired such assets or securities of the Issuer, as the case may
be, shall execute and deliver to the Holder simultaneously therewith a
new Warrant, satisfactory in form and substance to the Holder, together
with such other documents as the Holder may reasonably request,
entitling the Holder thereof to receive upon exercise of such Warrant
the kind and amount of shares of stock and other securities and
property receivable upon such consolidation, merger, sale, transfer, or
exchange of securities, or upon the dissolution following such sale or
other transfer, by a holder of the number of shares of Common Stock
purchasable upon exercise of this Warrant immediately prior to such
consolidation, merger, sale, transfer, or exchange. Such new Warrant
shall contain the same basic other terms and conditions as this Warrant
and shall provide for adjustments which, for events subsequent to the
effective date of such written instrument, shall be as nearly
equivalent as may be practicable to the adjustments provided for in
this Section 5. The above provisions of this paragraph (d) shall
similarly apply to successive consolidations, mergers, exchanges, sales
or other transfers covered hereby.
(e) 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
7
<PAGE>
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.
(f) The term "Common Stock" shall mean the Common Stock, $.01
par value, of the Issuer as the same exists as of the date hereof 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.
(g) 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 and the effect of the
adjustments.
(h) Notwithstanding any other provision, this Warrant shall be
binding upon and inure to the benefit of any successors and assigns of
the Issuer.
(i) 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 (i) shall be carried forward and
taken into account at the time of any subsequent adjustment in the
Exercise Price.
(j) 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.
(k) 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 6. 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
8
<PAGE>
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 7. 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 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 8. 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:
9
<PAGE>
(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:
SOURCE ENTERPRISES, INC.
215 Park Avenue South
11th floor
New York, NY 10003
Attn.: David Mays
With a copy to:
Schekter Rishty Goldstein & Blumenthal P.C.
1500 Broadway
New York, New York 10036
Attn: Neil Goldstein
(b) if to the Company, to:
JAMtv Corporation
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.
10
<PAGE>
Section 9. 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.
Dated: January 1, 1999
JAMTV CORPORATION
By: /s/ Howard A. Tullman
-----------------------------------
Name: Howard A. Tullman
----------------------------------
Title: CEO
--------------------------------
ATTEST:
/s/ Howard B. Katz
- ------------------------------
(Assistant) Secretary
11
<PAGE>
SCHEDULE I
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant and
to purchase ______ shares of JAMtv Corporation 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:____________________________________________________________________
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<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated as of June 2, 1997 by
and among JAMtv Corporation, a Delaware corporation (the "COMPANY"), each of the
Persons identified on the signature pages hereto as a GS Investor (individually,
a "GS INVESTOR" and collectively, the "GS INVESTORS") and each of the Persons
identified on the signature pages hereto as an Existing Investor (individually,
an "EXISTING INVESTOR" and collectively, the "EXISTING INVESTORS" and together
with the GS Investors, the "INVESTORS").
WHEREAS, Digital Entertainment Networks, L.L.C., an Illinois
limited liability company (the "ILLINOIS PREDECESSOR"), conducted business as
JAMtv Music Network;
WHEREAS, simultaneously with the execution of this Agreement, all
of the members of the Illinois Predecessor contributed all of their membership
interests in the Illinois Predecessor to the Company in exchange for common
stock of the Company (the "TRANSFER");
WHEREAS, simultaneously with the execution of this Agreement and
with the Transfer, all of the assets and liabilities of the Illinois Predecessor
were distributed to the Company as the sole member (such step, together with the
steps described in the previous recital, the "REORGANIZATION") and the Company,
as the sole member of the Illinois Predecessor, will effect the dissolution of
the Illinois Predecessor (the "DISSOLUTION");
WHEREAS, the Company's Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware as of May 29, 1997,
among other things, (a) authorizes a class of Convertible Preferred Stock,
consisting of 2,500,000 shares, par value $.01 per share, which shares have been
designated as Series A Convertible Preferred Stock (the "SERIES A PREFERRED
STOCK"), (b) authorizes 8,000,000 shares of Common Stock of the Company, par
value $.01 per share (the "COMMON STOCK"), (c) authorizes 2,000,000 shares of
preferred stock, par value $.01 per share and (d) sets forth the terms,
designations, powers, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions, of
the Series A Preferred Stock; and
WHEREAS, the Company wishes to sell to the Investors, and the
Investors wish to purchase from the Company, an aggregate of 1,666,666 shares of
Series A Preferred Stock on the terms and subject to the conditions contained
herein;
NOW, THEREFORE, the parties hereto, intending to be bound hereby,
do agree as follows:
<PAGE>
SECTION 1. DEFINITIONS. In this Agreement, the following terms
have the meanings specified or referred to in this SECTION 1 and shall be
equally applicable to both the singular and plural forms.
"BENEFIT PLAN" means any plan, program, policy, payroll practice,
contract, or other arrangement providing for fringe benefits or other employee
benefits of any kind, whether formal or informal, funded or unfunded, and
whether or not legally binding, including, without limitation each "employee
benefit plan," within the meaning of Section 3(3) of ERISA which is now or
previously has been maintained, contributed to, or required to be contributed to
by the Company or the Illinois Predecessor for the benefit of any kind of the
employees of either of them, and pursuant to which the Company has or may have
any liability, contingent or otherwise.
"CERTIFICATE OF INCORPORATION" means the Restated Certificate of
Incorporation of the Company in the form attached hereto as EXHIBIT 1.
"CLOSING" has the meaning specified in SECTION 2.4.
"CLOSING DATE" has the meaning specified in SECTION 2.4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" has the meaning specified in the fourth recital to
this Agreement.
"COMPANY" has the meaning specified in the first paragraph of
this Agreement.
"COURT ORDER" means any judgment, order, award or decree of any
foreign, federal, state, local or other court or tribunal and any award in any
arbitration proceeding.
"DOCUMENTS" means this Agreement, the Registration Rights
Agreement and the Stockholders' Agreement.
"EMPLOYMENT AGREEMENTS" means employment agreements between the
Company and each of Howard Tullman, Patrick Blake and Jerry Mickelson in the
forms attached hereto as EXHIBIT 5, EXHIBIT 6 and EXHIBIT 7, respectively.
"ENCUMBRANCE" means any lien, claim, charge, security interest,
mortgage, pledge, easement, conditional sale or other title retention agreement,
defect in title, covenant or other restrictions of any kind.
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"ENVIRONMENTAL COSTS" means, without limitation, any actual or
potential cleanup costs, remediation, removal, or other response costs (which
without limitation shall include costs to cause the Company to come into
compliance with Environmental Laws), investigation costs (including without
limitation reasonable fees of consultants, counsel, and other experts in
connection with any environmental investigation, testing, audits or studies),
losses, liabilities or obligations (including without limitation, liabilities or
obligations under any lease or other contract), payments, damages (including
without limitation any actual, punitive or consequential damages under any
statutory laws, common law cause of action or contractual obligations or
otherwise, including without limitation damages (a) of third parties for
personal injury or property damage, or (b) to natural resources), civil or
criminal fines or penalties, judgments, and amounts paid in settlement arising
out of or relating to or resulting from any Environmental Matter.
"ENVIRONMENTAL LAWS" means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601
ET SEQ., the Emergency Planning and Community Right-to-Know Act of 1986, 42
U.S.C. Sections 11001 ET SEQ., the Resource Conservation and Recovery Act, 42
U.S.C. Sections 6901 ET SEQ., the Occupational Safety and Health Act, 29 U.S.C.
Sections 641, ET SEQ., as any of the above statutes have been or may be amended
from time to time, all rules and regulations promulgated pursuant to any of the
above statutes, and any other Requirements of Laws governing Environmental
Matters, as the same have been or may be amended from time to time, including
any common law cause of action providing any right or remedy with respect to
Environmental Matters.
"ENVIRONMENTAL MATTER" means any matter arising out of, relating
to, or resulting from pollution, contamination, protection of the environment,
human health or safety, health or safety of employees, sanitation, and any
matters relating to emissions, discharges, disseminations, releases or
threatened releases, of Hazardous Substances into the air (indoor and outdoor),
surface water, groundwater, soil, land surface or subsurface, buildings,
facilities, real or personal property or fixtures or otherwise arising out of,
relating to, or resulting from the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA AFFILIATE" means any (i) corporation which is a member of
the same controlled group of corporations (within the meaning of Section 414(b)
of the Code) as the Company (or, with respect to periods prior to the
Reorganization, the Illinois Predecessor), (ii) partnership or other trade or
business under
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common control (within the meaning of Section 414(c) of the Code) with the
Company (or, with respect to periods prior to the Reorganization, the
Illinois Predecessor), and (iii) member of the same affiliated service group
(within the meaning of Section 414(m) of the Code) as the Company (or, with
respect to periods prior to the Reorganization, the Illinois Predecessor),
any corporation described in clause (i) or any partnership or other trade or
business described in clause (ii).
"EXISTING INVESTOR PURCHASE PRICE" has the meaning specified in
SECTION 2.2.
"EXISTING INVESTORS" has the meaning specified in the first
paragraph of this Agreement.
"GOVERNMENTAL BODY" means any foreign, federal, state, local or
other governmental authority or regulatory body.
"GS INVESTORS" has the meaning specified in the first paragraph
of this Agreement.
"GS PURCHASE PRICE" has the meaning specified in SECTION 2.2.
"HAZARDOUS SUBSTANCES" means any pollutants, contaminants, toxic
or hazardous or extremely hazardous substances, materials, wastes, constituents
or chemicals (including, without limitation, petroleum or any by-products or
fractions thereof, any form of natural gas, asbestos and asbestos-containing
materials, polychlorinated biphenyls ("PCBs") and PCB-containing equipment,
radon and other radioactive elements, infectious, carcinogenic, mutagenic, or
etiologic agents) that are regulated by, or may now or in the future form the
basis of liability under, any Environmental Laws.
"ILLINOIS PREDECESSOR" has the meaning specified in the first
recital to this Agreement.
"IMAGINATION PILOTS AGREEMENTS" means the agreements between the
Company and Imagination Pilots, Inc. in the forms attached hereto as EXHIBIT 8
and EXHIBIT 9.
"INDEMNIFIED PERSONS" has the meaning specified in SECTION 10.1.
"INTELLECTUAL PROPERTY RIGHTS" means all intellectual property
rights, including, without limitation, Proprietary Technology, patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, know-how, franchises,
licenses, trade secrets, proprietary processes and formulae.
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"INTERIM FINANCIALS" has the meaning specified in SECTION 3.8.
"INVESTORS" has the meaning specified in the first paragraph of
this Agreement.
"JAM PRODUCTIONS AGREEMENTS" means the agreements between the
Company (in the case of EXHIBIT 10, as successor to the Illinois Predecessor)
and Jam Productions, Ltd. in the forms attached hereto as EXHIBIT 10 and EXHIBIT
11.
"LOSS" has the meaning specified in SECTION 10.1.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i)
the business, assets, liabilities, results of operations, condition (financial
or otherwise) or prospects of the Company or (ii) on the ability of the Company
to perform its obligations under or with respect to, or to consummate the
transactions contemplated by, the Documents.
"PERMITTED ENCUMBRANCES" means (a) liens for Taxes and other
governmental charges and assessments which are not yet due and payable or which
are the subject of a good faith dispute and for which the Company has made
proper reserves, (b) liens of landlords and liens of carriers, warehousemen,
mechanics and materialmen and other like liens arising in the ordinary course of
business for sums not yet due and payable (provided that any such non-consensual
lien secures only obligations not in default and the holder thereof has not
taken any steps to enforce it), (c) other liens or imperfections on property
which are not material in amount or do not materially detract from the value of
or materially impair the existing use of the property affected by such lien or
imperfection and (d) liens identified on SCHEDULE 1 hereto.
"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization or Governmental Body.
"PROPRIETARY TECHNOLOGY" means all source and object code,
algorithms, architecture, structure, software, firmware, display screens,
layouts, processes, inventions, trade secrets, know-how, development tools and
other proprietary rights owned by the Company (or owned by the Illinois
Predecessor prior to the Reorganization), pertaining to any product or service
manufactured, marketed or sold, or proposed to be manufactured, marketed or sold
(as the case may be), by the Company, or used, employed or exploited in the
development, license, sale, marketing, distribution or maintenance thereof, and
all documentation and media constituting, describing or relating to the above,
including, without limitation, manuals, memoranda,
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know-how, notebooks, patents and patent applications, trademarks and
trademark applications, copyrights and copyright applications, records and
disclosures.
"PURCHASE PRICE" has the meaning specified in SECTION 2.2.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement in the form of EXHIBIT 2 hereto.
"REORGANIZATION" has the meaning specified in the third recital
to this Agreement.
"REQUIREMENTS OF LAWS" means any foreign, federal, state and
local laws, statutes, regulations, rules, codes or ordinances enacted, adopted,
issued or promulgated by any Governmental Body or common law.
"SERIES A PREFERRED STOCK" has the meaning specified in the
fourth recital to this Agreement.
"SERIES A RESERVED SHARES" has the meaning specified in SECTION
2.1.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement in
the form of EXHIBIT 3 hereto.
"TAX" means any federal, state, local or foreign net income,
alternative or add-on minimum, gross income, gross receipts, property, sales,
use, transfer, gains, license, excise, employment, payroll, withholding or
minimum tax, or any other tax custom, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or any
penalty, addition to tax or additional amount imposed by any Governmental Body.
"TAX RETURN" means any return, report or similar statement
required to be filed with respect to any Taxes (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return and declaration of estimated Tax.
"TRANSFER" has the meaning specified in the second recital to
this Agreement.
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SECTION 2. ISSUANCE AND SALE OF SERIES A PREFERRED STOCK.
2.1. ISSUANCE OF SERIES A PREFERRED STOCK AND RESERVATION OF
SERIES A RESERVED SHARES. Subject to the terms and conditions hereof, the
Company has authorized (a) the issuance on the Closing Date of 1,666,666 shares
of Series A Preferred Stock, and (b) the reservation of such number of shares of
Common Stock as is necessary, but not less than 1,666,666 shares of Common
Stock, for issuance upon conversion of the Series A Preferred Stock (such
reserved shares being referred to herein as the "SERIES A RESERVED SHARES").
2.2. AGREEMENT TO SELL AND PURCHASE THE SERIES A PREFERRED
STOCK. At the Closing, (a) the Company is issuing and selling, and each GS
Investor is purchasing from the Company, upon the terms and subject to the
conditions hereinafter set forth, the number of shares of Series A Preferred
Stock set forth in SCHEDULE I, for the purchase price set forth in SCHEDULE I
(representing an aggregate purchase price of $4,500,000 (the "GS PURCHASE
PRICE") for all the shares of Series A Preferred Stock being sold to the GS
Investors);
(b) the Company is issuing and selling, and each Existing
Investor is purchasing from the Company, upon the terms and subject to the
conditions hereinafter set forth, the number of shares of Series A Preferred
Stock set forth in SCHEDULE I, for the purchase price set forth in SCHEDULE I
(representing an aggregate purchase price of $500,000.00 (the "EXISTING INVESTOR
PURCHASE PRICE" and aggregated with the GS Purchase Price, the "PURCHASE PRICE")
for all the shares of Series A Preferred Stock being sold to the Existing
Investors).
2.3. DELIVERY OF SERIES A PREFERRED STOCK TO THE INVESTORS.
At the Closing, the Company is delivering to each GS Investor and each
Existing Investor one certificate representing the number of shares of Series
A Preferred Stock being purchased by such Investor, registered in the name of
such Investor. Delivery of such certificate to each Investor is being made
against receipt by the Company from such Investor of the portion of the
Purchase Price to be paid by such Investor (as set forth in SCHEDULE I
hereto), which amount is being paid, in the case of each GS Investor, by a
wire transfer to an account designated at least two business days prior to
the Closing Date by the Company, or in the case of each Existing Investor, by
the cancellation by such Existing Investor of a promissory note of the
Company payable to such Existing Investor in an amount equal to the portion
of the Purchase Price to be paid by such Existing Investor.
2.4. THE CLOSING. The closing (the "Closing") hereunder with
respect to the transactions contemplated hereby is
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taking place at the offices of Freeborn & Peters, 311 South Wacker Drive,
Suite 3000, Chicago, Illinois, simultaneously with the execution and delivery
of this Agreement (the "CLOSING DATE").
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to the Investors as follows:
3.1. REORGANIZATION. (a) Except as set forth on SCHEDULE 3.1
hereto, the Reorganization complied and the Dissolution will comply in all
respects with all applicable provisions of federal and state law.
(b) The Reorganization transferred good and sufficient title
to all properties and assets, real, personal or mixed, tangible or intangible,
owned or held by the Illinois Predecessor, and all obligations and liabilities
of the Illinois Predecessor, to the Company.
(c) The Reorganization did not and the Dissolution will not:
(i) violate any Court Order or Requirements of Laws
applicable to the Illinois Predecessor or the Company or any of their
properties or assets,
(ii) conflict with or result in any breach of any of the
terms, conditions or provisions of, or constitute (with due notice or
lapse of time, or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the
creation of any Encumbrance upon any of the properties or assets of the
Illinois Predecessor or the Company under, (A) the Certificate of
Incorporation of the Company, the articles of organization of the
Illinois Predecessor or the Operating Agreement of the Illinois
Predecessor, (B) the by-laws of the Company or (C) any note, indenture,
mortgage, lease agreement or other contract, agreement or instrument to
which the Illinois Predecessor or the Company is or was a party or by
which any of them or the properties or assets of any of them is or was
bound or affected, or
(iii) require the approval, consent, authorization or act of,
or the making of any declaration, filing or registration with, any
Person, except for articles of dissolution of the Illinois Predecessor
to be filed with the Secretary of the State of the State of Illinois and
except for approvals and consents which have been obtained.
(d) SCHEDULE 3.1 contains a list of all holders of membership
or other equity interests in the Illinois Predecessor that were outstanding as
of the time immediately prior to the
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Reorganization, including the number of membership or other equity interests
held by such holder. All of such membership or other equity interests were
validly issued, were not issued in violation of any preemptive or similar
rights, and were issued in compliance with all applicable federal and state
securities laws.
3.2. ORGANIZATION AND GOOD STANDING; POWER AND AUTHORITY;
QUALIFICATIONS. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as presently conducted and as proposed to
be conducted and to carry out the transactions contemplated by this Agreement.
The Company is qualified to transact business as a foreign corporation in, and
is in good standing under the laws of, those jurisdictions listed on SCHEDULE
3.2 hereto, which jurisdictions constitute all of the jurisdictions wherein the
character of the property owned or leased or the nature of the activities
conducted by the Company makes such qualification necessary.
3.3. AUTHORIZATION OF THE DOCUMENTS. The execution, delivery
and performance by the Company of each of the Documents have been duly
authorized by all requisite corporate action by the Company, and each Document
constitutes a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms except to the extent that
enforceability may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally or equitable principles.
The execution, delivery and performance of the Documents and the
consummation of the transactions contemplated thereby, the compliance with the
provisions thereof by the Company and the issuance, sale and delivery of the
Series A Preferred Stock and the Series A Reserved Shares by the Company will
not:
(a) violate any Court Order or Requirements of Laws
applicable to the Company or any of its properties or assets,
(b) conflict with or result in any breach of any of the
terms, conditions or provisions of, or constitute (with due notice or
lapse of time, or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the
creation of any Encumbrance upon any of the properties or assets of the
Company under, (i) the Certificate of Incorporation, (ii) the by-laws of
the Company or (iii) any note, indenture, mortgage, lease agreement or
other contract, agreement or instrument to which the Company is a party
or by which it or any of its properties or assets is bound or affected,
or
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(c) require the approval, consent, authorization or act of,
or the making of any declaration, filing or registration with, any
Person (other than such notifications or filings required under
applicable state securities laws, if any, which shall be made by the
Company on a timely basis).
3.4. CAPITALIZATION. (a) The authorized capital stock of the
Company immediately upon the consummation at the Closing of the transactions
contemplated hereby shall consist of:
(i) 2,500,000 shares of Series A Preferred Stock, of which
1,666,666 shall have been validly issued to the Investors and be
outstanding, fully paid and non-assessable, with no personal liability
attaching to the ownership thereof, and no other shares of Series A
Preferred Stock shall be issued or outstanding;
(ii) 8,000,000 shares of Common Stock, of which (x) 1,150,530
shares shall have been validly issued and be outstanding, fully paid and
non-assessable, with no personal liability attaching to the ownership
thereof; and (y) 2,500,000 shares shall have been duly reserved for
issuance upon the conversion of the Series A Preferred Stock; and
(iii) 2,000,000 shares of preferred stock, par value $.01 per
share, issuable in series, of which none are outstanding.
(b) SCHEDULE 3.4 hereto contains a list of (i) all holders of
capital stock of the Company, including the number of shares of capital stock
held by each such holder, and (ii) all outstanding warrants, options,
agreements, convertible securities or other commitments pursuant to which the
Company is or may become obligated to issue any shares of the capital stock or
other securities of the Company, which names all Persons entitled to receive
such shares or other securities and the shares of capital stock or other
securities required to be issued thereunder as of the date hereof, in each case
(i) and (ii), immediately upon the consummation of the Closing of the
transactions contemplated hereby. All of the outstanding capital stock and
other securities of the Company were issued in compliance with all applicable
federal and state securities laws.
(c) Except as set forth on SCHEDULE 3.4 or as contemplated by
the Documents, there are, and immediately upon consummation at the Closing of
the transactions contemplated hereby, there will be, no preemptive or similar
rights to purchase or otherwise acquire shares of the capital stock of the
Company pursuant to any provision of law, the Certificate of Incorporation or
by-laws of the Company (in each case as amended and in effect on the date
hereof), or any agreement to which the Company is a party; and, except as
contemplated by the Documents,
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there is, and immediately upon the consummation at the Closing of the
transactions contemplated hereby, there will be, to the best knowledge of the
Company, no agreement, restriction or encumbrance (such as a right of first
refusal, right of first offer, proxy, voting agreement, voting trust,
registration rights agreement, stockholders' agreement, etc.) with respect to
the sale or voting of any shares of capital stock of the Company (whether
outstanding or issuable upon conversion or exercise of outstanding
securities). The transactions contemplated by the Documents will not trigger
any anti-dilution protection provisions given by the Company to any Person or
entity (including without limitation, any stockholder, lender, warrant
holder, lessor and/or licensee).
3.5. AUTHORIZATION OF THE SERIES A PREFERRED STOCK, AND SERIES
A RESERVED SHARES. The authorization, issuance, sale and delivery of the Series
A Preferred Stock and the authorization, reservation, issuance, sale and
delivery of the Series A Reserved Shares have been duly authorized by all
requisite corporate action of the Company, and when issued, sold and delivered
in accordance with this Agreement, the Series A Preferred Stock and the Series A
Reserved Shares will be validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof, and
not subject to preemptive or any other similar rights of the stockholders of the
Company or others. The terms, designations, powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions, of the Series A Preferred Stock are as stated in
the Certificate of Incorporation. The holders of the Series A Preferred Stock
are parties to the Stockholders' Agreement and are subject to the terms thereof.
3.6. EQUITY INVESTMENTS. Other than the Company's prior
ownership of all of the issued and outstanding equity interests in the Illinois
Predecessor, neither the Company nor the Illinois Predecessor has ever had, nor
does either of them currently have, any subsidiaries, nor has either of them
owned, nor does either of them presently own, any capital stock or other
proprietary interest, directly or indirectly, in any corporation, association,
trust, partnership, limited liability company, joint venture or other entity.
3.7. INTELLECTUAL PROPERTY RIGHTS. Except as set forth on
SCHEDULE 3.7 hereto:
(a) the Company owns, possesses, has the exclusive right to
use, has the right to bring actions for the infringement of, and, where
necessary, has made timely and proper application for, all Intellectual
Property Rights necessary or required for the conduct of its business as
presently conducted or as presently proposed to be conducted
(collectively, the "REQUISITE RIGHTS"), including, without
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limitation, the Intellectual Property Rights identified on SCHEDULE 3.7;
(b) SCHEDULE 3.7 lists all patents, patent applications,
trademarks, trademark applications, registered copyrights and licenses
necessary or required for the conduct of the Company's business as
currently conducted or as proposed to be conducted;
(c) except as set forth in SCHEDULE 3.7, no royalties,
honoraria or fees are payable by the Company or were payable by the
Illinois Predecessor prior to the Reorganization to other persons by
reason of the ownership or use of the Requisite Rights;
(d) no product, service or process manufactured, marketed,
sold or used, or proposed to be manufactured, marketed, sold or used, by
the Company or by the Illinois Predecessor prior to the Reorganization
violates or violated any license or, to the best knowledge of the
Company, will violate any license, or, to the best knowledge of the
Company, infringes upon, or will infringe upon, any Intellectual
Property Rights of any other Person;
(e) there is no litigation (nor to the best knowledge of the
Company does there exist any basis therefor) contesting the validity of
the Intellectual Property Rights of the Company or the right of the
Company to use any product, service or process manufactured, marketed,
sold or used or proposed to be manufactured, marketed, sold or used by
the Company or by the Illinois Predecessor prior to the Reorganization;
(f) there is no pending or, to the knowledge of the Company,
threatened claim (nor to the best knowledge of the Company does there
exist any basis therefor) contesting the validity of the Intellectual
Property Rights of the Company or the right to use any product, service
or process manufactured, marketed, sold or used or proposed to be
manufactured, marketed, sold or used by the Company or by the Illinois
Predecessor prior to the Reorganization; and
(g) neither the Company nor the Illinois Predecessor has
received any notice that any of the Requisite Rights or the operation or
proposed operation of the Company's business conflicts or will conflict
with the asserted rights of any other Person, nor to the best knowledge
of the Company does there exist any basis for any such conflict.
3.8. FINANCIAL INFORMATION. (a) The Company has previously
delivered to each Investor the following financial information:
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(i) the unaudited statement of financial position of the
Illinois Predecessor as of April 30, 1997, and the related unaudited
statements of income, shareholders' equity and cash flows for the
four-month period then ended (the "INTERIM FINANCIALS"); and
(ii) the unaudited statements of financial position of the
Illinois Predecessor as of December 31, 1996, and the related statements
of income, shareholders' equity and cash flows for year then ended.
(b) Except as set forth on SCHEDULE 3.8 hereto, the financial
statements referred to in the foregoing clause (a) of this SECTION 3.8: (i) are
in accordance with the books and records of the Illinois Predecessor; (ii)
fairly present the financial condition and the results of operations of the
Illinois Predecessor as of the dates and for the periods indicated; and (iii)
have been prepared in accordance with generally accepted accounting principles
consistently applied.
3.9. ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth
on SCHEDULE 3.9 hereto, the Company has no obligations or liabilities of any
nature (matured or unmatured, fixed or contingent) other than (i) obligations
disclosed or provided for in the Interim Financials and (ii) obligations or
liabilities incurred by the Company or the Illinois Predecessor in the ordinary
course of business since April 30, 1997, none of which either individually or in
the aggregate has been or could reasonably be expected to be material to the
business, assets, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company.
3.10. ABSENCE OF CHANGES. Except as set forth on SCHEDULE 3.10
hereto and except for the Reorganization, since April 30, 1997, there has not
been:
(a) any material adverse change in the business, assets,
liabilities, results of operations, condition (financial or otherwise)
or prospects of the Company (or, with respect to periods prior to the
Reorganization, the Illinois Predecessor) or, to the best knowledge of
the Company, any circumstances or development which could reasonably be
expected to give rise to such a change,
(b) any indebtedness incurred by the Company or the Illinois
Predecessor for borrowed money,
(c) any asset or property of the Company (or, with respect to
periods prior to the Reorganization, the Illinois Predecessor) made
subject to an Encumbrance (other than Permitted Encumbrances),
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(d) any waiver of any material right of the Company (or, with
respect to periods prior to the Reorganization, the Illinois
Predecessor), or the cancellation of any material debt or claim held by
the Company (or, with respect to periods prior to the Reorganization,
the Illinois Predecessor),
(e) any payment of dividends on, or other distributions with
respect to, or any direct or indirect redemption or acquisition of, any
shares of the capital stock of the Company (or, with respect to periods
prior to the Reorganization and other than pursuant to the
Reorganization, any membership units or other equity interest in the
Illinois Predecessor) or any agreement or commitment therefor,
(f) any issuance of any stock, bonds or other securities of
the Company (or, with respect to periods prior to the Reorganization and
other than pursuant to the Reorganization, the Illinois Predecessor), or
any agreement or commitment therefor,
(g) any sale, assignment or transfer of any tangible or
intangible assets of the Company (or, with respect to periods prior to
the Reorganization and other than pursuant to the Reorganization, the
Illinois Predecessor), except in the ordinary course of business,
(h) any loan by the Company (or, with respect to periods
prior to the Reorganization, the Illinois Predecessor) to any officer,
director, employee, consultant or stockholder of the Company or the
Illinois Predecessor or any agreement or commitment therefor (other than
advances to such persons in the ordinary course of business in
connection with travel and travel-related expenses),
(i) any damage, destruction or loss (whether or not covered
by insurance) affecting in any material respect the business, assets,
liabilities, results of operations, condition (financial or otherwise)
or prospects of the Company (or, with respect to periods prior to the
Reorganization, the Illinois Predecessor),
(j) any extraordinary increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee,
consultant or agent of the Company (or, with respect to periods prior to
the Reorganization, the Illinois Predecessor),
(k) any change in the accounting methods, practices or
policies followed by the Company (or, with respect to periods prior to
the Reorganization, the Illinois
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Predecessor) or any change in depreciation or amortization policies or
rates theretofore adopted,
(l) any amendment to or termination of any material agreement
to which the Company (or, with respect to periods prior to the
Reorganization, the Illinois Predecessor) is a party (other than
amendments to or terminations of agreements pursuant to or contemplated
by the Documents) or
(m) any disclosure of information relating to Proprietary
Technology other than in the ordinary course of business, other than
pursuant to a confidentiality agreement and other than to
representatives of the Company (or, with respect to periods prior to the
Reorganization, the Illinois Predecessor).
3.11. TAX MATTERS. Except as set forth on SCHEDULE 3.11
hereto:
(a) the Company and the Illinois Predecessor have each filed
all Tax Returns required to be filed by them prior to the Closing (other
than those subject to a valid extension of time to file on the Closing);
(b) all such Tax Returns are complete and correct and
disclose all Taxes required to be paid by the Company or the Illinois
Predecessor for the periods covered thereby;
(c) the Company and the Illinois Predecessor have each timely
paid or made provision for all Taxes shown as due and payable on such
Tax Returns, and all Taxes which the Company and the Illinois
Predecessor are required by law to withhold or to collect for payment
have been duly withheld or collected and paid over;
(d) in each jurisdiction where the Company sells (or the
Illinois Predecessor sold) personal property, whether tangible or
intangible, the Company or the Illinois Predecessor, as applicable, has
timely withheld or collected and paid over to the appropriate
Governmental Body all sales, use, value-added or similar Taxes with
respect to its sales, and has registered to collect such Taxes, all to
the extent and in the manner required by Requirements of Laws;
(e) neither the Company nor the Illinois Predecessor is or
was required to file any Tax Return for any period ending on or prior to
December 31, 1995;
(f) all deficiencies asserted or assessments made as a result
of any examination of the Tax Returns referred to in clause (a) have
been paid in full;
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(g) neither the Company nor the Illinois Predecessor is
delinquent in the payment of any Taxes, nor has either of them requested
any extension of time within which to file any Tax Return, which Tax
Return has not since been filed;
(h) there is no action, suit, investigation, audit, claim or
assessment pending, proposed or threatened with respect to Taxes of the
Company or the Illinois Predecessor and, to the best knowledge of the
Company, no basis exists therefor;
(i) there are no liens for Taxes upon the assets of the
Company except liens relating to current Taxes not yet due and payable;
(j) neither the Company nor the Illinois Predecessor has
waived or been requested to waive any statute of limitations in respect
of Taxes;
(k) neither the Company nor the Illinois Predecessor has ever
filed consolidated returns under Section 1502 of the Code with any
Person; and
(l) all assets reflected on the financial statements
described in SECTIONS 3.8(A)(I) and 3.8(A)(II) are properly treated as
owned by the Company for all income Tax purposes.
3.12. EMPLOYEE BENEFIT PLANS. (a) Except as set forth on
SCHEDULE 3.12, the Company and the Illinois Predecessor have complied with and
performed all obligations required to be performed by them under or with respect
to each of their Benefit Plans and any related trust or insurance contract and
have complied with all applicable Requirements of Laws with respect to each of
their Benefits Plans. All contributions and other payments required to be made
by the Company or the Illinois Predecessor to each Benefit Plan prior to the
date hereof have been made. There is no claim, dispute, grievance, charge,
complaint, restraining or injunctive order, litigation or proceeding pending, or
to the best knowledge of the Company, threatened or anticipated (other than
routine claims for benefits) against or relating to any Benefit Plan or against
the assets thereof. Neither the Company nor the Illinois Predecessor has
communicated generally to employees or specifically to any employee regarding
any future increase in benefit levels or the creation of any new employee
benefit plan beyond those reflected in the Benefit Plans.
(b) Neither the Company, the Illinois Predecessor, nor any
ERISA Affiliate contributes or has ever contributed to or maintained an employee
benefit plan which is subject either to Title IV of ERISA or Section 412 of the
Code.
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(c) The Company does not, and the Illinois Predecessor did
not, maintain or contribute to any Benefit Plan which provides, and has no
liability or obligation to provide, life insurance, medical or other employee
welfare benefits to any employee (or beneficiary) upon his or her retirement or
termination of employment, except as required by law, and neither the Company
nor the Illinois Predecessor has ever represented, promised or committed to any
employee that such employee would be provided with life insurance, medical, or
other employee welfare benefits upon his retirement or termination of
employment, except to the extent required by law.
(d) Each of the Company's Benefit Plans can be amended,
terminated, or otherwise discontinued, without personal liability to the
Investors.
(e) No "prohibited transaction," within the meaning of
Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to
any Benefit Plan of the Company or the Illinois Predecessor.
(f) No transaction contemplated by this Agreement will
(either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Benefit Plan, agreement, trust, or loan that will
or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
compensation or benefits or obligation to fund benefits with respect to any
employee.
3.13. PROPERTIES. (a) Except as set forth on SCHEDULE 3.13
hereto, the Company has good and marketable title to all of the properties,
interests in properties and assets, real, personal or mixed, reflected in the
Interim Financials or acquired by the Company or the Illinois Predecessor after
April 30, 1997 (except property sold or otherwise disposed of since April 30,
1997, in the ordinary course of business and accounts receivable and notes
receivable paid in full subsequent to April 30, 1997), which properties and
assets constitute all assets and properties (other than Intellectual Property
Rights) used in the business of the Company, free and clear of all Encumbrances
except for Permitted Encumbrances.
(b) All furniture, machinery and equipment owned or leased by
the Company which are necessary to the operations of the Company are in good
condition and repair (ordinary wear and tear excepted) and are suitable for the
uses for which they are intended.
(c) All accounts receivable of the Company are valid and
genuine and have arisen from BONA FIDE transactions in the ordinary course of
business. The accounts receivable reflected on the balance sheet included in
the Interim Financials have been
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paid or the Company has no reason to believe will not be paid in the ordinary
course of business of the Company in the book amounts thereof.
3.14. REAL PROPERTY. The Company does not own any real
property. SCHEDULE 3.14 hereto contains a list and description of all real
property leased by the Company.
3.15. CONTRACTS. (a) SCHEDULE 3.15(a) (with paragraph
references corresponding to those set forth below) contains a true and complete
list of each of the following contracts or other arrangements (true and complete
copies or, if none, reasonably complete and accurate written descriptions of
which, together with all amendments and supplements thereto and all waivers of
any terms thereof, have been delivered to the GS Investors and made available to
the Existing Investors prior to the execution of this Agreement), to which the
Company is a party or by which any of its assets and properties is bound:
(i) (A) all contracts providing for a commitment of
employment or consultation services for a specified or unspecified term
or otherwise relating to employment or the termination of employment,
the name, position and rate of compensation of each Person party to such
a contract and the expiration date of each such contract; and (B) any
written or unwritten representations, commitments, promises,
communications or courses of conduct involving in the case of either
clause (A) or clause (B) an obligation of the Company to make payments
in any year to any employee exceeding $65,000;
(ii) all contracts with any Person containing any provision or
covenant prohibiting or limiting the ability of the Company to engage in
any business activity or compete with any Person or prohibiting or
limiting the ability of any Person to compete with the Company;
(iii) all partnership, joint venture, limited liability
company, shareholders' or other similar contracts or agreements with any
Person;
(iv) all contracts relating to indebtedness for borrowed money
of the Company;
(v) all contracts with distributors, dealers, manufacturer's
representatives, sales agencies or franchisees;
(vi) all contracts relating to the future disposition or
acquisition of any assets and properties, other than dispositions or
acquisitions in the ordinary course of business consistent with past
practice;
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(vii) all contracts between or among the Company and any
stockholder of the Company;
(viii) all collective bargaining or similar labor contracts;
(ix) all leases or agreements under which the Company is
lessee of or holds or operates any real property owned by any other
Person;
(x) all leases or other agreements under which the Company is
lessee of or holds or operates any machinery, equipment, vehicle or
other tangible personal property owned by any other Person;
(xi) all guaranties by the Company of the performance,
liabilities or obligations of any other Person;
(xii) all contracts relating to Intellectual Property Rights;
(xiii) all contracts that (A) limit or contain restrictions on
the ability of the Company to declare or pay dividends on, to make any
other distribution in respect of or to issue or purchase, redeem or
otherwise acquire its capital stock, to incur indebtedness, to incur or
suffer to exist any Encumbrance, to purchase or sell any assets and
properties or to change the lines of business in which it participates
or (B) require the Company to maintain specified financial ratios or
levels of net worth or other indicia of financial condition; and
(xiv) all other contracts (other than insurance policies listed
in SCHEDULE 3.18) that (A) involve the payment or potential payment,
pursuant to the terms of any such contract, by or to the Company of more
than $100,000 annually and (B) cannot be terminated within sixty (60)
days after giving notice of termination without resulting in any
material cost or penalty to the Company.
(b) Except as set forth in SCHEDULE 3.15(b), each contract
required to be listed in SCHEDULE 3.15(a) is in full force and effect and
constitutes a legal, valid and binding agreement, enforceable in accordance with
its terms, of each party thereto, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally and to general equitable principles; and except as set forth in
SCHEDULE 3.15(b) neither the Company nor, to the best knowledge of the Company,
any other party to such contract is, or has received notice that it is, in
violation or breach of or default under any such contract (or with notice or
lapse of time or both, would be in violation or breach of or default under any
such contract) in any material respect.
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(c) Except as set forth in SCHEDULE 3.15(c), the Company is
not a party to or bound by any contract that has been or could reasonably be
expected to, individually or in the aggregate with any other such contracts,
have a Material Adverse Effect.
3.16. LABOR RELATIONS; EMPLOYEES. Except as set forth on
SCHEDULE 3.16 hereto:
(i) the Company is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them to the date hereof or
amounts required to be reimbursed to such employees,
(ii) the Company is in compliance in all material respects
with all applicable laws and regulations respecting labor, immigration,
employment and employment practices, terms and conditions of employment
and wages and hours,
(iii) there is no labor strike, dispute, slowdown or stoppage
actually pending or, to the best knowledge of the Company, threatened
against or involving the Company,
(iv) neither any grievance which might have a Material Adverse
Effect nor any arbitration proceeding arising out of or under collective
bargaining agreements is pending and no claim therefor has been
asserted,
(v) the Company is not a party to any employment or
consulting agreement or any agreement, plan or arrangement providing for
severance payments to any employee of the Company upon termination of
employment or which provides benefits upon a change in control of the
Company, and
(vi) to the best knowledge of the Company, no salaried key
employee has any plans to terminate his or her employment with the
Company.
3.17. LITIGATION; COMPLIANCE WITH LAWS. Except as set forth on
SCHEDULE 3.17, there is no (i) action, suit, claim, proceeding or, to the
knowledge of the Company, investigation pending or, to the best knowledge of the
Company, threatened against or affecting the Company, at law or in equity, or
before or by any Governmental Body, (ii) arbitration proceeding relating to the
Company or (iii) governmental inquiry pending or, to the best knowledge of the
Company, threatened against or affecting the Company, and there is no basis for
any of the foregoing, except for such items that could not reasonably be
expected to have a Material Adverse Effect. The Company is not in default with
respect to any Court Order known to or served upon the Company or the Illinois
Predecessor. There is no action or suit by the Company pending or threatened
against others. The Company
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and the Illinois Predecessor have complied with all Requirements of Laws
applicable to their business, operations, properties, assets, products and
services, and the Company has all necessary permits, licenses and other
authorizations required to conduct its business as conducted and as proposed
to be conducted, except where the failure to so comply or obtain permits,
licenses or authorizations could not reasonably be expected to have a
Material Adverse Effect. There is no existing law, rule, regulation or
order, and, except as provided in SCHEDULE 3.17 hereto, the Company after due
inquiry is not aware of any proposed law, rule, regulation or order, whether
federal or state, which would prohibit or restrict the Company from
conducting its business as conducted and as proposed to be conducted, or
otherwise have a Material Adverse Effect.
3.18. INSURANCE. SCHEDULE 3.18 contains a true and complete
list (including the names of the insurers, the names of the Persons to whom such
policies have been issued, the expiration dates thereof, the annual premiums and
payment terms thereof, whether it is a "claims made" or an "occurrence" policy
and a brief description of the interests insured thereby) of all liability,
property, workers' compensation, life, directors' and officers' liability and
other insurance policies currently in effect that insure the business,
operations or employees of the Company or affect or relate to the ownership, use
or operation of any of the assets and properties of the Company and that (i)
have been issued to the Company or (ii) have been issued to any Person (other
than the Company) for the benefit of the Company. The insurance coverage
provided by any of the policies described in clause (i) above will not terminate
or lapse by reason of the transactions contemplated by this Agreement. Each
policy listed on SCHEDULE 3.18 is valid and binding and in full force and
effect, all premiums due thereunder have been paid and neither the Company, the
Illinois Predecessor nor the Person to whom such policy has been issued has
received any notice of cancellation or termination in respect of any such policy
or is in default thereunder. Such insurance policies are in amounts and have
coverages that, based on the experience of the executive officers of the
Company, are reasonable for Persons engaged in such businesses and operations
and having such assets and properties. Neither the Company, the Illinois
Predecessor nor, to the best knowledge of the Company, the Person to whom such
policy has been issued has received notice that any insurer under any policy
referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
3.19. ENVIRONMENTAL MATTERS. (i) There has not been any
material release of Hazardous Substances in violation of any
Environmental Laws on any of the real property currently or formerly
operated or leased by the Company or the Illinois Predecessor;
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(ii) the Company and the Illinois Predecessor have not used
any waste disposal site, or otherwise disposed of, transported, or
arranged for the transportation of any Hazardous Substances to any place
or location in violation of any Environmental Laws; and
(iii) the Company and the Illinois Predecessor have not
received any notice or other communication that either of them is or may
be a potentially responsible person or otherwise liable for any
Environmental Costs in connection with any waste disposal site allegedly
containing any Hazardous Substances.
3.20. MATERIAL INTERESTS OF CERTAIN PERSONS. Except as set
forth in SCHEDULE 3.20 and except for the Employment Agreements, the Imagination
Pilots Agreements and the Jam Productions Agreements, since January 1, 1997,
none of the officers or directors of the Company, nor any persons with which any
officer or director of the Company has any relationship by blood, marriage or
adoption, has engaged in any material transaction with the Company or the
Illinois Predecessor (other than transactions by officers and directors in their
capacity as such) or has or has had any material interest in (i) any contract,
arrangement or understanding with, or relating to the business or operations of,
the Company or the Illinois Predecessor, (ii) any property (real or personal),
tangible or intangible, used or intended to be used in, or pertaining to, the
business of the Company or the Illinois Predecessor or (iii) any business or
entity which competes with, or is a customer or supplier of, the Company.
3.21. USE OF PROCEEDS. The net proceeds received by the
Company from the sale of the Series A Preferred Stock shall be used by the
Company as set forth on SCHEDULE 3.21 hereto.
3.22. OFFERING EXEMPTION. The offering and sale of the Series
A Preferred Stock and the Series A Reserved Shares upon conversion of the Series
A Preferred Shares, as the case may be, are each exempt from registration under
the Securities Act and under applicable state securities and "blue sky" laws.
3.23. BROKERS. Neither the Company, the Illinois Predecessor
nor any of the officers, directors, managers, employees or stockholders of
either of them has employed any broker or finder in connection with the
transactions contemplated by this Agreement.
3.24. REGISTRATION RIGHTS. Except as contemplated by the
Registration Rights Agreement, no Person has any right to cause the Company to
effect the registration under the Securities Act of any shares of Common Stock
or any other securities of the Company.
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3.25. DISCLOSURE. Neither this Agreement nor any other
document, certificate, instrument or written statement furnished or made to the
Investors by or on behalf of the Company in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR. (a) Each
GS Investor represents and warrants to the Company as follows:
(i) Such GS Investor is acquiring the Series A
Preferred Stock being purchased by it hereunder for its own
account, for investment and not with a view to the distribution
thereof within the meaning of the Securities Act.
(ii) Such GS Investor understands that (i) the Series A
Preferred Stock has not been, and that the Series A Reserved
Shares will not be, registered under the Securities Act, by
reason of their issuance by the Company in a transaction exempt
from the registration requirements of the Securities Act and (ii)
the Series A Preferred Stock and the Series A Reserved Shares may
not be sold unless such disposition is registered under the
Securities Act or is exempt from registration.
(iii) Such GS Investor further understands that the
exemption from registration afforded by Rule 144 (the provisions
of which are known to the GS Investor) promulgated under the
Securities Act depends on the satisfaction of various conditions,
and that, if applicable, Rule 144 may afford the basis for sales
only in limited amounts.
(iv) Such GS Investor has not employed any broker or
finder in connection with the transactions contemplated by this
Agreement.
(v) Such GS Investor is an "Accredited Investor" (as
defined in Rule 501(a) under the Securities Act).
(vi) Such GS Investor has such knowledge and experience in
financial or business matters that it is capable of evaluating the
merits and risks of the transactions contemplated by this Agreement.
(vii) Such GS Investor has full power and authority
without the consent or approval of any court, agency or other
third party, to enter into and perform this Agreement. This
Agreement has been duly authorized by all necessary action on the
part of such
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GS Investor. When duly executed and delivered this Agreement
will constitute a valid and binding agreement of such GS Investor
enforceable against such GS Investor in accordance with its terms
except to the extent that enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting creditors'
rights generally or equitable principles.
(b) Each Existing Investor represents and warrants to the
Company as follows:
(i) Such Existing Investor is acquiring the Series A
Preferred Stock being purchased by it hereunder for its own
account, for investment and not with a view to the distribution
thereof within the meaning of the Securities Act.
(ii) Such Existing Investor understands that (i) the
Series A Preferred Stock has not been, and that the Series A
Reserved Shares will not be, registered under the Securities Act,
by reason of their issuance by the Company in a transaction
exempt from the registration requirements of the Securities Act
and (ii) the Series A Preferred Stock and the Series A Reserved
Shares may not be sold unless such disposition is registered
under the Securities Act or is exempt from registration.
(iii) Such Existing Investor further understands that
the exemption from registration afforded by Rule 144 (the
provisions of which are known to the Existing Investor)
promulgated under the Securities Act depends on the satisfaction
of various conditions, and that, if applicable, Rule 144 may
afford the basis for sales only in limited amounts.
(iv) Such Existing Investor has not employed any broker
or finder in connection with the transactions contemplated by
this Agreement.
(v) Unless the name of such Existing Investor is set
forth on SCHEDULE 4(b) hereto, such Existing Investor is an
"Accredited Investor" (as defined in Rule 501(a) under the
Securities Act).
(vi) Such Existing Investor has such knowledge and experience
in financial or business matters that it is capable of evaluating the
merits and risks of the transactions contemplated by this Agreement.
(vii) Such Existing Investor has full power and
authority, without the consent or approval of any court, agency
or other third party, to enter into and perform this Agreement.
This Agreement has been duly
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authorized by all necessary action on the part of such Existing
Investor. When duly executed and delivered this Agreement will
constitute a valid and binding agreement of such Existing
Investor enforceable against such Existing Investor in accordance
with its terms except to the extent that enforceability may be
limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally or equitable principles.
SECTION 5. DELIVERIES AT THE CLOSING. Simultaneously with the
Closing (or, in the case of (d) and (e) below on or prior to the Closing Date),
the following actions are being taken:
(a) The Stockholders' Agreement is being duly executed and
delivered by the Company and all parties thereto.
(b) The Registration Rights Agreement is being duly executed
and delivered by the Company and the Investors.
(c) The Company is delivering to the Investors:
(i) a long form certificate of good standing of the Company
dated as of a recent date from the State of Delaware;
(ii) a certificate of good standing of the Company dated as of
a recent date from the State of Illinois;
(iii) a certificate of the secretary of the Company as to (1)
the Articles of Incorporation; (2) the by-laws of the Company; (3) the
resolutions of the Board of Directors of the Company authorizing the
execution and performance of the Documents and the transactions
contemplated thereby; (4) the resolutions of the stockholders of the
Company authorizing the execution and performance of the Documents and
the transactions contemplated thereby; and (5) the incumbency and
signatures of the officers of the Company executing the Documents; and
(iv) the opinion of Freeborn & Peters, counsel for the
Company, in the form of EXHIBIT 4 attached hereto.
(d) Fully executed copies of the Employment Agreements, the
Imagination Pilots Agreements and the Jam Productions Agreements are being or
have previously been delivered or made available to the GS Investors and made
available to the Existing Investors.
(e) Fully executed copies of the partnership or affiliate
agreements listed on SCHEDULE 5 hereto are being or
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have previously been delivered to the GS Investors and made available to the
Existing Investors.
SECTION 6. TRANSFER TAXES. The Company will be liable for and
will pay, and will hold each Investor harmless from, any and all liability with
respect to any stamp, transfer or similar Taxes arising from the execution,
delivery or performance of this Agreement or any modification, amendment or
alteration of the terms or provisions of this Agreement, and that it will
similarly be liable for, pay and hold each Investor harmless from all issue
Taxes in respect of the issuance of the Series A Preferred Stock and the Series
A Reserved Shares to such Investor.
SECTION 7. EXCHANGES; LOST, STOLEN OR MUTILATED CERTIFICATES.
Upon surrender by an Investor to the Company of any certificate representing
Series A Preferred Stock or Series A Reserved Shares purchased or acquired
hereunder, the Company at its expense will issue in exchange therefor, and
deliver to such Investor, a new certificate or certificates representing such
shares, in such denominations as may be requested by such Investor. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of any certificate representing any Series A Preferred Stock or
Series A Reserved Shares purchased or acquired by an Investor hereunder, and in
case of any such loss, theft or destruction, upon delivery of any indemnity
agreement satisfactory to the Company, or in any case of any such mutilation,
upon surrender and cancellation of such certificate, the Company at its expense
will issue and deliver to such Investor a new certificate for such Series A
Preferred Stock or Series A Reserved Shares of like tenor, in lieu of such lost,
stolen or mutilated certificate.
SECTION 8. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. The representations and warranties contained in this Agreement
shall survive the Closing for a period of four (4) years from the Closing Date
and shall thereupon terminate and cease to be of further force and effect
together with any associated right to indemnification, except that any
representation and warranty shall survive the time it would otherwise terminate
pursuant to this SECTION 8 if notice of the breach thereof (specifying in
reasonable detail the nature of such beach) giving rise to a right of
indemnification shall have been given to the indemnifying party prior to such
time. The survival periods set forth in this SECTION 8 shall be applicable
regardless of any investigation made by or on behalf of any party. Except as
otherwise provided herein, the covenants and agreements in this Agreement shall
survive without limitation as to time.
SECTION 9. EXPENSES. The Company and the Investors shall each
pay all costs and expenses incurred by it or on its behalf in connection with
this Agreement and the transactions
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contemplated hereby, including, without limiting the generality of the
foregoing, fees and expenses of its own financial consultants, accountants
and counsel, except that the Company shall, promptly following its receipt of
invoices therefor, pay or reimburse the GS Investors for all fees and
expenses (including, without limiting the generality of the foregoing, fees
and expenses of its own accountants and counsel) reasonably incurred by the
Investors in connection with the preparation and negotiation of the Documents
and the consummation of the transactions contemplated by the Documents.
SECTION 10. INDEMNIFICATION.
10.1. GENERAL INDEMNIFICATION. The Company agrees to indemnify
and hold the Investors and their subsidiaries and affiliates (other than the
Company) and the respective partners, officers, directors, employees, agents and
representatives of each of the foregoing (collectively, the "INDEMNIFIED
PERSONS") harmless from and against any and all costs, expenses, losses, claims,
damages, penalties, fines, liabilities and obligations whenever arising or
incurred (including, without limitation, amounts paid in settlement, reasonable
costs of investigation and attorneys' fees and expenses) (individually, a
"LOSS", and collectively, "LOSSES") arising out of or relating to (a) any breach
of any representation or warranty set forth in any Document or any related
schedule or exhibit, and (b) any breach of any covenant or obligation of the
Company contained in any Document.
10.2. CALCULATION OF LOSSES. For purposes of this SECTION 10,
(a) Losses shall, without duplication, include any Loss indirectly incurred as a
result of a decrease in value to the Investors (or their permitted successors
and assigns) of their investment (measured as of the Closing Date) in the
Company pursuant hereto as compared to such value so measured absent the matter,
condition or event giving rise to such Loss and (b) with respect to the
indemnification obligations of the Company, the amount of any Loss shall also
reflect any decrease in the value to the Investors (or their permitted
successors and assigns) of their investment in the Company resulting from any
payments made by the Company to any Indemnified Persons (other than the
Investors) pursuant to SECTION 10.1.
10.3. PROCEDURES RELATING TO INDEMNIFICATION. An indemnified
party under this SECTION 10 shall give prompt written notice to the indemnifying
party (when and to the extent that the indemnified party has actual knowledge
thereof) of any condition, event or occurrence or the commencement of any
action, suit or proceeding for which indemnification may be sought, and the
indemnifying party, through counsel reasonably satisfactory to the indemnified
party and the Company, shall assume the defense thereof or other indemnification
obligation with respect thereto; PROVIDED, HOWEVER, that any indemnified party
shall be entitled
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to participate in any such action, suit or proceeding with counsel of its own
choice but at its own expense and PROVIDED, FURTHER, that any indemnified
party shall be entitled to participate in any such action, suit or proceeding
with counsel of its own choice at the expense of the indemnifying party, if,
in the good faith judgment of the indemnified party's counsel, representation
by the indemnifying party's counsel may present a conflict of interests. The
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this SECTION 10,
except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice. In any event, if the indemnifying party fails
to assume the defense within a reasonable time, the indemnified party may
assume such defense or other indemnification obligation and the reasonable
fees and expenses of its attorneys will be covered by the indemnity provided
for in this SECTION 10. No action, suit or proceeding for which
indemnification may be sought shall be compromised or settled in any manner
which might adversely affect the interests of the indemnifying party without
the prior written consent of such indemnifying party (which shall not be
unreasonably withheld). Notwithstanding anything in this SECTION 10 to the
contrary, the indemnifying party shall not, without the written consent of
the indemnified party, (i) settle or compromise any action, suit or
proceeding or consent to the entry of any judgment which does not include as
an unconditional term thereof the delivery by the claimant or plaintiff to
the indemnified party of a written release from all liability in respect of
such action, suit or proceeding or (ii) settle or compromise any action, suit
or proceeding in any manner that may materially and adversely affect the
indemnified party other than as a result of money damages or other money
payments. The indemnifying party shall pay all expenses, including
attorneys' fees, that may be incurred by any indemnified party in enforcing
the indemnity provided for in this SECTION 10.
10.4. EXCLUSIVE REMEDY. From and after the Closing, the
indemnities set forth in this SECTION 10 shall be the exclusive remedies of the
Indemnified Persons for any breach of a representation, warranty, covenant or
agreement of the Company or any Stockholder contained in this Agreement,
PROVIDED that the foregoing shall not be deemed to limit in any respect any
equitable remedies to which the Indemnified Persons may be entitled and shall
not apply to any willful and deliberate material breach of this Agreement on the
part of the Company.
SECTION 11. REMEDIES. In case any one or more of the covenants
and/or agreements set forth in this Agreement shall have been breached by the
Company, the Investor may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including, but not limited to, an action
for damages as a result of any such breach and/or an action for
-28-
<PAGE>
specific performance of any such covenant or agreement contained in this
Agreement.
SECTION 12. SUCCESSORS AND ASSIGNS. This Agreement shall bind
and inure to the benefit of the Company and the Investors and the respective
successors, assigns, heirs and personal representatives of the Company and the
Investors; PROVIDED, HOWEVER, that this Agreement or any right hereunder shall
not be assigned by the Company (except by operation of law) without the consent
of the Investors. Each Investor may assign this Agreement or any right
hereunder to any partnership, corporation, trust or other organization which is
controlled by, controlling or under common control with such Investor. The
transferee of any Series A Preferred Stock or Series A Reserved Shares from an
Investor pursuant to a transfer permitted by the Stockholders' Agreement shall
be deemed to be such Investor's successor and assign under this Agreement.
SECTION 13. ENTIRE AGREEMENT. This Agreement and the other
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior and contemporaneous arrangements
or understandings with respect thereto.
SECTION 14. NOTICES. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
(i) if to the Company, to:
JAMtv Corporation
640 North LaSalle
Suite 560
Chicago, Illinois 60610
Facsimile: (312) 642-0616
Attention: President, CEO and Chairman
with a copy to:
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, Illinois
Facsimile: (312) 360-6520
Attention: Michael E. Shabat
-29-
<PAGE>
(ii) if to the GS Investors, to:
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Facsimile: (212) 902-3000
Attention: Carla Skodinski
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Facsimile: (312) 853-7036
Attention: Dennis V. Osimitz
(iii) if to an Existing Investor, to such Existing
Investor at its address set forth in the stock ledger of the
Company.
All such notices, requests, consents and other communications shall be deemed to
have been given when received.
SECTION 15. AMENDMENTS. Any waiver, change, modification or
discharge of the provisions of this Agreement shall require the written consent
of the Company and the Investors as and to the extent provided in this SECTION
15. This Agreement may be amended as to the Investors and their successors and
assigns (determined as provided in SECTION 11), and the Company may take any
action herein prohibited, or omit to perform any act required to be performed by
it in respect of the Investors, if the Company shall obtain the written consent
of the Investors and/or such successors and assigns who are then the registered
holders of not less than a majority of the shares of Series A Preferred Stock
and shares of Common Stock into which shares of Series A Preferred Stock sold
pursuant hereto have been converted then held by the Investors and/or such
successors and assigns.
SECTION 16. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, and each such counterpart hereof shall be deemed to be
an original instrument, but all such counterparts together shall constitute but
one agreement.
SECTION 17. HEADINGS. The headings of the sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
SECTION 18. SEVERABILITY. Wherever possible, each provision
hereof shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such
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<PAGE>
provision shall be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder
of such invalid, illegal or unenforceable provision or provisions or any
other provisions hereof, unless such a construction would be unreasonable.
SECTION 19. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois applicable to
contracts made and to be performed wholly therein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
agreement as of the date first above written.
COMPANY:
ATTEST: JAMTV CORPORATION, a Delaware
corporation
/s/ Howard A. Tullman By: /s/ Patrick J. Blake
- -------------------------- ---------------------------------
Secretary President
GS INVESTORS:
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/ Joseph H. Gleberman
------------------------------
Its: Vice President
------------------------------
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/ Joseph H. Gleberman
----------------------------------
Its: Vice President
----------------------------------
-32-
<PAGE>
GOLDMAN SACHS & CO. VERWALTUNGS GMBH, a
company organized under the laws of
Germany
By: /s/ Joseph H. Gleberman
----------------------------------
Joseph H. Gleberman, Managing
Director
and
By: /s/ Carla H. Skodinski
----------------------------------
Carla H. Skodinski, Registered Agent
STONE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp.,
General Partner
By: /s/ Carla H. Skodinski
----------------------------------
Its: Vice President
----------------------------------
BRIDGE STREET FUND 1997, L.P., a
Delaware limited partnership
By: Stone Street Asset Corp.,
Managing General Partner
By: /s/ Carla H. Skodinski
----------------------------------
Its: Vice President
----------------------------------
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<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
Dated as of June 2, 1997
Among
JAMtv Corporation
and
The Investors named on the Signature Pages Hereto
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2. Issuance and Sale of Series A Preferred Stock. . . . . . . . . . 6
2.1. Issuance of Series A Preferred Stock and
Reservation of Series A Reserved Shares. . . . . . . . . . . 6
2.2. Agreement to Sell and Purchase the Series A
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . 7
2.3. Delivery of Series A Preferred Stock to the
Investors. . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4. The Closing. . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3. Representations and Warranties of the Company. . . . . . . . . . 7
3.1. Reorganization . . . . . . . . . . . . . . . . . . . . . . . 8
3.2. Organization and Good Standing; Power and
Authority; Qualifications. . . . . . . . . . . . . . . . . . 8
3.3. Authorization of the Documents.. . . . . . . . . . . . . . . 9
3.4. Capitalization.. . . . . . . . . . . . . . . . . . . . . . . 10
3.5. Authorization of the Series A Preferred
Stock, and Series A Reserved Shares. . . . . . . . . . . . . 11
3.6. Equity Investments.. . . . . . . . . . . . . . . . . . . . . 11
3.7. Intellectual Property Rights.. . . . . . . . . . . . . . . . . 11
3.8. Financial Information. . . . . . . . . . . . . . . . . . . . . 12
3.9. Absence of Undisclosed Liabilities.. . . . . . . . . . . . . . 13
3.10. Absence of Changes.. . . . . . . . . . . . . . . . . . . . . . 13
3.11. Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.12. Employee Benefit Plans.. . . . . . . . . . . . . . . . . . . . 16
3.13. Properties.. . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.14. Owned Real Property. . . . . . . . . . . . . . . . . . . . . . 17
3.15. Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.16. Labor Relations; Employees.. . . . . . . . . . . . . . . . . . 19
3.17. Litigation; Compliance With Laws.. . . . . . . . . . . . . . . 20
3.18. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.19. Environmental Matters. . . . . . . . . . . . . . . . . . . . . 21
3.20. Material Interests of Certain Persons. . . . . . . . . . . . . 22
3.21. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 22
3.22. Offering Exemption.. . . . . . . . . . . . . . . . . . . . . . 22
3.23. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.24. Registration Rights. . . . . . . . . . . . . . . . . . . . . . 22
3.25. Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4. Representations and Warranties of Each Investor. . . . . . . . . 23
SECTION 5. Deliveries at the Closing. . . . . . . . . . . . . . . . . . . . 25
SECTION 6. Transfer Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . 25
i
<PAGE>
PAGE
----
<S> <C>
SECTION 7. Exchanges; Lost, Stolen or Mutilated
Certificates.. . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 8. Survival of Representations, Warranties and
Agreements.. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 9. Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 10. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 27
10.1. General Indemnification. . . . . . . . . . . . . . . . . . . . 27
10.2. Calculation of Losses. . . . . . . . . . . . . . . . . . . . . 27
10.3. Procedures Relating to Indemnification.. . . . . . . . . . . . 27
10.4. Exclusive Remedy.. . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 11. Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 12. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . 28
SECTION 13. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 14. Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 15. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 16. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 17. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 18. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 19. Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
ii
<PAGE>
LIST OF EXHIBITS
EXHIBIT
1 Certificate of Incorporation
2 Registration Rights Agreement
3 Stockholders' Agreement
4 Form of Opinion of Counsel to the Company
5 Form of Employment Agreement between the Company and Howard Tullman
6 Form of Employment Agreement between the Company and Patrick Blake
7 Form of Employment Agreement between the Company and Jerry Mickelson
8 Form of Bill of Sale, Assignment, and Assumption Agreement between
Imagination Pilots, Inc. and the Company
9 Form of Technology Sale Agreement between Imagination Pilots, Inc. and
the Company
10 Trademark License Agreement, dated as of February 28, 1997, between
Jam Productions, Ltd., and the Illinois Predecessor
11 Form of Multimedia Content Agreement between the Company and Jam
Productions, Ltd.
iii
<PAGE>
LIST OF SCHEDULES
Schedule I Purchase of Series A Preferred Stock
Schedule 1 Permitted Encumbrances
Schedule 3.1 Reorganization
Schedule 3.2 Foreign Qualification
Schedule 3.4 Capital Stock
Schedule 3.7 Intellectual Property Rights
Schedule 3.8 Financial Statements
Schedule 3.9 Undisclosed Liabilities
Schedule 3.10 Absence of Changes
Schedule 3.11 Tax Matters
Schedule 3.12 Employee Benefit Plans
Schedule 3.13 Properties
Schedule 3.14 Real Property
Schedule 3.15(a) Contracts
Schedule 3.15(b) Status of Contracts
Schedule 3.15(c) Burdensome Contracts
Schedule 3.16 Labor Matters
Schedule 3.17 Litigation; Compliance with Laws
Schedule 3.18 Insurance
Schedule 3.20 Material Interests
Schedule 3.21 Use of Proceeds
Schedule 4(b) Existing Investors who are not Accredited Investors
Schedule 5 Deliveries at the Closing
iv
<PAGE>
SUBSCRIPTION AGREEMENT
FOR
SERIES B STOCK
(NEW INVESTORS)
This SUBSCRIPTION AGREEMENT, dated as of the ___ day of October, 1997,
is made between JAMtv Corporation, a Delaware corporation (the "Company"), and
__________________________________________, being referred to herein as the
"Subscriber."
W I T N E S S E T H :
WHEREAS, the Company is authorized to issue a series of shares of Series
B Convertible Preferred Stock, par value $.01 per share (the "Series B Stock"),
such Series B Stock having the rights, preferences, and privileges as set forth
in the Company's Second Amended and Restated Certificate of Incorporation;
WHEREAS, the Company desires to issue to the Subscriber, and the
Subscriber desires to purchase and receive from the Company, shares of Series B
Stock as described in this Agreement; and
WHEREAS, in connection with the offer and sale of the Series B Stock
hereunder, the Subscriber shall become a party to that certain Stockholders'
Agreement, dated as of June 2, 1997, among the Company and the other parties
named therein, as amended from time to time (the "Stockholders' Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereby agree as follows:
1. PURCHASE OF SHARES
1.1 ISSUANCE OF SHARES. Subject to the terms and conditions
of this Agreement, Subscriber hereby subscribes for, and the Company agrees to
sell to Subscriber, an aggregate of __________ shares of the Series B Stock (the
"Subscribed Shares") upon the terms and conditions of this Agreement. The
purchase by and sale to the Subscriber of the Subscribed Shares is made only by
means of this Agreement and any supplements or amendments hereto. The
Subscriber hereby agrees that this subscription is and shall be irrevocable.
1.2 CONSIDERATION FOR SHARES. The consideration to the
Company for the Subscribed Shares shall be $5.00 per share (the "Purchase
Price"), and the representations, warranties, covenants, and other undertakings
of Subscriber set forth herein. Simultaneously with the execution of this
Agreement, the Subscriber shall pay to the Company the Purchase Price in cash or
such other form of immediately available funds as is acceptable by the Company.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and covenants with, the Subscriber as
follows:
2.1 ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease and
operate its properties, to carry on its business as presently conducted and as
proposed to be conducted and to carry out the transactions contemplated by this
Agreement.
2.2 AUTHORIZATION. The execution, delivery and performance
by the Company of this Agreement has been duly authorized by all requisite
corporate action by the Company, and this Agreement constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms except to the extent that enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally or equitable principles.
The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, the compliance with the
provisions hereof by the Company and the issuance, sale and delivery of the
Subscribed Shares and the Series B Reserved Shares (as defined in Section 2.4
below) by the Company will not:
(a) violate any court order or legal requirement applicable to
the Company or any of its properties or assets,
(b) conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute (with due notice or lapse of
time, or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or result in the creation of any
encumbrance upon any of the properties or assets of the Company under,
(i) the Certificate of Incorporation, (ii) the by-laws of the Company or
(iii) any note, indenture, mortgage, lease agreement or other contract,
agreement or instrument to which the Company is a party or by which it
or any of its properties or assets is bound or affected, or
(c) require the approval, consent, authorization or act of, or
the making of any declaration, filing or registration with, any person
(other than such notifications or filings required under applicable
state securities laws, if any, which shall be made by the Company on a
timely basis).
2.3 CAPITALIZATION. (a) The authorized capital stock of the
Company immediately prior to the consummation of the transactions contemplated
hereby shall consist of:
(i) 2,500,000 shares of Series A Preferred Stock, of which
1,666,666 shares of Series A-I Convertible Preferred Stock are
outstanding;
2
<PAGE>
(ii) 8,000,000 shares of Common Stock, of which (x) 1,150,530
shares shall have been validly issued and be outstanding, fully paid and
non-assessable, with no personal liability attaching to the ownership
thereof; (y) 2,500,000 shares shall have been duly reserved for issuance
upon the conversion of the Series A Preferred Stock, and (z) 400,000
shares shall have been duly reserved for issuance upon conversion of the
Series B Stock;
(iii) 400,000 shares of Series B Preferred Stock, none of which
are outstanding; and
(vi) 1,600,000 shares of preferred stock, par value $.01 per
share, issuable in series, of which none are outstanding.
(b) Except as set forth on SCHEDULE 2.3(b) hereto, there are no
preemptive or similar rights to purchase or otherwise acquire shares of the
capital stock of the Company pursuant to any provision of law, the Certificate
of Incorporation or by-laws of the Company (in each case as amended and in
effect on the date hereof), or any agreement to which the Company is a party;
and, there is, to the best knowledge of the Company, no agreement, restriction
or encumbrance (such as a right of first refusal, right of first offer, proxy,
voting agreement, voting trust, registration rights agreement, stockholders'
agreement, etc.) with respect to the sale or voting of any shares of capital
stock of the Company (whether outstanding or issuable upon conversion or
exercise of outstanding securities). The transactions contemplated by this
Agreement will not trigger any anti-dilution protection provisions given by the
Company to any person or entity (including without limitation, any stockholder,
lender, warrant holder, lessor and/or licensee).
2.4 ISSUANCE OF SERIES B STOCK AND RESERVATION OF SERIES B
RESERVED SHARES. The Company has authorized (a) the issuance of up to 400,000
shares of Series B Stock, and (b) the reservation of such number of shares of
Common Stock as is necessary, but not less than 400,000 shares of Common Stock,
for issuance upon conversion of the Series B Stock (such reserved shares being
referred to herein as the "SERIES B RESERVED SHARES").
2.5 AUTHORIZATION OF THE SERIES B STOCK AND SERIES B RESERVED
SHARES. The authorization, issuance, sale and delivery of the Series B Stock
and the authorization, reservation, issuance, sale and delivery of the Series B
Reserved Shares have been duly authorized by all requisite corporate action of
the Company, and when issued, sold and delivered in accordance with this
Agreement, the Series B Stock and the Series B Reserved Shares will be validly
issued and outstanding, fully paid and nonassessable with no personal liability
attaching to the ownership thereof, and not subject to preemptive or any other
similar rights of the stockholders of the Company or others. The terms,
designations, powers, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions, of
the Series B Stock are as stated in the Certificate of Incorporation.
3
<PAGE>
3. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE SUBSCRIBER.
The Subscriber represents and warrants to the Company as follows:
(i) The Subscriber is acquiring the Series B Stock being
purchased by it hereunder for its own account, for investment and
not with a view to the distribution thereof within the meaning of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) The Subscriber understands that (i) the Series B
Stock has not been, and that the Series B Reserved Shares will
not be, registered under the Securities Act, by reason of their
issuance by the Company in a transaction exempt from the
registration requirements of the Securities Act and (ii) the
Series B Stock and the Series B Reserved Shares may not be sold
unless such disposition is registered under the Securities Act or
is exempt from registration;
(iii) The Subscriber further understands that the
exemption from registration afforded by Rule 144 (the provisions
of which are known to the Subscriber) promulgated under the
Securities Act depends on the satisfaction of various conditions,
and that, if applicable, Rule 144 may afford the basis for sales
only in limited amounts;
(iv) The Subscriber has not employed any broker or
finder in connection with the transactions contemplated by this
Agreement;
(v) The Subscriber is an "Accredited Investor" (as
defined in Rule 501(a) under the Securities Act);
(vi) The Subscriber has such knowledge and experience in
financial or business matters that it is capable of evaluating the
merits and risks of the transactions contemplated by this Agreement;
(vii) The Subscriber has been furnished with any materials which
the Subscriber has requested relating to the Company, its business and
financial condition, the offering of the Series B Stock, and the
simultaneous offering of the Series A-II Convertible Preferred Stock of
the Company, and the Subscriber has been afforded an opportunity to ask
questions and receive answers concerning such matters;
(viii) The Subscriber has full power and authority
without the consent or approval of any court, agency or other
third party, to enter into and perform this Agreement. This
Agreement has been duly authorized by all necessary action on the
part of the Subscriber. When duly executed and delivered this
Agreement will constitute a valid and binding agreement of the
Subscriber enforceable against the Subscriber in accordance with
its terms except to the extent that enforceability
4
<PAGE>
may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally or equitable principles.
4. MISCELLANEOUS PROVISIONS.
4.1 TRANSFER TAXES. The Company will be liable for and will
pay, and will hold the Subscriber harmless from, any and all liability with
respect to any stamp, transfer or similar taxes arising from the execution,
delivery or performance of this Agreement or any modification, amendment or
alteration of the terms or provisions of this Agreement, and that it will
similarly be liable for, pay and hold the Subscriber harmless from all issue
taxes in respect of the issuance of the Series B Stock and the Series B Reserved
Shares to such Subscriber.
4.2 EXCHANGES; LOST, STOLEN OR MUTILATED CERTIFICATES. Upon
surrender by the Subscriber to the Company of any certificate representing
shares of Series B Stock or Series B Reserved Shares purchased or acquired
hereunder, the Company at its expense will issue in exchange therefor, and
deliver to such Subscriber, a new certificate or certificates representing such
shares, in such denominations as may be requested by such Subscriber. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of any certificate representing any Series B Stock or Series B
Reserved Shares purchased or acquired by the Subscriber hereunder, and in case
of any such loss, theft or destruction, upon delivery of any indemnity agreement
satisfactory to the Company, or in any case of any such mutilation, upon
surrender and cancellation of such certificate, the Company at its expense will
issue and deliver to such Subscriber a new certificate for such Series B Stock
or Series B Reserved Shares of like tenor, in lieu of such lost, stolen or
mutilated certificate.
4.3 NO BROKER'S COMMISSION. The Subscriber and the Company
agree that none of the parties has employed or retained any person, firm, or
Company as a broker, dealer, or sales agent to bring about or to represent any
of them in the transaction contemplated by this Agreement.
4.4 CONSTRUCTION. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Illinois without giving effect to the conflict of law provisions thereof.
4.5 SURVIVAL OF REPRESENTATIONS. All representations,
warranties, covenants, and agreements made herein shall survive the execution
and delivery of this Agreement.
4.6 NOTICES. All notices hereunder shall be in writing and
shall be deemed to have been given at the time when mailed by certified mail,
return receipt requested and postage prepaid, addressed as follows:
5
<PAGE>
If to the Company:
JAMtv Corporation
640 North LaSalle Street, Suite 560
Chicago, IL 60610
Facsimile: (312) 642-0616
Attention: Howard Tullman
with a copy to:
Freeborn & Peters
311 South Wacker Drive, Suite 3000
Chicago, IL 60606
Facsimile: (312) 360-6596
Attention: Michael E. Shabat
If to the Subscriber:
___________________________________
___________________________________
___________________________________
Facsimile:_________________________
4.7 ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Company, the Subscriber, and their respective
successors and permitted assigns. The Subscriber shall not assign this
Agreement without the prior written consent of the Company.
4.8 AMENDMENTS AND WAIVERS. This Agreement and the exhibit
hereto set forth the entire understanding of the parties with respect to the
investment contemplated hereby. This Agreement may be amended only by an
instrument in writing signed by both parties.
4.9 INTERPRETATION. In case any or one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein.
4.10 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
6
<PAGE>
4.11 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not constitute a part hereof.
4.12 STOCKHOLDERS' AGREEMENT. The Subscriber hereby agrees
that by executing and delivering this Agreement, the Subscriber and the shares
acquired pursuant hereto shall be bound by all of the terms and conditions of
the Stockholders' Agreement, a copy of which is set forth as EXHIBIT A hereto,
including but not limited to restrictions on transfer.
4.13 REGISTRATION RIGHTS. The shares issuable upon conversion
of the Subscribed Shares shall be "Registrable Securities" within the meaning of
the Registration Rights Agreement, dated as of June 2, 1997, by and among the
Company and the parties named therein, a copy of which is set forth as EXHIBIT
B, and the Subscriber, by executing and delivering this Agreement, agrees to be
bound by the terms and conditions thereof.
[Signature Page Follows]
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
JAMTV CORPORATION
By:
----------------------------
Howard Tullman, CEO
SUBSCRIBER
--------------------------------
[Print Name]
By:
----------------------------
Name:
Title:
8
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SUBSCRIPTION AGREEMENT
FOR
SERIES C STOCK
(NEW INVESTORS)
This SUBSCRIPTION AGREEMENT, dated as of the 11th day of February,
1998, is made between JAMtv Corporation, a Delaware corporation (the "Company"),
and __________________________________________, being referred to herein as the
"Subscriber."
W I T N E S S E T H :
WHEREAS, the Company is authorized to issue a series of shares of
Series C Convertible Preferred Stock, par value $.01 per share (the "Series C
Stock"), such Series C Stock having the rights, preferences, and privileges
as set forth in the resolutions of the Board of Directors creating the Series
C Stock, which resolutions are included in the Certificate of Designations
filed with the State of Delaware pursuant to Section 151(g) of the Delaware
General Corporation Law (the "Certificate of Designations");
WHEREAS, the Company desires to issue to the Subscriber, and the
Subscriber desires to purchase and receive from the Company, shares of Series
C Stock as described in this Agreement; and
WHEREAS, in connection with the offer and sale of the Series C Stock
hereunder, the Subscriber shall become a party to that certain Stockholders'
Agreement, dated as of June 2, 1997, among the Company and the other parties
named therein, as amended from time to time (the "Stockholders' Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereby agree as follows:
1. PURCHASE OF SHARES
1.1 ISSUANCE OF SHARES. Subject to the terms and conditions
of this Agreement, Subscriber hereby subscribes for, and the Company agrees
to sell to Subscriber, an aggregate of __________ shares of the Series C
Stock (the "Subscribed Shares") upon the terms and conditions of this
Agreement. The purchase by and sale to the Subscriber of the Subscribed
Shares is made only by means of this Agreement and any supplements or
amendments hereto. The Subscriber hereby agrees that this subscription is
and shall be irrevocable.
1.2 CONSIDERATION FOR SHARES. The consideration to the
Company for the Subscribed Shares shall be $7.50 per share (the "Purchase
Price"), and the representations, warranties, covenants, and other
undertakings of Subscriber set forth herein. Simultaneously
<PAGE>
with the execution of this Agreement, the Subscriber shall pay to the Company
the Purchase Price in cash or such other form of immediately available funds
as is acceptable by the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and covenants with, the Subscriber as
follows:
2.1 ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
and operate its properties, to carry on its business as presently conducted
and as proposed to be conducted and to carry out the transactions
contemplated by this Agreement.
2.2 AUTHORIZATION. The execution, delivery and performance
by the Company of each of this Agreement, Amendment No. 2 ("Amendment No. 2")
to the Registration Rights Agreement, dated as of June 2, 1997, among the
Company and the parties named therein, as amended on October 31, 1997 (the
"Registration Rights Agreement"), and the Joinder to Stockholders' Agreement
(this Agreement, Amendment No. 2, and the Joinder to Stockholders' Agreement
are hereafter referred to collectively as the "Transaction Documents"), has
been duly authorized by all requisite corporate action by the Company, and
this Agreement constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms except to the
extent that enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights generally or equitable principles.
The execution, delivery and performance of the Transaction Documents
and the consummation of the transactions contemplated thereby, the compliance
with the provisions hereof by the Company and the issuance, sale and delivery
of the Subscribed Shares and the Series C Reserved Shares (as defined in
Section 2.4 below) by the Company will not:
(a) violate any court order or legal requirement applicable to
the Company or any of its properties or assets,
(b) conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute (with due notice or lapse of
time, or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or result in the creation of any
encumbrance upon any of the properties or assets of the Company under,
(i) the Certificate of Incorporation, (ii) the by-laws of the Company or
(iii) any note, indenture, mortgage, lease agreement or other contract,
agreement or instrument to which the Company is a party or by which it
or any of its properties or assets is bound or affected, or
(c) require the approval, consent, authorization or act of, or
the making of any declaration, filing or registration with, any person
(other than such notifications or filings
2
<PAGE>
required under applicable state securities laws, if any, which shall
be made by the Company on a timely basis).
2.3 CAPITALIZATION. (a) The authorized capital stock of
the Company immediately prior to the consummation of the transactions
contemplated hereby shall consist of:
(i) 2,500,000 shares of Series A Preferred Stock, par value
$.01 per share, of which 1,666,666 shares of Series A-I Convertible
Preferred Stock and 200,000 shares of Series A-II Convertible Preferred
Stock are issued and outstanding;
(ii) 500,000 shares of Series B Preferred Stock, par value $.01
per share, of which 472,000 shares are issued and outstanding;
(iii) 400,000 shares of Series C Stock, none of which are
outstanding;
(iv) 1,100,000 shares of preferred stock, par value $.01 per
share, issuable in series, none of which are outstanding; and
(v) 8,000,000 shares of Common Stock, of which (w) 1,150,530
shares are issued and outstanding; (x) 2,500,000 shares have been
reserved for issuance upon conversion of the Series A Preferred Stock;
(y) 500,000 shares have been reserved for issuance upon conversion of
the Series B Preferred Stock; and (z) 400,000 shares shall have been
duly reserved for issuance upon conversion of the Series C Stock;
In addition, shares of Common Stock have been reserved for issuance by the
Company pursuant to the terms of the Plan and the Warrant, each of which is
described on SCHEDULE 2.3 hereto.
(b) Except as set forth on SCHEDULE 2.3 hereto, there are no
preemptive or similar rights to purchase or otherwise acquire shares of the
capital stock of the Company pursuant to any provision of law, the
Certificate of Incorporation or by-laws of the Company (in each case as
amended and in effect on the date hereof), or any agreement to which the
Company is a party; and, there is, to the best knowledge of the Company, no
agreement, restriction or encumbrance (such as a right of first refusal,
right of first offer, proxy, voting agreement, voting trust, registration
rights agreement, stockholders' agreement, etc.) with respect to the sale or
voting of any shares of capital stock of the Company (whether outstanding or
issuable upon conversion or exercise of outstanding securities). The
transactions contemplated by this Agreement will not trigger any
anti-dilution protection provisions given by the Company to any person or
entity (including without limitation, any stockholder, lender, warrant
holder, lessor and/or licensee). Except as set forth on SCHEDULE 2.3, there
are no contracts relating to the issuance, sale or transfer of any equity
securities or other securities of the Company. Except for its wholly-owned
subsidiary, JAMtv Interactive Services Corporation, an Illinois corporation,
the Company does not own and does not have any contract to acquire equity
securities or other securities of any other party or any direct or indirect
equity or ownership interest in any other business.
3
<PAGE>
2.4 ISSUANCE OF SERIES C STOCK AND RESERVATION OF SERIES C
RESERVED SHARES. The Company has authorized (a) the issuance of up to
400,000 shares of Series C Stock, and (b) the reservation of such number of
shares of Common Stock as is necessary, but not less than 400,000 shares of
Common Stock, for issuance upon conversion of the Series C Stock (such
reserved shares being referred to herein as the "SERIES C RESERVED SHARES").
2.5 AUTHORIZATION OF THE SERIES C STOCK AND SERIES C
RESERVED SHARES. The authorization, issuance, sale and delivery of the
Series C Stock and the authorization, reservation, issuance, sale and
delivery of the Series C Reserved Shares have been duly authorized by all
requisite corporate action of the Company, and when issued, sold and
delivered in accordance with this Agreement, the Series C Stock and the
Series C Reserved Shares will be validly issued and outstanding, fully paid
and nonassessable with no personal liability attaching to the ownership
thereof, and not subject to preemptive or any other similar rights of the
stockholders of the Company or others. The terms, designations, powers,
preferences and relative, participating, optional and other special rights,
and the qualifications, limitations and restrictions, of the Series C Stock
are as stated in the Certificate of Designations.
2.6 FINANCIAL STATEMENTS. The Company has previously
delivered a copy of its unaudited consolidated balance sheet dated as of
December 31, 1997 and Consolidated Statement of Operations dated as of
December 31, 1997 (the "Financial Statements"). The Financial Statements
fairly present the financial condition and results of operations as at
December 31, 1997 and for the periods therein referred to and have been
prepared in accordance with GAAP, subject to the absence of notes and
year-end adjustments for expenses incurred in connection with the issuance of
stock and the grant of stock options to non-employees of the Company.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the
extent disclosed or provided for on the Financial Statements, the Company
does not have any debts, liabilities or obligations, whether matured or
unmatured, fixed or contingent (including, without limitation, obligations as
the guarantor) other than those incurred since December 31, 1997, in the
ordinary course of business consistent with past practice.
2.8 NO MATERIAL ADVERSE CHANGES. Since December 31, 1997,
there has been no material adverse change in the financial condition,
operating results, assets, operations or business prospects of the Company.
2.9 COMPLIANCE WITH ORDERS AND LAWS. The Company is not in
default with respect to any judgment, order, award or decree of any foreign,
federal, state, local or other court or tribunal or any award in any
arbitration proceeding known to or served upon the Company. The Company has
complied with all foreign, federal, state and local laws, statutes,
regulations, rules, codes or ordinances enacted, adopted, issued or
promulgated by any foreign, federal, state, local or other governmental
authority or regulatory body, or common law applicable to its business,
operations, properties, assets, products and services, and the Company has
all necessary permits, licenses and other authorizations required to conduct
its business as conducted and
4
<PAGE>
proposed to be conducted, except where the failure to so comply or obtain
such permits, licenses or authorizations could not reasonably be expected to
have a material adverse effect on the business, operations, affairs or
financial condition of the Company or any of its properties or assets.
2.10 ABSENCE OF CERTAIN DEVELOPMENTS. Except for the
issuance of Series B Convertible Preferred Stock and Series C Stock and the
registration and other rights granted by the Company in connection therewith,
and except for the grant of stock options under the Company's stock option
plan described in SCHEDULE 2.3, since the date of the Financial Statements,
there has not been any:
(i) change in the authorized or issued capital stock of the
Company; grant of any right to purchase shares of capital stock of the
Company; issuance of any security convertible into capital stock of the
Company; grant of any registration rights with respect to shares of
capital stock of the Company; purchase, redemption, retirement, or other
acquisition by the Company of any shares of its capital stock; or the
declaration or payment of any dividend or other distribution or payment
in respect of shares of capital stock of the Company;
(ii) amendment of (a) the Certificate of Incorporation or
by-laws of the Company, (b) the Stockholders' Agreement, or (c)
Registration Rights Agreement;
(iii) adoption of, or increase in the payments to or benefits
under any profit sharing, bonus, deferred compensation, savings,
insurance, pension, retirement or other employee benefit plan for or
with any Company employees;
(iv) material change in the accounting methods used by the
Company;
(v) entry into by the Company or any agreement, arrangement,
understanding or commitment other than in the ordinary course of
business; or
(vi) any substantial losses or waiver of any rights of
material value, whether or not in the ordinary course of business.
2.11 LITIGATION. Except as set forth in SCHEDULE 2.11
attached hereto, there is no litigation or governmental proceeding or
investigation pending, or, to the knowledge of the Company, threatened
against the Company affecting any of its properties or assets, nor, to the
knowledge of the Company, has there occurred any event or does there exist
any condition on the basis of which it is reasonably likely that any such
litigation, proceeding or investigation might properly be instituted. There
are no actions or proceedings pending, or to the Company's knowledge,
threatened (nor is there any reasonable basis therefor which is known to the
Company) which might result, either in any case or in the aggregate, in any
material adverse change in the business, operations, affairs or financial
condition of the Company or in any of its
5
<PAGE>
properties or assets, or which might call into question the validity of this
Agreement, or any action taken or to be taken pursuant hereto.
2.12 INTELLECTUAL PROPERTY. Except as disclosed on SCHEDULE
2.11 (regarding pending or threatened claims), the Company owns or otherwise
has the right to use all of the patents, trademarks, service marks, trade
names, and copyrights necessary for the conduct of the Company's business as
currently conducted or as proposed to be conducted. The Company has a
contractual right to use the "Rolling Stone Trademarks" and certain other
intellectual property pursuant to an Affiliation Agreement dated November 10,
1997 between the Company and Straight Arrow Publishers Company, L.P., without
violating or conflicting with the rights of others, except as provided in
such Affiliation Agreement.
2.13 RELATIONSHIPS WITH RELATED PERSONS. There are no
loans, leases, royalty agreements or other continuing transactions between
(a) the Company or any of its customers or suppliers, and (b) any officer,
employee, consultant or director of the Company or any person owning five
percent (5%) or more of the capital stock of the Company, or to the Company's
knowledge, any member of the immediate family of such officer, employee,
consultant, director or stockholder or any corporation or other entity
controlled by such officer, employee, consultant, director or stockholder, or
a member of the immediate family of such officer, employee, consultant,
director or stockholder, except as provided on SCHEDULE 2.13 attached hereto.
2.14 FULL DISCLOSURE. The Company has made available to the
Subscriber, or has otherwise disclosed in writing in, or pursuant to, this
Agreement all facts material to the business, operations, assets or condition
(financial or otherwise) of the Company. No representation or warranty to
Subscriber contained in this Agreement, and no statement contained in the
Schedules to this Agreement, or any certificate, list or other writing
furnished by the Company to Subscriber pursuant to the provisions hereof,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein not
misleading.
2.15 STOCKHOLDERS' AGREEMENT. Attached hereto as EXHIBIT A
is a true and complete copy of the Stockholders' Agreement, as amended to the
date hereof, which has not since been modified or amended in any respect.
2.16 REGISTRATION RIGHTS. Attached hereto as EXHIBIT B is a
true and complete copy of the Registration Rights Agreement, as amended to
the date hereof, which has not since been modified or amended in any respect.
2.17 CERTIFICATE OF INCORPORATION. Attached hereto as
EXHIBIT C is a true and complete copy of the Company's Second Amended and
Restated Certificate of Incorporation, as amended to the date hereof.
6
<PAGE>
3. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE SUBSCRIBER.
The Subscriber represents and warrants to the Company as follows:
(i) The Subscriber is acquiring the Series C Stock being
purchased by it hereunder for its own account, for investment and
not with a view to the distribution thereof within the meaning of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) The Subscriber understands that (i) the Series C
Stock has not been, and that the Series C Reserved Shares will
not be, registered under the Securities Act, by reason of their
issuance by the Company in a transaction exempt from the
registration requirements of the Securities Act and (ii) the
Series C Stock and the Series C Reserved Shares may not be sold
unless such disposition is registered under the Securities Act or
is exempt from registration;
(iii) The Subscriber further understands that the
exemption from registration afforded by Rule 144 (the provisions
of which are known to the Subscriber) promulgated under the
Securities Act depends on the satisfaction of various conditions,
and that, if applicable, Rule 144 may afford the basis for sales
only in limited amounts;
(iv) The Subscriber has not employed any broker or
finder in connection with the transactions contemplated by this
Agreement;
(v) The Subscriber is an "Accredited Investor" (as
defined in Rule 501(a) under the Securities Act);
(vi) The Subscriber has such knowledge and experience in
financial or business matters that it is capable of evaluating the
merits and risks of the transactions contemplated by this Agreement;
(vii) The Subscriber has been furnished with any materials which
the Subscriber has requested relating to the Company, its business and
financial condition and the offering of the Series C Stock, and the
Subscriber has been afforded an opportunity to ask questions and receive
answers concerning such matters;
(viii) The Subscriber has full power and authority
without the consent or approval of any court, agency or other
third party, to enter into and perform this Agreement. This
Agreement has been duly authorized by all necessary action on the
part of the Subscriber. When duly executed and delivered this
Agreement will constitute a valid and binding agreement of the
Subscriber enforceable against the Subscriber in accordance with
its terms except to the extent that enforceability may be limited
by bankruptcy, insolvency or other similar laws affecting
7
<PAGE>
creditors' rights generally or equitable principles.
4. MISCELLANEOUS PROVISIONS.
4.1 TRANSFER TAXES. The Company will be liable for and
will pay, and will hold the Subscriber harmless from, any and all liability
with respect to any stamp, transfer or similar taxes arising from the
execution, delivery or performance of this Agreement or any modification,
amendment or alteration of the terms or provisions of this Agreement, and
that it will similarly be liable for, pay and hold the Subscriber harmless
from all issue taxes in respect of the issuance of the Series C Stock and the
Series C Reserved Shares to such Subscriber.
4.2 EXCHANGES; LOST, STOLEN OR MUTILATED CERTIFICATES.
Upon surrender by the Subscriber to the Company of any certificate
representing shares of Series C Stock or Series C Reserved Shares purchased
or acquired hereunder, the Company at its expense will issue in exchange
therefor, and deliver to such Subscriber, a new certificate or certificates
representing such shares, in such denominations as may be requested by such
Subscriber. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction or mutilation of any certificate representing any
Series C Stock or Series C Reserved Shares purchased or acquired by the
Subscriber hereunder, and in case of any such loss, theft or destruction,
upon delivery of any indemnity agreement satisfactory to the Company, or in
any case of any such mutilation, upon surrender and cancellation of such
certificate, the Company at its expense will issue and deliver to such
Subscriber a new certificate for such Series C Stock or Series C Reserved
Shares of like tenor, in lieu of such lost, stolen or mutilated certificate.
4.3 NO BROKER'S COMMISSION. The Subscriber and the Company
agree that none of the parties has employed or retained any person, firm, or
Company as a broker, dealer, or sales agent to bring about or to represent
any of them in the transaction contemplated by this Agreement. The Company
shall not be liable to the Subscriber for any costs, fees or expenses in the
nature of any commission to a broker, dealer or sales agent. The Company
will reimburse the Subscriber for reasonable legal fees and expenses incurred
by the Subscriber in connection with its purchase of the Series C Stock,
provided that the Company shall have no liability to reimburse Subscriber and
all other subscribers for Series C Stock for legal fees and expenses
exceeding $25,000 in the aggregate.
4.4 CONSTRUCTION. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Illinois without giving effect to the conflict of law provisions thereof.
4.5 SURVIVAL OF REPRESENTATIONS. All representations,
warranties, covenants, and agreements made herein shall survive the execution
and delivery of this Agreement.
4.6 NOTICES. All notices hereunder shall be in writing and
shall be deemed to
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<PAGE>
have been given at the time when mailed by certified mail, return receipt
requested and postage prepaid, addressed as follows:
If to the Company:
JAMtv Corporation
640 North LaSalle Street, Suite 560
Chicago, IL 60610
Facsimile: (312) 642-0616
Attention: Howard Tullman
with a copy to:
Freeborn & Peters
311 South Wacker Drive, Suite 3000
Chicago, IL 60606
Facsimile: (312) 360-6596
Attention: Michael E. Shabat
If to the Subscriber:
___________________________________
___________________________________
___________________________________
Facsimile:_________________________
4.7 ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Company, the Subscriber, and their respective
successors and permitted assigns. The Subscriber shall not assign this
Agreement without the prior written consent of the Company.
4.8 AMENDMENTS AND WAIVERS. This Agreement and the exhibit
hereto set forth the entire understanding of the parties with respect to the
investment contemplated hereby. This Agreement may be amended only by an
instrument in writing signed by both parties.
4.9 INTERPRETATION. In case any or one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal,
or unenforceable provision had never been contained herein.
9
<PAGE>
4.10 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument.
4.11 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not constitute a part hereof.
4.12 ATTENDANCE AT BOARD MEETINGS. The Company will permit
one representative of the holders of Series C Stock as is designated by the
holders of Series C Stock, with the approval of the Chief Executive Officer
of the Company, exercisable in his sole discretion, to attend meetings of the
Board of Directors of the Company.
4.13 DELIVERY OF AUDITED FINANCIAL STATEMENTS. Promptly
upon the written request of the Subscriber, and subject to Subscriber's
written confidentiality obligations to the Company, the Company will deliver
to the Subscriber the audited consolidated financial statements of the
Company and the accompanying report of the Company's independent auditors.
[intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
JAMTV CORPORATION
By:
------------------------------------
Howard A. Tullman,
Chief Executive Officer
SUBSCRIBER
---------------------------------------
[Print Name]
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
SUBSCRIPTION AGREEMENT
FOR
SERIES D STOCK
This SUBSCRIPTION AGREEMENT, dated as of __________, 1998, is made
between JAMtv Corporation, a Delaware corporation (the "Company"), and
__________________, being referred to herein as the "Subscriber."
W I T N E S S E T H :
WHEREAS, the Company is authorized to issue a series of shares of Series
D Convertible Preferred Stock, par value $.01 per share (the "Series D
Stock"), such Series D Stock having the rights, preferences, and privileges
as set forth in the resolutions of the Board of Directors creating the Series
D Stock, which resolutions are included in the Certificate of Designations
filed with the State of Delaware pursuant to Section 151(g) of the Delaware
General Corporation Law (the "Certificate of Designations");
WHEREAS, the Company desires to issue to the Subscriber, and the
Subscriber desires to purchase and receive from the Company, shares of Series
D Stock as described in this Agreement; and
WHEREAS, in connection with the offer and sale of the Series D Stock
hereunder, the Subscriber shall become a party to that certain Stockholders'
Agreement, dated as of June 2, 1997, among the Company and the other parties
named therein, as amended from time to time (the "Stockholders' Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereby agree as follows:
1. PURCHASE OF SHARES
1.1 ISSUANCE OF SHARES. Subject to the terms and conditions of this
Agreement, Subscriber hereby subscribes for, and the Company agrees to sell
to Subscriber, an aggregate of [_____________] shares of the Series D Stock
(the "Subscribed Shares") upon the terms and conditions of this Agreement.
The purchase by and sale to the Subscriber of the Subscribed Shares is made
only by means of this Agreement and any supplements or amendments hereto.
The Subscriber hereby agrees that this subscription is and shall be
irrevocable.
1.2 CONSIDERATION FOR SHARES. The consideration to the Company for the
Subscribed Shares shall be $10.00 per share (the "Purchase Price"), and the
representations, warranties, covenants, and other undertakings of Subscriber
set forth herein. Simultaneously with the execution of this Agreement, the
Subscriber shall pay to the Company the Purchase Price in cash or such other
form of immediately available funds as is acceptable by the Company.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to, and covenants with, the Subscriber as follows:
2.1 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own, lease and operate
its properties, to carry on its business as presently conducted and as
proposed to be conducted and to carry out the transactions contemplated by
this Agreement.
2.2 AUTHORIZATION. The execution, delivery and performance by
the Company of each of this Agreement, Amendment No. 3 ("Amendment No. 3") to
the Registration Rights Agreement, dated as of June 2, 1997, among the
Company and the parties named therein, as amended by Amendment No. 1 and
Amendment No. 2 (the "Registration Rights Agreement"), and the Joinder to
Stockholders' Agreement (this Agreement, Amendment No. 3, and the Joinder to
Stockholders' Agreement are hereafter referred to collectively as the
"Transaction Documents"), has been duly authorized by all requisite corporate
action by the Company, and this Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms except to the extent that enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally or equitable principles.
The execution, delivery and performance of the Transaction Documents and
the consummation of the transactions contemplated thereby, the compliance
with the provisions hereof by the Company and the issuance, sale and delivery
of the Subscribed Shares and the Series D Reserved Shares (as defined in
Section 2.4 below) by the Company will not:
(a) violate any court order or legal requirement applicable to the
Company or any of its properties or assets,
(b) conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute (with due notice or lapse of
time, or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or result in the creation of any
encumbrance upon any of the properties or assets of the Company under, (i)
the Certificate of Incorporation, (ii) the by-laws of the Company or (iii)
any note, indenture, mortgage, lease agreement or other contract, agreement
or instrument to which the Company is a party or by which it or any of its
properties or assets is bound or affected, or
(c) require the approval, consent, authorization or act of, or the
making of any declaration, filing or registration with, any person (other
than such notifications or filings required under applicable state
securities laws, if any, which shall be made by the Company on a timely
basis).
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<PAGE>
2.3 CAPITALIZATION. (a) The authorized capital stock of the
Company immediately prior to the consummation of the transactions
contemplated hereby shall consist of:
(i) 2,500,000 shares of Series A Preferred Stock, par value $.01 per
share, of which 1,666,666 shares of Series A-I Convertible Preferred Stock
and 200,000 shares of Series A-II Convertible Preferred Stock are issued
and outstanding, and of which 150,000 shares of Series A-III Convertible
Preferred Stock shall be issued and outstanding upon the consummation of
the investment contemplated by this Agreement;
(ii) 500,000 shares of Series B Preferred Stock, par value $.01 per
share, of which 472,000 shares are issued and outstanding;
(iii) 533,340 shares of Series C Stock, 533,334 shares of which are
issued and outstanding;
(iv) 800,000 shares of Series D Stock, up to 800,000 shares of which
may be issued and outstanding upon the consummation of the investment
contemplated by this Agreement;
(iv) 166,660 shares of preferred stock, par value $.01 per share,
issuable in series, none of which are outstanding; and
(v) 8,000,000 shares of Common Stock, of which (v) 1,150,530 shares
are issued and outstanding; (w) 2,500,000 shares have been reserved for
issuance upon conversion of the Series A Preferred Stock; (x) 500,000
shares have been reserved for issuance upon conversion of the Series B
Preferred Stock; (y) 533,340 shares shall have been duly reserved for
issuance upon conversion of the Series C Stock; and (z) 800,000 shares
shall have been duly reserved for issuance upon conversion of the Series D
Stock.
In addition, shares of Common Stock have been reserved for issuance by the
Company pursuant to the terms of the Plan, the Warrant, and certain
transactions pending before the Company, each of which is described on
SCHEDULE 2.3 hereto, and the Company expects to amend its Second Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock to 10,500,000 shares and the number of authorized
shares of Preferred Stock to 5,000,000 (which amendment may have become
effective prior to the date of this Agreement).
(b) Except as set forth on SCHEDULE 2.3 hereto, there are no
preemptive or similar rights to purchase or otherwise acquire shares of the
capital stock of the Company pursuant to any provision of law, the
Certificate of Incorporation or by-laws of the Company (in each case as
amended and in effect on the date hereof), or any agreement to which the
Company is a party; and, there is, to the best knowledge of the Company, no
agreement, restriction or encumbrance (such as a right of first refusal,
right of first offer, proxy, voting agreement, voting trust, registration
rights agreement, stockholders' agreement, etc.) with respect to the sale or
voting of
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<PAGE>
any shares of capital stock of the Company (whether outstanding or issuable
upon conversion or exercise of outstanding securities). Except as set forth
on SCHEDULE 2.3, the transactions contemplated by this Agreement will not
trigger any anti-dilution protection provisions given by the Company to any
person or entity (including without limitation, any stockholder, lender,
warrant holder, lessor and/or licensee). Except as set forth on SCHEDULE 2.3,
there are no contracts relating to the issuance, sale or transfer of any
equity securities or other securities of the Company. Except as set forth on
SCHEDULE 2.3 and except for its wholly-owned subsidiary, JAMtv Interactive
Services Corporation, an Illinois corporation, the Company does not own and
does not have any contract to acquire equity securities or other securities
of any other party or any direct or indirect equity or ownership interest in
any other business.
2.4 ISSUANCE OF SERIES D STOCK AND RESERVATION OF SHARES. The
Company has authorized (a) the issuance of up to 800,000 shares of Series D
Stock, and (b) the reservation of such number of shares of Common Stock as is
necessary, but not less than the number of issued and outstanding shares of
Series D Stock, for issuance upon conversion of the Series D Stock (such
reserved shares being referred to herein as the "SERIES D RESERVED SHARES").
2.5 AUTHORIZATION OF THE SERIES D STOCK AND SERIES D RESERVED
SHARES. The authorization, issuance, sale and delivery of the Series D Stock
and the authorization, reservation, issuance, sale and delivery of the Series
D Reserved Shares have been duly authorized by all requisite corporate action
of the Company, and when issued, sold and delivered in accordance with this
Agreement, the Series D Stock and the Series D Reserved Shares will be
validly issued and outstanding, fully paid and nonassessable with no personal
liability attaching to the ownership thereof, and not subject to preemptive
or any other similar rights of the stockholders of the Company or others.
The terms, designations, powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions, of the Series D Stock are as stated in the Certificate of
Designations.
2.6 FINANCIAL STATEMENTS. The Company has previously delivered to
Subscriber a copy of its audited consolidated financial statements as of
December 31, 1997 (the "Financial Statements"). The Financial Statements
fairly present the financial condition and results of operations as at
December 31, 1997 and for the periods therein referred to and have been
prepared in accordance with GAAP.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent
disclosed or provided for on the Financial Statements, or as set forth on
SCHEDULE 2.3 or SCHEDULE 2.7 hereto, the Company does not have any debts,
liabilities or obligations, whether matured or unmatured, fixed or contingent
(including, without limitation, obligations as the guarantor) other than
those incurred since December 31, 1997, in the ordinary course of business
consistent with past practice.
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2.8 NO MATERIAL ADVERSE CHANGES. Since December 31, 1997, there
has been no material adverse change in the financial condition, operating
results, assets, operations or business prospects of the Company.
2.9 COMPLIANCE WITH ORDERS AND LAWS. The Company is not in
default with respect to any judgment, order, award or decree of any foreign,
federal, state, local or other court or tribunal or any award in any
arbitration proceeding known to or served upon the Company. The Company has
complied with all foreign, federal, state and local laws, statutes,
regulations, rules, codes or ordinances enacted, adopted, issued or
promulgated by any foreign, federal, state, local or other governmental
authority or regulatory body, or common law applicable to its business,
operations, properties, assets, products and services, and the Company has
all necessary permits, licenses and other authorizations required to conduct
its business as conducted and proposed to be conducted, except where the
failure to so comply or obtain such permits, licenses or authorizations could
not reasonably be expected to have a material adverse effect on the business,
operations, affairs or financial condition of the Company or any of its
properties or assets.
2.10 ABSENCE OF CERTAIN DEVELOPMENTS. Except for (i) the issuance
of Series B Convertible Preferred Stock, Series C Stock, Series D Stock and
150,000 shares of Series A-III Convertible Preferred Stock of the Company,
and the registration and other rights granted by the Company in connection
therewith, (ii) the increase in the number of shares of Common Stock
available for issuance under the Company's stock option plan described in
SCHEDULE 2.3 from 1,100,000 to 1,300,000, and the grant of stock options
thereunder, (iii) the pending transactions described on SCHEDULE 2.3, and
(iv) the anticipated amendment to the Certificate of Incorporation (which
amendment may have become effective prior to the date of this Agreement) to
increase the number of authorized shares of Common Stock and Preferred Stock
as described in Section 2.3, since the date of the Financial Statements,
there has not been any:
(i) change in the authorized or issued capital stock of the Company;
grant of any right to purchase shares of capital stock of the Company;
issuance of any security convertible into capital stock of the Company;
grant of any registration rights with respect to shares of capital stock of
the Company; purchase, redemption, retirement, or other acquisition by the
Company of any shares of its capital stock; or the declaration or payment
of any dividend or other distribution or payment in respect of shares of
capital stock of the Company;
(ii) amendment of (a) the Certificate of Incorporation or by-laws of
the Company, (b) the Stockholders' Agreement, or (c) Registration Rights
Agreement;
(iii) adoption of, or increase in the payments to or benefits under
any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement or other employee benefit plan for or with any Company
employees;
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(iv) material change in the accounting methods used by the Company;
(v) entry into by the Company or any agreement, arrangement,
understanding or commitment other than in the ordinary course of business;
or
(vi) any substantial losses or waiver of any rights of material
value, whether or not in the ordinary course of business.
2.11 LITIGATION. Except as set forth in SCHEDULE 2.11 attached
hereto, there is no litigation or governmental proceeding or investigation
pending, or, to the knowledge of the Company, threatened against the Company
affecting any of its properties or assets, nor, to the knowledge of the
Company, has there occurred any event or does there exist any condition on
the basis of which it is reasonably likely that any such litigation,
proceeding or investigation might properly be instituted. There are no
actions or proceedings pending, or to the Company's knowledge, threatened
(nor is there any reasonable basis therefor which is known to the Company)
which might result, either in any case or in the aggregate, in any material
adverse change in the business, operations, affairs or financial condition of
the Company or in any of its properties or assets, or which might call into
question the validity of this Agreement, or any action taken or to be taken
pursuant hereto.
2.12 INTELLECTUAL PROPERTY. Except as disclosed on SCHEDULE 2.11
(regarding pending or threatened claims), the Company owns or otherwise has
the right to use all of the patents, trademarks, service marks, trade names,
and copyrights necessary for the conduct of the Company's business as
currently conducted or as proposed to be conducted. The Company has a
contractual right to use the "Rolling Stone Trademarks" and certain other
intellectual property pursuant to an Affiliation Agreement dated November 10,
1997 between the Company and Straight Arrow Publishers Company, L.P., without
violating or conflicting with the rights of others, except as provided in
such Affiliation Agreement.
2.13 RELATIONSHIPS WITH RELATED PERSONS. There are no loans,
leases, royalty agreements or other continuing transactions between (a) the
Company or any of its customers or suppliers, and (b) any officer, employee,
consultant or director of the Company or any person owning five percent (5%)
or more of the capital stock of the Company, or to the Company's knowledge,
any member of the immediate family of such officer, employee, consultant,
director or stockholder or any corporation or other entity controlled by such
officer, employee, consultant, director or stockholder, or a member of the
immediate family of such officer, employee, consultant, director or
stockholder, except as provided on SCHEDULE 2.13 attached hereto.
2.14 FULL DISCLOSURE. The Company has made available to the
Subscriber, or has otherwise disclosed in writing in, or pursuant to, this
Agreement all facts material to the business, operations, assets or condition
(financial or otherwise) of the Company. No representation or warranty to
Subscriber contained in this Agreement, and no statement
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<PAGE>
contained in the Schedules to this Agreement, or any certificate, list or
other writing furnished by the Company to Subscriber pursuant to the
provisions hereof, contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements herein or
therein not misleading.
2.15 STOCKHOLDERS' AGREEMENT. Attached hereto as EXHIBIT A is a
true and complete copy of the Stockholders' Agreement, as amended to the date
hereof, which has not since been modified or amended in any respect.
2.16 REGISTRATION RIGHTS. Attached hereto as EXHIBIT B is a true
and complete copy of the Registration Rights Agreement, as amended to the
date hereof, which has not since been modified or amended in any respect.
2.17 CERTIFICATE OF INCORPORATION. Attached hereto as EXHIBIT C
is a true and complete copy of the Company's Second Amended and Restated
Certificate of Incorporation, as amended to the date hereof, provided
however, that EXHIBIT C does not include the anticipated amendment to the
Certificate of Incorporation as described in Section 2.3, which amendment may
have become effective prior to the date of this Agreement.
3. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE SUBSCRIBER. The
Subscriber represents and warrants to the Company as follows:
(i) The Subscriber is acquiring the Series D Stock being
purchased by it hereunder for its own account, for investment and not
with a view to the distribution thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) The Subscriber understands that (i) the Series D Stock has
not been, and that the Series D Reserved Shares will not be,
registered under the Securities Act, by reason of their issuance by
the Company in a transaction exempt from the registration requirements
of the Securities Act and (ii) the Series D Stock and the Series D
Reserved Shares may not be sold unless such disposition is registered
under the Securities Act or is exempt from registration;
(iii) The Subscriber further understands that the exemption from
registration afforded by Rule 144 (the provisions of which are known
to the Subscriber) promulgated under the Securities Act depends on the
satisfaction of various conditions, and that, if applicable, Rule 144
may afford the basis for sales only in limited amounts;
(iv) The Subscriber has not employed any broker or finder in
connection with the transactions contemplated by this Agreement;
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<PAGE>
(v) The Subscriber is an "Accredited Investor" (as defined in
Rule 501(a) under the Securities Act);
(vi) The Subscriber has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of
the transactions contemplated by this Agreement;
(vii) The Subscriber has been furnished with any materials which the
Subscriber has requested relating to the Company, its business and
financial condition and the offering of the Series D Stock, and the
Subscriber has been afforded an opportunity to ask questions and receive
answers concerning such matters;
(viii) The Subscriber has full power and authority without the
consent or approval of any court, agency or other third party, to
enter into and perform this Agreement. This Agreement has been duly
authorized by all necessary action on the part of the Subscriber.
When duly executed and delivered this Agreement will constitute a
valid and binding agreement of the Subscriber enforceable against the
Subscriber in accordance with its terms except to the extent that
enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights generally or equitable
principles.
4. MISCELLANEOUS PROVISIONS.
4.1 TRANSFER TAXES. The Company will be liable for and will pay,
and will hold the Subscriber harmless from, any and all liability with
respect to any stamp, transfer or similar taxes arising from the execution,
delivery or performance of this Agreement or any modification, amendment or
alteration of the terms or provisions of this Agreement, and that it will
similarly be liable for, pay and hold the Subscriber harmless from all issue
taxes in respect of the issuance of the Series D Stock and the Series D
Reserved Shares to such Subscriber.
4.2 EXCHANGES; LOST, STOLEN OR MUTILATED CERTIFICATES. Upon
surrender by the Subscriber to the Company of any certificate representing
shares of Series D Stock or Series D Reserved Shares purchased or acquired
hereunder, the Company at its expense will issue in exchange therefor, and
deliver to such Subscriber, a new certificate or certificates representing
such shares, in such denominations as may be requested by such Subscriber.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of any certificate representing any Series D Stock
or Series D Reserved Shares purchased or acquired by the Subscriber
hereunder, and in case of any such loss, theft or destruction, upon delivery
of any indemnity agreement satisfactory to the Company, or in any case of any
such mutilation, upon surrender and cancellation of such certificate, the
Company at its expense will issue and deliver to such Subscriber a new
certificate for such Series D Stock or Series D Reserved Shares of like
tenor, in lieu of such lost, stolen or mutilated certificate.
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<PAGE>
4.3 NO BROKER'S COMMISSION. The Subscriber and the Company agree
that none of the parties has employed or retained any person, firm, or
Company as a broker, dealer, or sales agent to bring about or to represent
any of them in the transaction contemplated by this Agreement. The Company
shall not be liable to the Subscriber for any costs, fees or expenses in the
nature of any commission to a broker, dealer or sales agent.
4.4 CONSTRUCTION. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Illinois without giving effect to the conflict of law provisions thereof.
4.5 SURVIVAL OF REPRESENTATIONS. All representations,
warranties, covenants, and agreements made herein shall survive the execution
and delivery of this Agreement.
4.6 NOTICES. All notices hereunder shall be in writing and shall
be deemed to have been given at the time when mailed by certified mail,
return receipt requested and postage prepaid, addressed as follows:
If to the Company:
JAMtv Corporation
640 North LaSalle Street, Suite 560
Chicago, IL 60610
Facsimile: (312) 642-0616
Attention: Howard A. Tullman
with a copy to:
Freeborn & Peters
311 South Wacker Drive, Suite 3000
Chicago, IL 60606
Facsimile: (312) 360-6596
Attention: Michael E. Shabat
If to the Subscriber:
---------------------------
---------------------------
---------------------------
Facsimile:
----------------
Attention:
----------------
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with a copy to:
---------------------------
---------------------------
---------------------------
Facsimile:
----------------
Attention:
----------------
4.7 ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the Company, the Subscriber, and their respective
successors and permitted assigns. The Subscriber shall not assign this
Agreement without the prior written consent of the Company.
4.8 AMENDMENTS AND WAIVERS. This Agreement and the exhibit
hereto set forth the entire understanding of the parties with respect to the
investment contemplated hereby. This Agreement may be amended only by an
instrument in writing signed by both parties.
4.9 INTERPRETATION. In case any or one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein.
4.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
4.11 HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not constitute a part hereof.
4.12 ATTENDANCE AT BOARD MEETINGS. The Company will permit one
representative of the holders of Series D Stock as is designated by the
holders of Series D Stock, with the approval of the Chief Executive Officer
of the Company, exercisable in his sole discretion, to attend meetings of the
Board of Directors of the Company.
4.13 DELIVERY OF AUDITED FINANCIAL STATEMENTS. Promptly upon the
written request of the Subscriber, and subject to Subscriber's written
confidentiality obligations to the Company, the Company will deliver to the
Subscriber the audited consolidated financial statements of the Company and
the accompanying report of the Company's independent auditors.
[intentionally left blank]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
JAMTV CORPORATION
By:
----------------------------------
Howard A. Tullman,
Chief Executive Officer
SUBSCRIBER
Print Name:
--------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT is made as of March 17, 1999 by
and between Tunes.com Inc., a Delaware corporation (the "COMPANY"), and the
persons or entities named on the signature page attached hereto (individually, a
"PURCHASER" and collectively, the "PURCHASERS").
The Parties hereby agree as follows:
1. AMOUNT AND TERMS OF THE LOAN; PURCHASE AND SALE OF THE WARRANTS
1.1 THE LOAN. Subject to the terms of this Agreement, the Company
shall borrow from the Purchaser and the Purchaser shall lend to the Company up
to the amount set forth opposite the Purchaser's name on the attached Schedule
of Purchasers (each, a "LOAN AMOUNT") pursuant to convertible promissory notes
in the form attached hereto as EXHIBIT A-1 in connection with Purchasers who are
GSCP Stockholders (as defined in that certain Stockholders' Agreement, dated as
of June 2, 1997, as amended, by and between the Company and the stockholders
named therein) and in the form attached hereto as EXHIBIT A-2 in connection with
all other Purchasers (collectively the "NOTES"). The Loan Amounts are
hereinafter referred to collectively as the "LOAN."
1.2 ISSUANCE OF WARRANTS. The Company will issue to the Purchaser,
severally and not jointly, warrants in the form attached hereto as EXHIBIT B
(the "WARRANTS") to purchase up to that number of shares of the Company's common
stock, par value $0.01 per share (the "COMMON STOCK" as set forth opposite the
Purchaser's name on the Schedule of Purchasers (each, a "WARRANT AMOUNT") at a
per share exercise price of $10.00.
1.3 ISSUANCE OF ADDITIONAL WARRANTS. In the event the Loan remains
outstanding as of March 17, 2000, effective on such date, the Company will issue
to the Purchaser, severally and not jointly, warrants that are identical to the
Warrants except that the issuance date of such additional warrants (the
"SECONDARY WARRANTS") shall be March 17, 2000, and the two-year term of such
Secondary Warrants shall commence as of March 17, 2000.
2. THE CLOSING
2.1 CLOSING DATES. The closing as to the purchase and sale of the
Notes and the Warrants (the "CLOSING") shall be held no later than March 17,
1999, at the offices of Tunes.com Inc., 640 N. LaSalle Street, Suite 560,
Chicago, IL 60614, or at such other time as the Company and the Purchasers of a
majority of the Notes shall agree (the "CLOSING DATE").
2.2 DELIVERY. At the Closing (i) the Purchaser will deliver to the
Company a check or wire transfer of funds in the amount of such Purchaser's Loan
Amount; and (ii) the Company shall deliver to the Purchaser a Note representing
such Purchaser's Loan Amount, and an executed Warrant.
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as follows:
3.1 CORPORATE POWER. The Company has all requisite corporate power
to execute and deliver this Agreement and to carry out and perform its
obligations under the terms of this Agreement.
3.2 AUTHORIZATION. All corporate action on the part of the Company,
its directors and its stockholders necessary for the authorization, execution,
delivery and performance of this Agreement by the Company and the performance of
the Company's obligations hereunder, including the issuance and delivery of the
Notes and Warrants and the reservation of the equity securities issuable upon
conversion of the Notes or exercise of the Warrants has been taken or will be
taken prior to the Closing. As the exact terms of the New Series A Preferred or
Next Round Preferred (each as defined in the Notes), as applicable, are not
currently fixed, no shares of such series have been authorized or reserved for
issuance upon conversion of the Notes. Upon authorization of the New Series A
Preferred or Next Round Preferred, as applicable, such reservations will be
made. This Agreement, the Notes and the Warrants, when executed and delivered
by the Company, shall constitute valid and binding obligations of the Company
enforceable in accordance with their terms, subject to laws of general
application relating to bankruptcy, insolvency, the relief of debtors and, with
respect to rights to indemnity, subject to federal and state securities laws.
The shares of Common Stock, New Series A Preferred or Next Round Preferred, as
applicable, or other equity securities of the Company, when issued in compliance
with the provisions of this Agreement, the Notes or the Warrants, will be
validly issued, fully paid and non-assessable and free of any liens or
encumbrances.
3.3 GOVERNMENTAL CONSENTS. All consents, approvals, orders or
authorizations of, or registrations, qualifications, designations, declarations
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement, the
offer, sale or issuance of the Notes, the Warrants and the equity securities
issuable upon exercise of the Warrants, conversion of the Note or the
consummation of any other transaction contemplated hereby shall have been
obtained and will be effective at the Closing, except for notices required or
permitted to be filed with certain state and federal securities commissions,
which notices will be filed on a timely basis.
3.4 OFFERING. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, issue and
sale of the Notes and Warrants are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"1933 ACT"), and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
4.1 PURCHASE FOR OWN ACCOUNT. The Purchaser represents that it is
acquiring the Notes, the equity securities issuable upon conversion of the
Notes, the Warrants and the equity securities issuable upon exercise of the
Warrants (collectively, the "SECURITIES") solely for its
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own account and beneficial interest for investment and not for sale or with a
view to distribution of the Securities or any part thereof, has no present
intention of selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the same, and does
not presently have reason to anticipate a change in such intention.
4.2 INFORMATION AND SOPHISTICATION. The Purchaser acknowledges that
it has received all the information it has requested from the Company and
considers necessary or appropriate for deciding whether to acquire the Notes and
Warrants. The Purchaser represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Notes and Warrants and to obtain any
additional information necessary to verify the accuracy of the information given
the Purchaser. The Purchaser further represents that it has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risk of this investment.
4.3 ABILITY TO BEAR ECONOMIC RISK. The Purchaser acknowledges that
investment in the Notes and Warrants involves a high degree of risk, and
represents that it is able, without materially impairing its financial
condition, to hold the Securities for an indefinite period of time and to suffer
a complete loss of its investment.
4.4 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, the Purchaser further agrees not to make
any disposition of all or any portion of the Securities unless and until:
(a) There is then in effect a registration statement under
the 1933 Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) The Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Purchaser shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration under the 1933 Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by gift, will or intestate succession to any spouse or lineal
descendants or ancestors (or to a custodian or trustee for the benefit of the
Purchaser or his or her spouse, lineal descendants or ancestors), if all
transferees agree in writing to be subject to the terms hereof to the same
extent as if they were Purchasers hereunder.
4.5 ACCREDITED INVESTOR. The Purchaser is an "accredited investor"
as such term is defined in Rule 501 under the 1933 Act.
5. MISCELLANEOUS
5.1 BINDING AGREEMENT. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any
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<PAGE>
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
5.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Illinois as applied to agreements among Illinois
residents, made and to be performed entirely within the State of Illinois.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 NOTICES. Any notice required or permitted under this Agreement
shall be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the Company at 640 N. LaSalle
Street, Suite 560, Chicago, Illinois 60610, Attn: Chief Financial Officer, or
to the Purchaser at its address shown on the signature page, or at such other
address as such party may designate by ten (10) days advance written notice to
the other party.
5.6 MODIFICATION; WAIVER. No modification or waiver of any provision
of this Agreement, the Notes or the Warrants or consent to departure therefrom
shall be effective unless in writing and approved by the Company and a majority
in interest of the Notes (determined by reference to the principal amount of the
Notes outstanding).
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY
TUNES.COM INC.
By:
Name: ___________________________
Title: _________________________
PURCHASER:
_________________________
Address:
Tax ID:
[Signature Page to Note and Warrant Purchase Agreement]
5
<PAGE>
Exhibit A-1
to
Note and Warrant Purchase Agreement
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE BORROWER THAT SUCH
REGISTRATION IS NOT REQUIRED.
CONVERTIBLE PROMISSORY NOTE
[FOR USE WITH GOLDMAN INVESTORS]
$_________ March __, 1999
Chicago, Illinois
FOR VALUE RECEIVED, Tunes.com Inc., a Delaware corporation
("BORROWER"), hereby unconditionally promises to pay to _____________
("LENDER"), in lawful money of the United States of America and in
immediately available funds, the principal sum of $_______ (the "LOAN")
together with accrued and unpaid interest thereon, payable on the dates and
in the manner set forth below.
This Convertible Promissory Note (the "NOTE") is non-negotiable and is
executed and delivered in connection with that certain Note and Warrant
Purchase Agreement dated as of March __, 1999, by and between Borrower and
Lender (as the same may from time to time be amended, modified or
supplemented, the "PURCHASE AGREEMENT"). All terms defined in the Purchase
Agreement shall have the same definitions when used herein, unless otherwise
defined herein. In the event of any conflict between the terms of this Note
and the terms of the Purchase Agreement, the terms of the Purchase Agreement
shall control.
1. PRINCIPAL REPAYMENT. The outstanding principal amount of the
Loan shall be payable on March __, 2001, subject to the conversion of the
Note into certain of Borrower's capital stock as further described in Section
5 below. Except with the prior consent of the Lender or as otherwise provided
herein, Borrower may not prepay this Note.
2. INTEREST RATE. Borrower further promises to pay interest on the
sum of the unpaid principal balance of the Loan outstanding on each day, from
the date of this Note until all such principal amounts shall have been repaid in
full or converted into capital stock of the Borrower, which interest shall be
payable at the rate of eight percent (8%) per annum or the maximum rate
permissible by law (which under the laws of the State of Illinois shall be
deemed to be the laws relating to permissible rates of interest on commercial
loans), whichever is less. Interest shall be payable at maturity and shall be
calculated on the basis of a 365-day year for the actual number of days elapsed.
<PAGE>
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable
to Lender at the address it specifies to Borrower in writing.
4. APPLICATION OF PAYMENTS. Payment on this Note shall be applied
first to accrued interest, and thereafter to the outstanding principal balance
hereof.
5. CONVERSION.
(a) CONVERSION BY THE BORROWER.
(1) This Note shall automatically be converted upon the next
closing of a sale of a series of Preferred Stock (the "NEXT ROUND PREFERRED") in
which the gross proceeds to the Borrower are at least $5,000,000 (a "QUALIFIED
FINANCING"), not including the conversion of the aggregate amount due under the
"Notes" (as defined below) and any additional funds tendered in connection
therewith by investors of the Company holding notes or shares of the Company
immediately prior to the closing of such sale of Preferred Stock (the "BRIDGE
FINANCING"), into fully paid and non-assessable shares of a new series of Series
A Preferred Stock (the "NEW SERIES A PREFERRED") having an "Issue Price" (as
defined in the Company's Certificate of Incorporation, as amended) equal to the
Conversion Price (as defined in subparagraph (c) below); provided that the
aggregate amount raised by the Company in the Qualified Financing combined with
the amount raised by the Company in connection with the Bridge Financing is at
least $10,000,000. "Notes" means, collectively, a reference to this Note and
those certain other Convertible Promissory Notes issued by the Company on or
about the date hereof and which are substantially similar to this Note.
(2) If not previously converted as provided herein, this Note
shall automatically be converted immediately prior to the closing of a firmly
underwritten public offering of Common Stock or other equity security of the
Company into fully paid and non-assessable shares of shares of Common Stock of
the Company.
(b) CONVERSION BY LENDER. At any time following the next
closing of a sale of Next Round Preferred by the Company in a transaction or
series of transactions in which the gross proceeds do not constitute a Qualified
Financing, this Note may be converted at the option of Lender into fully paid
and non-assessable shares of the New Series A Preferred.
(c) CONVERSION BY LENDER UPON A MERGER. This Note may be
converted at the option of Lender into fully paid and non-assessable shares of
shares of Common Stock of the Company immediately prior to the consummation of a
Merger. As used herein, "MERGER" means (i) the merger or consolidation of the
Company into or with another corporation in which the stockholders of the
Company immediately prior to the consummation of such merger or consolidation
shall own 50% or less of the voting securities of the surviving corporation,
(ii) the sale, transfer or lease (but not including a transfer or lease by
pledge or mortgage to a bona fide lender) of all or substantially all of the
assets of the Company, or (iii) the sale of 50% or more of the outstanding
capital stock of the Company. A conversion of this Note in connection with a
Merger shall be effective upon the closing of such Merger, subject to the due,
proper and prior surrender of this Note; provided, however, that should such
Merger not be consummated, the Company shall return this Note to the Lender and
the parties shall be returned to their respective
2
<PAGE>
positions vis-a-vis this Note as they held prior to the surrender by Lender
of this Note. If the Note is not converted by Lender as provided in
subparagraphs (b) or (c), then upon or immediately prior to the consummation
of a Merger, Borrower shall be permitted to prepay the Note without penalty
or premium.
(d) NUMBER OF SHARES; CONVERSION PRICE. The number of shares
of the applicable security issuable to the holder of this Note upon conversion
shall be equal to the principal balance and accrued but unpaid interest that is
being converted, divided by the Conversion Price. "CONVERSION PRICE" means (1)
with respect to a conversion of the Note into shares of New Series A Preferred
pursuant to subparagraphs (a)(1) or (b) above, the price per share at which
Borrower sells the Next Round Preferred, or (2) with respect to a conversion of
the Note into shares of Common Stock pursuant to subparagraphs (a)(2) or (c)
above, $10.00 per share.
(e) MECHANICS OF CONVERSION. Upon conversion of the Note, (i)
the Note shall become fully paid and satisfied, (ii) Lender shall surrender the
Note, duly endorsed, to Borrower's office or such other address Borrower shall
designate, (iii) if applicable, the Next Round Preferred issued to Lender upon
such conversion automatically thereupon shall become subject to the restrictions
upon such series of "Preferred Stock" under and as defined in that certain
Stockholders' Agreement dated as of June 2, 1997, as amended, between the
Company and its stockholders (the "Stockholders' Agreement") and Lender
automatically thereupon shall become a party to the Stockholders' Agreement in
accordance with the terms of the Joinder Agreement attached as EXHIBIT C to the
Purchase Agreement (except in the case where Lender is already a party to the
Stockholders' Agreement, in which case Lender hereby reaffirms its obligations
under the Stockholders' Agreement), and (iv) if applicable, if requested by the
Company, Lender shall execute and deliver to the Company the Joinder Agreement
(except in the case where Lender is already a party to the Stockholders'
Agreement) and such other documents or instruments reasonably necessary to
evidence the conversion and the other terms of this paragraph. Any conversion
other than a conversion which occurs automatically upon its terms shall require
notice by the Lender not less than five business days prior to the proposed
conversion date. The Company shall provide the Lender with not less than fifteen
business days prior written notice of any firmly underwritten public offering or
Merger.
(f) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN EVENTS. The
Conversion Price shall be subject to adjustment from time to time as follows:
(1) If the number of outstanding shares of the
Preferred Stock of Borrower is increased by a stock dividend, stock split-up or
by a subdivision of shares, then, following the record date fixed for the
determination of holders of Preferred Stock entitled to receive such stock
dividend, split-up or subdivision, the Conversion Price shall be appropriately
decreased so that the number of shares of New Series A Preferred issuable on
conversion of this Note shall be increased in proportion to such increase of
outstanding shares of Preferred Stock.
(2) If the number of shares of Preferred Stock
outstanding is decreased by a combination of the outstanding shares of Preferred
Stock, then, following the record date of such combination, the Conversion Price
shall be appropriately increased so that the number of
3
<PAGE>
shares of New Series A Preferred issuable on conversion of this Note shall be
decreased in proportion to such decrease in outstanding shares of Preferred
Stock.
(g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Section 5, Borrower at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to the Lender a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. Borrower shall,
upon the written request at any time of Lender, furnish or cause to be furnished
to Lender a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price, at the time in effect, and (iii) the
number of shares of New Series A Preferred and the amount, if any, of other
property which at the time would be received upon the conversion of this Note.
(h) NOTICES OF RECORD DATE. In the event of any taking by
Borrower of a record of the holders of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any security or right
convertible into or entitling the holder thereof to receive Preferred Stock or
other securities of Borrower, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, Borrower shall mail to Lender at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution, security or right, and the amount and character of such dividend,
distribution, security or right.
(i) ISSUE TAXES. Borrower shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of shares of
New Series A Preferred on conversion of this Note pursuant hereto; provided,
however, that Borrower shall not be obligated to pay any transfer taxes
resulting from any transfer requested by any holder in connection with any such
conversion.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. Borrower
shall at all times reserve and keep available out of its authorized but unissued
shares of Preferred Stock or other securities, solely for the purpose of
effecting the conversion of this Note, such number of its shares of Preferred
Stock or other securities from time to time issuable upon such conversion; and
if at any time the number of authorized but unissued shares of Preferred Stock
or other securities shall not be sufficient to effect the conversion of this
Note, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Preferred Stock or other securities to such number of shares as shall be
sufficient for such purpose, including, without limitation, using its best
efforts to obtain the requisite stockholder approval of any necessary amendment
to the Certificate of Incorporation.
(k) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of this Note. All shares of New Series A Preferred
(including fractions thereof) issuable upon conversion of this Note, along with
any other Notes held by the same Lender shall be aggregated for purposes of
determining the number of whole shares issuable upon conversion. In lieu of
issuing any fractional shares, Borrower shall pay to the Lender in cash any
remainder resulting after the number of whole shares is determined as a result
of the conversion.
4
<PAGE>
6. WAIVER. Borrower waives presentment and demand for payment,
notice of dishonor, protest and notice of protest of this Note, and shall pay
all costs of collection when incurred, including, without limitation, reasonable
attorneys' fees, costs and other expenses.
7. ATTORNEY'S FEES. In the event of default by the Borrower (or its
assignee) in the payment of principal or interest due on this Note, Lender shall
be entitled to receive and Borrower (or its assignee) agrees to pay all
reasonable costs of collection incurred by Lender, including, without
limitation, reasonable attorney's fees for consultation and suit.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure
to the benefit of and be binding on any successor to Borrower and shall extend
to any permitted holder hereof.
BORROWER:
TUNES.COM INC.
By:
----------------------------------
Howard A. Tullman, C.E.O.
5
<PAGE>
Exhibit A-2
to
Note and Warrant Purchase Agreement
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE BORROWER THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE PROMISSORY NOTE
[FOR USE WITH NON-GOLDMAN INVESTORS]
$_________ March __, 1999
Chicago, Illinois
FOR VALUE RECEIVED, Tunes.com Inc., a Delaware corporation ("BORROWER"),
hereby unconditionally promises to pay to _____________ ("LENDER"), in lawful
money of the United States of America and in immediately available funds, the
principal sum of $_______ (the "LOAN") together with accrued and unpaid interest
thereon, payable on the dates and in the manner set forth below.
This Convertible Promissory Note (the "NOTE") is non-negotiable and is
executed and delivered in connection with that certain Note and Warrant Purchase
Agreement dated as of March __, 1999, by and between Borrower and Lender (as
the same may from time to time be amended, modified or supplemented, the
"PURCHASE AGREEMENT"). All terms defined in the Purchase Agreement shall have
the same definitions when used herein, unless otherwise defined herein. In the
event of any conflict between the terms of this Note and the terms of the
Purchase Agreement, the terms of the Purchase Agreement shall control.
1. PRINCIPAL REPAYMENT. The outstanding principal amount of the
Loan shall be payable on March __, 2001, subject to the conversion of the Note
into certain of Borrower's capital stock as further described in Section 5
below. Except with the prior consent of the Lender or as otherwise provided
herein, Borrower may not prepay this Note.
2. INTEREST RATE. Borrower further promises to pay interest on the
sum of the unpaid principal balance of the Loan outstanding on each day, from
the date of this Note until all such principal amounts shall have been repaid in
full or converted into capital stock of the Borrower, which interest shall be
payable at the rate of eight percent (8%) per annum or the maximum rate
permissible by law (which under the laws of the State of Illinois shall be
deemed to be the laws relating to permissible rates of interest on commercial
loans), whichever is less. Interest shall be payable at maturity and shall be
calculated on the basis of a 365-day year for the actual number of days elapsed.
<PAGE>
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable
to Lender at the address it specifies to Borrower in writing.
4. APPLICATION OF PAYMENTS. Payment on this Note shall be applied
first to accrued interest, and thereafter to the outstanding principal balance
hereof.
5. CONVERSION.
(a) AUTOMATIC CONVERSION.
(1) This Note shall automatically be converted upon
the next closing of a sale of a series of Preferred Stock (the "NEXT
ROUND PREFERRED") in which the gross proceeds to the Borrower are at
least $5,000,000 (a "QUALIFIED FINANCING"), not including the conversion
of the aggregate amount due under the "Notes" (as defined below) and any
additional funds tendered in connection therewith by investors of the
Company holding notes or shares of the Company immediately prior to the
closing of such sale of Preferred Stock (the "BRIDGE FINANCING"), into
fully paid and non-assessable shares of the Next Round Preferred;
provided that the aggregate amount raised by the Company in the
Qualified Financing combined with the amount raised by the Company in
connection with the Bridge Financing is at least $10,000,000. "Notes"
means, collectively, a reference to this Note and those certain other
Convertible Promissory Notes issued by the Company on or about the date
hereof and which are substantially similar to this Note.
(2) If not previously converted as provided herein,
this Note shall automatically be converted immediately prior to the
closing of a firmly underwritten public offering of Common Stock or
other equity security of the Company into fully paid and non-assessable
shares of shares of Common Stock of the Company.
(b) CONVERSION BY LENDER. At any time following the next
closing of a sale of Next Round Preferred by the Company in a transaction or
series of transactions in which the gross proceeds do not constitute a Qualified
Financing, this Note may be converted at the option of Lender into fully paid
and non-assessable shares of the Next Round Preferred.
(c) CONVERSION BY LENDER UPON A MERGER. This Note may be
converted at the option of Lender into fully paid and non-assessable shares of
shares of Common Stock of the Company immediately prior to the consummation of a
Merger. As used herein, "MERGER" means (i) the merger or consolidation of the
Company into or with another corporation in which the stockholders of the
Company immediately prior to the consummation of such merger or consolidation
shall own 50% or less of the voting securities of the surviving corporation,
(ii) the sale, transfer or lease (but not including a transfer or lease by
pledge or mortgage to a bona fide lender) of all or substantially all of the
assets of the Company, or (iii) the sale of 50% or more of the outstanding
capital stock of the Company. A conversion of this Note in connection with a
Merger shall be effective upon the closing of such Merger, subject to the due,
proper and prior surrender of this Note; provided, however, that should such
Merger not be consummated, the Company shall return this Note to the Lender and
the parties shall be returned to their respective positions vis-a-vis this Note
as they held prior to the surrender by Lender of this Note. If the
2
<PAGE>
Note is not converted by Lender as provided in subparagraphs (b) or (c), then
upon or immediately prior to the consummation of a Merger, Borrower shall be
permitted to prepay the Note without penalty or premium.
(d) NUMBER OF SHARES; CONVERSION PRICE. The number of shares
of the applicable security issuable to the holder of this Note upon conversion
shall be equal to the principal balance and accrued but unpaid interest that is
being converted, divided by the Conversion Price. "CONVERSION PRICE" means (1)
with respect to a conversion of the Note into shares of Next Round Preferred
pursuant to subparagraphs (a)(1) or (b) above, the price per share at which
Borrower sells the Next Round Preferred, or (2) with respect to a conversion of
the Note into shares of Common Stock pursuant to subparagraphs (a)(2) or (c)
above, $10.00 per share.
(e) MECHANICS OF CONVERSION. Upon conversion of the Note, (i)
the Note shall become fully paid and satisfied, (ii) Lender shall surrender the
Note, duly endorsed, to Borrower's office or such other address Borrower shall
designate, (iii) if applicable, the Next Round Preferred issued to Lender upon
such conversion automatically thereupon shall become subject to the restrictions
upon such series of "Preferred Stock" under and as defined in that certain
Stockholders' Agreement dated as of June 2, 1997, as amended, between the
Company and its stockholders (the "Stockholders' Agreement") and Lender
automatically thereupon shall become a party to the Stockholders' Agreement in
accordance with the terms of the Joinder Agreement attached as EXHIBIT C to the
Purchase Agreement (except in the case where Lender is already a party to the
Stockholders' Agreement, in which case Lender hereby reaffirms its obligations
under the Stockholders' Agreement), and (iv) if applicable, if requested by the
Company, Lender shall execute and deliver to the Company the Joinder Agreement
(except in the case where Lender is already a party to the Stockholders'
Agreement) and such other documents or instruments reasonably necessary to
evidence the conversion and the other terms of this paragraph. Any conversion
other than a conversion which occurs automatically upon its terms shall require
notice by the Lender not less than five business days prior to the proposed
conversion date. The Company shall provide the Lender with not less than fifteen
business days prior written notice of any firmly underwritten public offering or
Merger.
(f) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN EVENTS. The
Conversion Price shall be subject to adjustment from time to time as follows:
(1) If the number of outstanding shares of the
Preferred Stock of Borrower is increased by a stock dividend, stock split-up or
by a subdivision of shares, then, following the record date fixed for the
determination of holders of Preferred Stock entitled to receive such stock
dividend, split-up or subdivision, the Conversion Price shall be appropriately
decreased so that the number of shares of Next Round Preferred issuable on
conversion of this Note shall be increased in proportion to such increase of
outstanding shares of Preferred Stock.
(2) If the number of shares of Preferred Stock
outstanding is decreased by a combination of the outstanding shares of Preferred
Stock, then, following the record date of such combination, the Conversion Price
shall be appropriately increased so that the number of shares of Next Round
Preferred issuable on conversion of this Note shall be decreased in proportion
to such decrease in outstanding shares of Preferred Stock.
3
<PAGE>
(g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Section 5, Borrower at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to the Lender a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. Borrower shall,
upon the written request at any time of Lender, furnish or cause to be furnished
to Lender a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price, at the time in effect, and (iii) the
number of shares of Next Round Preferred and the amount, if any, of other
property which at the time would be received upon the conversion of this Note.
(h) NOTICES OF RECORD DATE. In the event of any taking by
Borrower of a record of the holders of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any security or right
convertible into or entitling the holder thereof to receive Preferred Stock or
other securities of Borrower, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, Borrower shall mail to Lender at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution, security or right, and the amount and character of such dividend,
distribution, security or right.
(i) ISSUE TAXES. Borrower shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of shares of
Next Round Preferred on conversion of this Note pursuant hereto; provided,
however, that Borrower shall not be obligated to pay any transfer taxes
resulting from any transfer requested by any holder in connection with any such
conversion.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. Borrower
shall at all times reserve and keep available out of its authorized but unissued
shares of Preferred Stock or other securities, solely for the purpose of
effecting the conversion of this Note, such number of its shares of Preferred
Stock or other securities from time to time issuable upon such conversion; and
if at any time the number of authorized but unissued shares of Preferred Stock
or other securities shall not be sufficient to effect the conversion of this
Note, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Preferred Stock or other securities to such number of shares as shall be
sufficient for such purpose, including, without limitation, using its best
efforts to obtain the requisite stockholder approval of any necessary amendment
to the Certificate of Incorporation.
(k) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of this Note. All shares of Next Round Preferred (including
fractions thereof) issuable upon conversion of this Note, along with any other
Notes held by the same Lender shall be aggregated for purposes of determining
the number of whole shares issuable upon conversion. In lieu of issuing any
fractional shares, Borrower shall pay to the Lender in cash any remainder
resulting after the number of whole shares is determined as a result of the
conversion.
4
<PAGE>
6. WAIVER. Borrower waives presentment and demand for payment,
notice of dishonor, protest and notice of protest of this Note, and shall pay
all costs of collection when incurred, including, without limitation, reasonable
attorneys' fees, costs and other expenses.
7. ATTORNEY'S FEES. In the event of default by the Borrower (or its
assignee) in the payment of principal or interest due on this Note, Lender shall
be entitled to receive and Borrower (or its assignee) agrees to pay all
reasonable costs of collection incurred by Lender, including, without
limitation, reasonable attorney's fees for consultation and suit.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure
to the benefit of and be binding on any successor to Borrower and shall extend
to any permitted holder hereof.
BORROWER:
TUNES.COM INC.
By:
---------------------------------
Howard A. Tullman, C.E.O.
5
<PAGE>
Exhibit B
to
Note and Warrant Purchase Agreement
Warrant No. W __
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK OF
TUNES.COM INC.
____________________
(VOID AFTER THE DATE THAT IS TWO (2) YEARS AFTER THE DATE HEREOF)
This certifies that _________________________ (the "Holder"), or assigns, for
value received, is entitled to purchase from Tunes.com Inc., a Delaware
corporation (the "Company"), having a place of business at 640 N. LaSalle
Street, Suite 560, Chicago, IL 60614 up to _______ fully paid and nonassessable
shares of common stock, $.01 par value, of the Company (the "Common Stock"), at
a purchase price per share (the "Stock Purchase Price") equal to the lesser of
(a) $10.00 or (b) the price per share at which the Company sells the Next Round
Preferred (as defined in a certain Convertible Promissory Note issued to the
original holder hereof pursuant to the Note Purchase Agreement (as defined
below)), at any time, and from time to time, on or after the date hereof through
5:00 p.m. (Central Time) on the date two (2) years after the date hereof, such
later date being referred to herein as the "Expiration Date."
The Stock Purchase Price and the number of shares purchasable hereunder
are subject to adjustment as provided in Section 3 of this Warrant.
This Warrant was originally issued in connection with the execution
and delivery of a certain Note and Warrant Purchase Agreement, dated as of
March __, 1999, by and between the Company and the Holder (the "Note Purchase
Agreement"). Terms used herein and not otherwise defined shall have the
meaning ascribed to them in the Note Purchase Agreement.
<PAGE>
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the Holder
of record hereof, at any time or from time to time, on or after the date hereof
up to the Expiration Date for all or any part of the shares of Common Stock (but
not for a fraction of a share) which may be purchased hereunder; provided,
however, that this Warrant must be either exercised or the Warrant terminates
immediately before the closing of a firmly underwritten public offering of
Common Stock or other equity security of the Company; provided that the Company
has given the holder of this Warrant at least fifteen (15) days prior written
notice of such closing.
1.2 ISSUANCE OF CERTIFICATES. The Company agrees that the shares of
Common Stock purchased under this Warrant shall be and are deemed to be issued
to the Holder hereof as the record owner of such shares as of the close of
business on the date on which (i) this Warrant shall have been surrendered,
properly endorsed, to the Company, (ii) the Company shall have received the
completed Subscription Form (a copy of which is attached hereto as EXHIBIT A),
the Investment Representations Letter (a copy of which is attached hereto as
EXHIBIT B), and, if requested by the Company (except in the case where the
Holder is already a party to the Stockholders' Agreement), the Joinder Agreement
(a copy of which is attached as EXHIBIT C to the Note Purchase Agreement) duly
executed by the Holder, and (iii) the Holder shall have made payment for such
shares. Certificates for the shares of Common Stock so purchased, together with
any other securities or property to which the Holder hereof is entitled upon
such exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within a reasonable time after the rights represented by this
Warrant have been so exercised. Each stock certificate so delivered shall be in
such denominations of Common Stock as may be requested by the Holder hereof and
shall be registered in the name of such Holder. In case of a purchase of less
than all the shares which may be purchased under this Warrant, the Company shall
cancel this Warrant and execute and deliver a new Warrant or Warrants of like
tenor for the balance of the shares purchasable under the Warrant surrendered
upon such purchase to the Holder hereof within a reasonable time. Upon exercise
of this Warrant, (i) the Common Stock issued to the Holder upon such conversion
automatically thereupon shall become subject to the restrictions upon "Common
Stock" under and as defined in that certain Stockholders' Agreement dated as of
June 2, 1997, as amended, between the Company and its stockholders (the
"Stockholders' Agreement"), (ii) the Holder automatically thereupon shall become
a party to the Stockholders' Agreement in accordance with the terms of the
Joinder Agreement attached as EXHIBIT C to the Note Purchase Agreement (except
in the case where the Holder is already a party to the Stockholders' Agreement,
in which case the Holder hereby reaffirms its obligations under the
Stockholders' Agreement), and (iii) if requested by the Company, the Holder
shall execute and deliver to the Company such other documents or instruments
reasonably necessary to evidence the exercise of this Warrant and the other
terms of this paragraph.
1.3 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Common Stock is
greater than the Stock Purchase Price (at the date of calculation as set forth
below), in lieu of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
2
<PAGE>
office of the Company together with the properly endorsed Form of Subscription
and notice of such election in which event the Company shall issue to the Holder
a number of shares of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised,
the portion of the Warrant being canceled (at the date of such
calculation)
A = the fair market value of one share of Common Stock (at the date
of such calculation)
B = Stock Purchase Price (as adjusted to the date of such
calculation)
For purposes of the above calculation, the fair market value of one share of
Common Stock shall be determined by the Company's Board of Directors in good
faith; PROVIDED, HOWEVER, that in the event the Company makes an initial public
offering of its Common Stock the fair market value per share shall be: (i) if
the Warrant is being converted in connection with and contingent upon a public
offering of the Company's securities, and if the Company's registration
statement relating to such public offering has been declared effective by the
U.S. Securities and Exchange Commission, then the fair market value of the
Common Stock shall be the initial "Price to Public" specified in the final
prospectus with respect to such offering multiplied by the number of shares of
Common Stock into which each share of Common Stock is then convertible; or (ii)
if the Warrant is not being converted in connection with and contingent upon a
public offering of the Company's securities, then as follows: (x) if traded on
a securities exchange or the Nasdaq National Market, the fair market value of
the Common Stock shall be deemed to be the average of the daily closing prices
per share of such stock for the 20 consecutive trading days commencing 30
trading days before the date of calculation, and the fair market value of the
Common Stock shall be deemed to be such fair market value of the Common Stock
multiplied by the number of shares of Common Stock into which each share of
Common Stock is then convertible or (y) if otherwise traded in an
over-the-counter market, the fair market value of the Common Stock shall be
deemed to be the median of the average of the reported closing bid and ask
prices of the Common Stock over the 30-day period ending five business days
prior to the date of calculation, and the fair market value of the Common Stock
shall be deemed to be such fair market value of the Common Stock multiplied by
the number of shares of Common Stock into which each share of Common Stock is
then convertible.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all shares of Common Stock that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and non-assessable and free from all
preemptive rights of any stockholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the
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<PAGE>
Company will at all times have authorized and reserved, for the purpose of
issue or transfer upon exercise of the subscription rights evidenced by this
Warrant, a sufficient number of shares of authorized but unissued Common
Stock, or other securities and property, when and as required to provide for
the exercise of the rights represented by this Warrant. The Company will
take all such action as may be necessary to assure that such shares of Common
Stock may be issued as provided herein without violation of any applicable
law or regulation, or of any requirements of any domestic securities exchange
upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under federal or state
securities laws with respect to such exercise. The Company will not take any
action which would result in any adjustment of the Stock Purchase Price (as
set forth in Section 3 hereof) (i) if the total number of shares of Common
Stock issuable after such action upon exercise of all outstanding warrants
and options, together with all shares of Common Stock then outstanding and
all shares of Common Stock then issuable upon the conversion of all
convertible securities then outstanding, would exceed the total number of
shares of Common Stock then authorized by the Company's Certificate of
Incorporation, or (ii) if the total number of shares of Common Stock issuable
after such action upon the conversion of all outstanding shares of Common
Stock, together with all shares of Common Stock then issuable upon the
conversion of all shares of Common Stock then issuable upon exercise of all
outstanding warrants and options, together with all shares of Common Stock
then outstanding and all shares of Common Stock then issuable upon exercise
of all warrants and options and upon the conversion of all convertible
securities then outstanding would exceed the total number of shares of Common
Stock then authorized by the Company's Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OF COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
3.2.1 Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or
4
<PAGE>
options to subscribe for, purchase or otherwise acquire any of the foregoing
by way of dividend or other distribution;
3.2.2 Any cash paid or payable otherwise than as a cash
dividend; or
3.2.3 Common Stock or additional stock or other securities or
property (including cash) by way of spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement (other than (i) shares
of Common Stock issued as a stock split, adjustments in respect of which shall
be covered by the terms of Section 3.1 above or (ii) an event for which
adjustment is otherwise made pursuant to Section 3.3 below);
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses 3.2.2 and 3.2.3 above) which such Holder
would hold on the date of such exercise had he been the Holder of record of such
Common Stock as of the date on which holders of Common Stock received or became
entitled to receive such shares or all other additional stock and other
securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
3.3.1 If any recapitalization, reclassification or
capital reorganization of the capital stock of the Company (including any
merger not described in Section 3.3.2 below) shall be effected in such a way
that holders of Common Stock shall be entitled to receive stock, securities,
or other assets or property (a "Restructuring"), then, as a condition of such
Restructuring, lawful and adequate provisions shall be made whereby the
Holder hereof shall thereafter have the right to purchase and receive (in
lieu of the shares of the Common Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby) such shares of stock, securities or other assets or property as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby. In any Restructuring described above,
appropriate provision shall be made with respect to the rights and interests
of the Holder of this Warrant to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Stock
Purchase Price and of the number of shares purchasable and receivable upon
the exercise of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof.
3.3.2 In the event of a consolidation or merger of the
Company with another corporation in which the holders of the Company's voting
securities before the transaction beneficially own 50% or less of the voting
securities of the surviving entity after the transaction, or the sale of all or
substantially all of its assets of the Company (a "Change of Control"), any
unexercised portion of this Warrant shall be deemed to have been automatically
converted pursuant to Section 1.3 hereof and thereafter the Holder shall
participate in the Change of Control on the same terms as other holders of the
Common Stock; provided however, that if the Stock Purchase Price in effect
immediately prior to the Change of Control exceeds the value of the stock,
securities or other assets or property (determined in good faith by the Board of
5
<PAGE>
Directors of the Company) issuable or payable with respect to one share of
Common Stock immediately theretofore purchasable and receivable upon exercise of
the rights represented hereby, the Warrant shall terminate and be of no further
effect as of the Change of Control.
3.4 NOTICE OF ADJUSTMENT. Upon any adjustment of the Stock Purchase
Price or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such Holder as shown on the books of the Company. The
notice shall be signed by an officer of the Company and shall state the Stock
Purchase Price resulting from such adjustment and the increase or decrease, if
any, in the number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
3.5 OTHER NOTICES. If at any time:
3.5.1 the Company shall declare any cash dividend upon its
Common Stock;
3.5.2 the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other distribution to the
holders of its Common Stock;
3.5.3 there shall be any Restructuring or Change of Control;
3.5.4 there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
3.5.5 there shall be an initial public offering of securities
of the Company;
then, in any one or more of said cases, the Company shall give, by first
class mail, postage prepaid, addressed to the Holder of this Warrant at the
address of such Holder as shown on the books of the Company, (a) at least ten
(10) days prior written notice of the date on which the books of the Company
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
Restructuring, Change of Control, dissolution, liquidation or winding-up, and
(b) in the case of any such Restructuring, Change of Control, dissolution,
liquidation, winding-up or public offering, at least ten (10) days prior
written notice of the date when the same shall take place; PROVIDED, HOWEVER,
that the Holder shall make a best efforts attempt to respond to such notice
as early as possible after the receipt thereof. Any notice given in
accordance with the foregoing clause (a) shall also specify, in the case of
any such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto. Any notice given in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such Restructuring, Change
of Control, dissolution, liquidation, winding-up or public offering, as the
case may be.
3.6 CERTAIN EVENTS. If any change in the outstanding Common Stock of
the Company or any other event occurs as to which the other provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of the Warrant in accordance with such
provisions, the Board of Directors of the
6
<PAGE>
Company shall make an adjustment in the number and class of shares available
under the Warrant, the Stock Purchase Price or the application of such
provisions, so as to protect such purchase rights as aforesaid. The
adjustment shall be such as will give the Holder of the Warrant upon exercise
for the same aggregate Stock Purchase Price the total number, class and kind
of shares as he would have owned had the Warrant been exercised prior to the
event and had he continued to hold such shares until after the event
requiring adjustment.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock upon
the exercise of the Warrant shall be made without charge to the Holder of the
Warrant for any issue tax (other than any applicable income taxes) in respect
thereof; PROVIDED, HOWEVER, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the then Holder of the
Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provision hereof in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
7. REGISTRATION RIGHTS. The registration rights of the Holder (including
Holder's successors) with respect to the shares of Common Stock issuable upon
exercise of this Warrant will be subject to the same rights and obligations
under the Registration Rights Agreement, dated as of June 2, 1997, as amended,
by and among the Company and certain investors, as the Common Stock, and the
holders thereof.
8. WARRANTS NON-TRANSFERABLE. This Warrant is not transferable and the
shares acquired upon exercise hereof shall not be transferred or assigned in
whole or in part except in compliance with the Stockholders' Agreement and
applicable federal and state securities laws.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the Holder of this Warrant and of the Holder of
shares of Common Stock issued upon exercise of this Warrant, referred to in
Sections 7 and 8 shall survive the exercise of this Warrant.
10. NOTICES. Any notice, request or other document required or permitted to
be given or delivered to the Holder hereof or the Company shall be delivered or
shall be sent by first-class mail, postage prepaid, to each such Holder at its
address as shown on the books of the Company
7
<PAGE>
or to the Company at the address indicated therefor in the first paragraph of
this Warrant or such other address as either may from time to time provide to
the other.
11. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Illinois.
12. LOST WARRANTS. The Company represents and warrants to the Holder hereof
that upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Warrant and, in the case of any
such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
13. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share,
pay the Holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer, thereunto duly authorized as of the day and
year first written above.
TUNES.COM INC.,
a Delaware corporation
By: _____________________________
Name: __________________________
Title: __________________________
9
<PAGE>
EXHIBIT A
TO WARRANT
SUBSCRIPTION FORM
Date:______________, 19___
Tunes.com Inc.
640 N. LaSalle Street
Suite 560
Chicago, IL 60614
Attn: Chief Executive Officer
Ladies and Gentlemen:
/ / The undersigned hereby elects to exercise the warrant issued to it by
________________ (the "Company") and dated ____________________, 1999,
Warrant No. W-__ (the "Warrant") and to purchase thereunder __________
shares of the Common Stock (as defined in the Warrant) of the Company
(the "Shares") at a purchase price per share of $_________, or an
aggregate purchase price of ___________________________________
($__________) (the "Purchase Price").
/ / The undersigned hereby elects to convert ___________________ percent
(___%) of the value of the Warrant pursuant to the provisions of Section
1.3 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also makes the representations set forth on the attached
EXHIBIT B of the Warrant.
Very truly yours,
__________________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
<PAGE>
EXHIBIT B
TO WARRANT
INVESTMENT REPRESENTATIONS
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO TUNES.COM INC. ALONG
WITH THE SUBSCRIPTION FORM BEFORE THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE
WARRANT DATED __________________, 199__, WILL BE ISSUED.
_____________________, 19__
Tunes.com Inc.
640 N. LaSalle Street
Suite 560
Chicago, IL 60614
Attn: Chief Executive Officer
Ladies and Gentlemen:
The undersigned, _______________________________________ ("Purchaser"),
intends to acquire up to _______________ shares of the Common Stock (as defined
in the Warrant to purchase such Common Stock held by the Purchaser (the
"Warrant")) of Tunes.com Inc. (the "Company") from the Company pursuant to the
exercise or conversion of the Warrant. The Common Stock will be issued to
Purchaser in a transaction not involving a public offering and pursuant to an
exemption from registration under the Securities Act of 1933, as amended (the
"1933 Act") and applicable state securities laws. Purchaser has been advised
that the Common Stock has not been registered under the 1933 Act or state
securities laws on the ground that this transaction is exempt from registration,
and that reliance by the Company on such exemptions is predicated in part on
Purchaser's representations set forth in this letter. Accordingly, Purchaser
represents, warrants and agrees as follows:
1. Purchaser is acquiring the Common Stock for its own account and
beneficial interest, to hold for investment and not for sale or with a
view to distribution of the Common Stock or any part thereof. Purchaser
has no present intention of selling (in connection with a distribution
or otherwise), granting any participation in, or otherwise distributing
the same, and does not presently have reason to anticipate a change in
such intention.
2. Purchaser acknowledges that it has received all the information
it has requested from the Company and considers necessary or appropriate
for deciding whether to acquire the Common Stock. Purchaser represents
that it has had an opportunity to ask questions and receive answers from
the Company regarding the terms and conditions of the offering of the
Common Stock and to obtain any additional information necessary to
verify the accuracy of the information given the Purchaser. Purchaser
further represents
<PAGE>
that it has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risk of this
investment.
3. Purchaser is an "accredited investor" as such term is defined in
Rule 501 under the 1933 Act.
4. Purchaser acknowledges that investment in the Common Stock
involves a high degree of risk, and represents that it is able, without
materially impairing its financial condition, to hold the Common Stock
for an indefinite period of time and to suffer a complete loss of its
investment.
5. Purchaser has been informed that under the 1933 Act, the Common
Stock must be held indefinitely unless it is subsequently registered
under the 1933 Act or unless an exemption from such registration (such
as Rule 144) is available with respect to any proposed transfer or
disposition by Purchaser of the Common Stock. Purchaser further agrees
that the Company may refuse to permit Purchaser to sell, transfer or
dispose of the Common Stock (except as permitted under Rule 144) unless
there is in effect a registration statement under the 1933 Act and any
applicable state securities laws covering such transfer, or unless
Purchaser furnishes an opinion of counsel reasonably satisfactory to
counsel for the Company, to the effect that such registration is not
required. Purchaser shall not make any sale, transfer or other
disposition of the Common Stock in violation of the 1933 Act or the
General Rules and Regulations promulgated thereunder by the Securities
and Exchange Commission or in violation of any applicable state
securities law.
6. Purchaser also understands and agrees that there will be placed
on the certificate(s) for the Common Stock, or any substitutions
therefor, a legend stating in substance:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"1933 Act"), or any state securities laws. These shares have
been acquired for investment and may not be sold or otherwise
transferred in the absence of an effective registration statement
for these shares under the 1933 Act and applicable state
securities laws, or an opinion of counsel satisfactory to the
Company that registration is not required and that an applicable
exemption is available."
Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Common Stock with Purchaser's counsel.
Very truly yours,
__________________________________________
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
2
<PAGE>
Exhibit C
to
Note and Warrant Purchase Agreement
JOINDER AGREEMENT
The undersigned stockholder ("Investor") hereby covenants and agrees to
become a party to that certain Stockholders' Agreement (the "Stockholders'
Agreement") dated as of June 2, 1997, as amended, among Tunes.com Inc., a
Delaware corporation formerly known as JAMtv Corporation ("Tunes.com"), and the
"Stockholders" named therein, and hereby undertakes all of the respective
representations, warranties, obligations and duties of, and accepts all of the
benefits of, an "Existing Investor" and a "Stockholder" (but not a "GSCP
Stockholder") under and as defined in the Stockholders' Agreement.
Dated as of ____________________
___________________________________
[Print name of Investor]
By:_________________________________
Its:__________________________________
Tunes.com hereby covenants and agrees that Investor is hereby made a
party to the Stockholders' Agreement, and hereby undertakes all of the
respective representations, warranties, obligations and duties of the "Company"
under the Stockholder's Agreement, including the grant to Investor of all of the
benefits of the "Existing Investors" and the "Stockholders" (but not the "GSCP
Stockholders") under and as defined in the Stockholders' Agreement.
Dated as of ____________________
TUNES.COM INC.
By: _________________________________
Its:__________________________________
<PAGE>
EXECUTION COPY
TUNES.COM INC.
SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the
"Agreement") is made as of May 4, 1999 (the "Effective Date"), by and among
Tunes.com Inc., a Delaware corporation (the "Company"), and the investors set
forth on EXHIBIT A hereto (the "Investors").
R E C I T A L S:
WHEREAS, the Company desires to sell to the Investors, and the Investors
desire to purchase from the Company, shares of Series E Convertible Preferred
Stock ("Series E Stock") and, if applicable, shares of Series A-IV Convertible
Preferred Stock ("Series A-IV Stock"), on the terms and subject to the
conditions contained herein.
NOW, THEREFORE, the parties hereto, intending to be bound hereby, do
agree as follows:
1. PURCHASE AND SALE OF SHARES.
1.1 CERTIFICATE OF INCORPORATION. The Company shall file
with the Secretary of State of the State of Delaware on or before the Closing
(as defined below) the Third Restated Certificate of Incorporation of the
Company in the form attached hereto as EXHIBIT B (collectively, as amended and
restated, and together with all Certificates of Designations which may become of
record, the "Certificate of Incorporation").
1.2 PURCHASE AND SALE. Subject to the terms and conditions
of this Agreement, each Investor agrees to purchase, and the Company agrees to
sell and issue to each Investor, at the Closing, at a price per share of $10.00,
that number of shares of the Company's Series E Stock and, if applicable, Series
A-IV Stock (collectively, the "Shares"), opposite each Investor's name and for
the aggregate purchase price set forth on EXHIBIT A hereto.
1.3 CLOSING. Subject to the conditions set forth herein, the
purchase and sale of the Shares shall take place on May 28, 1999 at such place
and time as the Company and the Investors acquiring in the aggregate more than
half of the Shares to be sold pursuant hereto mutually agree upon, or at such
other place and time as the Company and the Investors acquiring in the aggregate
more than half of the Shares to be sold pursuant hereto mutually agree upon (the
"Closing"). At the Closing, the Company shall deliver to each Investor a
certificate representing the Shares which such Investor is purchasing at the
Closing against payment of the purchase price for such Shares by wire transfer
or check payable to the Company.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY TO THE INVESTORS.
The Company hereby represents and warrants to the Investors as of the Effective
Date as follows:
2.1 CORPORATE ORGANIZATION AND AUTHORITY. The Company:
(a) is a corporation duly organized, validly existing,
authorized to exercise all its corporate powers, rights and privileges, and is
in good standing in the State of Delaware;
(b) has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now
conducted and as currently proposed to be conducted and possesses all business
licenses, franchises, and other governmental requirements, except where such a
failure would not have a Material Adverse Effect (as defined below); and
(c) is duly qualified and authorized to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure to so qualify would have a Material Adverse Effect.
2.2 CAPITALIZATION.
(a) The authorized capital stock of the Company
immediately prior to the Closing shall consist of:
(i) 2,500,000 shares of Series A Convertible Preferred Stock,
par value $.01 per share, of which 1,666,666 shares of Series A-I Convertible
Preferred Stock, 200,000 shares of Series A-II Convertible Preferred Stock, and
150,000 shares of Series A-III Convertible Preferred Stock are issued and
outstanding; and 300,000 of which are designated as shares of Series A-IV Stock,
none of which are issued and outstanding;
(ii) 500,000 shares of Series B Convertible Preferred Stock,
par value $.01 per share, of which 472,000 shares are issued and outstanding;
(iii) 533,340 shares of Series C Convertible Preferred Stock,
par value $.01 per share, of which 533,334 shares are issued and outstanding;
(iv) 800,000 shares of Series D Convertible Preferred Stock,
par value $.01 per share, of which 666,136 shares are issued and outstanding;
(v) 1,999,999 shares of Series E Stock, none of which are
issued and outstanding;
-2-
<PAGE>
(vi) 666,661 shares of undesignated preferred stock, issuable
in series, none of which are issued and outstanding; and
(vii) 11,500,000 shares of common stock, par value $.01 per
share (the "Common Stock"), of which 1,340,530 shares are issued and
outstanding.
The Company has duly reserved (i) 1,550,000 shares of Common Stock for
issuance by the Company pursuant to the terms of the Company's 1997 Stock Option
Plan and (ii) 500,000 shares of Common Stock for issuance by the Company
pursuant to the terms of the Company's 1999 Stock Option Plan.
The Company has duly reserved sufficient shares of Common Stock for
issuance upon (i) conversion of the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock, the Series C Convertible Preferred Stock,
the Series D Convertible Preferred Stock, and the Series E Stock and (ii)
exercise of: that certain Warrant dated November 10, 1997 issued by the Company
to Straight Arrow Publishers Company, L.P., that certain Warrant dated January
1, 1999 issued by the Company to Source Enterprises, Inc., that certain Warrant
to be issued by the Company to SG Cowen Securities Corporation pursuant to the
engagement letter regarding the placement of the Company's securities dated
December 18, 1998, and those certain Warrants dated March 17, 1999 issued by the
Company to the investors under those certain Note and Warrant Purchase
Agreements dated as of March 17, 1999.
The Company has duly reserved sufficient shares of Series E Stock for
issuance upon conversion of those certain Convertible Promissory Notes in the
aggregate principal amount of $3,995,000, which are convertible into
approximately 400,000 shares of Series E Stock at the Closing.
(b) Except as set forth on SCHEDULE 2.2 hereto and in
the Certificate of Incorporation and the Bylaws of the Company (the "Bylaws")
(in each case as amended and in effect as of the Closing), there are no
preemptive or similar rights to purchase or otherwise acquire shares of the
capital stock of the Company pursuant to any provision of law, or any agreement
to which the Company is a party. Except as set forth on SCHEDULE 2.2 hereto,
there is, to the knowledge of the Company, no agreement, restriction, or
encumbrance (such as a right of first refusal, right of first offer, proxy,
voting agreement, voting trust, registration rights agreement, stockholders'
agreement, etc.) with respect to the voting or the pending or unconsummated sale
of any shares of capital stock of the Company (whether outstanding or issuable
upon conversion or exercise of outstanding securities) other than any such
agreement, restriction, or encumbrance which has expired or been terminated
prior to the date hereof. Except as set forth on SCHEDULE 2.2 hereto, the
transactions contemplated by this Agreement will not trigger any anti-dilution
protection provisions given by the Company to any person or entity (including,
without limitation, any stockholder, lender, warrant holder, lessor and/or
licensee). Except as set forth on SCHEDULE 2.2 hereto, there are no contracts
with respect to the pending or unconsummated issuance, sale or transfer by the
Company of any equity securities or other securities of the Company.
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2.3 SUBSIDIARIES. Except for the Company's ownership of all
of the outstanding capital stock of JAMtv Interactive Services Corporation, an
Illinois corporation ("JISC"), and Tunes Acquisition Corp., a Delaware
corporation ("T Sub") (JISC and T Sub sometimes are referred to herein as the
"Subsidiaries"), and as set forth on SCHEDULE 2.3 hereto, the Company does not
directly or indirectly own any interest in any other corporation, partnership,
joint venture or other business association or entity. JISC is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Illinois and has all requisite corporate power and authority to own,
operate and lease its properties and assets and to carry on its business as it
is now being conducted. T Sub is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to own, operate and lease its properties
and assets and to carry on its business as it is now being conducted. Each of
the Subsidiaries is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to so qualify would have a Material
Adverse Effect. All outstanding shares of capital stock of each of the
Subsidiaries are validly issued, fully paid and nonassessable and are owned by
the Company free and clear of any liens, claims or encumbrances. Except as set
forth on SCHEDULE 2.3 hereto, there are no agreements, rights of first refusal,
options or other rights to acquire any of the capital stock of either of the
Subsidiaries.
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of all obligations under this
Agreement, the Certificate of Incorporation, the Registration Rights Agreement
and the Stockholders' Agreement and for the issuance and delivery of the Shares
and the Common Stock issuable upon conversion of the Shares has been taken (or
will be taken prior to the Closing), and this Agreement, the Registration Rights
Agreement and the Stockholders' Agreement constitute legally binding and valid
obligations of the Company, enforceable in accordance with their terms, except
as certain indemnification provisions may be limited by principles of public
policy, enforceability may be limited by applicable laws relating to bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally and except as such enforceability is
subject to general principles of equity.
2.5 VALIDITY OF SHARES. The Shares, when issued, sold and
delivered in accordance with the terms and for the consideration expressed in
this Agreement, shall be duly and validly issued, fully paid and non-assessable
and, based in part upon the representations and warranties of the Investors in
this Agreement, will be issued in compliance with applicable federal and state
securities laws, and the Common Stock issuable upon conversion of the Shares has
been duly and validly reserved and, when issued in compliance with the
provisions of the Certificate of Incorporation, will be duly and validly issued,
fully paid and nonassessable and issued in compliance with applicable federal
and state securities laws as presently in effect. Except as set forth on
SCHEDULE 2.2 hereto, the Shares and the Common Stock issuable upon conversion of
the Shares are and will be free and clear of all liens, claims and encumbrances,
respectively, other than
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those created by, or imposed upon, the holders thereof through no action of
the Company; PROVIDED, HOWEVER, that the Shares and the Common Stock issuable
upon conversion of the Shares shall be subject to restrictions on transfer
under applicable securities laws. Neither the Company nor any holder of the
Shares shall be subject to any preemptive or similar right with respect
thereto, except as set forth herein, the Stockholders' Agreement, or on
SCHEDULE 2.2 hereto.
2.6 NO CONFLICT WITH OTHER INSTRUMENTS. The execution,
delivery and performance of this Agreement, the Registration Rights Agreement
and the Stockholders' Agreement will not result in any violation of, be in
conflict with, or constitute a default under, with or without the passage of
time or the giving of notice: (i) any provision of the Certificate of
Incorporation or the Bylaws or any provision of the charter documents of either
Subsidiary; (ii) any provision of any judgment, decree or order to which the
Company or either Subsidiary is a party or by which the Company or either
Subsidiary or any of their property is bound; (iii) any Contract to which the
Company or either Subsidiary is a party or by which the Company or either
Subsidiary or any of their property is bound; or (iv) any statute, rule or
governmental regulation applicable to the Company or either Subsidiary.
2.7 FINANCIAL STATEMENTS. Attached as SCHEDULE 2.7 hereto
are the audited consolidated financial statements of the Company for the fiscal
years ending December 31, 1998 and December 31, 1997, and the unaudited
consolidated financial statements of the Company for the months ended January
31, 1999, February 28, 1999 and March 31, 1999, consisting of consolidated
balance sheets as of the end of each of such periods and consolidated statements
of income for such periods and as of the dates indicated (collectively, the
"Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied,
present fairly the financial position of the Company and the Subsidiaries as of
the dates indicated, present fairly the results of the Company's and the
Subsidiaries' operations for the periods then ended, and are in accordance with
the books and records of the Company and each Subsidiary, which have been
properly maintained and are complete and correct in all material respects.
2.8 ABSENCE OF CHANGES. Except as set forth on SCHEDULE 2.8
hereto, since December 31, 1998, there has not been:
(a) any material adverse change in the business,
assets, liabilities, results of operations, condition (financial or otherwise),
or prospects of the Company and the Subsidiaries (when viewing the Company and
the Subsidiaries together as a whole), or any circumstances or development which
would reasonably be expected to give rise to such a change (a "Material Adverse
Effect"); provided that the parties agree and acknowledge that neither the
Company's losses nor negative cash flows since December 31, 1998 incurred at a
rate reasonably comparable to the fourth quarter of 1998 shall constitute a
Material Adverse Effect;
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(b) any indebtedness incurred by the Company or either
Subsidiary for borrowed money in excess of $50,000;
(c) any assets or property of the Company or either
Subsidiary having a value in excess of $50,000 made subject to any lien, claim,
charge, security interest, mortgage, pledge, or other encumbrance;
(d) any waiver of any material right of the Company or
either Subsidiary, or the cancellation of any material debt or claim held by the
Company or either Subsidiary having a value in excess of $50,000;
(e) any payment of dividends on, or other
distributions with respect to, or any direct or indirect redemption or
acquisition of, any shares of the capital stock of the Company or either
Subsidiary or any agreement or commitment therefor;
(f) any issuance of any stock, bonds or other
securities of the Company or either Subsidiary or any agreement or commitment
therefor;
(g) any sale, assignment or transfer of any tangible
or intangible assets of the Company or either Subsidiary except in the ordinary
course of business;
(h) any loan by the Company or either Subsidiary to
any officer, director, employee, consultant or stockholder of the Company or
either Subsidiary or any agreement or commitment therefor (other than advances
to such persons in the ordinary course of business in connection with travel,
travel-related, entertainment, and other reimbursable business expenses);
(i) any damage, destruction or loss (whether or not
covered by insurance) having a Material Adverse Effect;
(j) any increase in the compensation paid or payable
to any officer or director of the Company or either Subsidiary;
(k) any change in the accounting methods, practices or
policies followed by the Company or either Subsidiary or any change in
depreciation or amortization policies or rates theretofore adopted;
(l) any material amendment to or termination of any
Contract (as defined below);
(m) any disclosure of trade secrets (the disclosure of
which has had or reasonably could be expected to cause a Material Adverse
Effect) other than in the ordinary course of business, other than pursuant to a
confidentiality agreement, and other than to officers, directors, employees,
authorized agents, and other representatives of the Company or either
Subsidiary; or
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(n) any resignation or threatened resignation of any
officer or director of the Company or either Subsidiary.
2.9 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth
on SCHEDULE 2.9 hereto and for liabilities which in the aggregate do not exceed
$50,000, neither the Company nor either Subsidiary has any obligations or
liabilities of any nature (matured or unmatured, fixed or contingent) other than
(i) obligations disclosed or provided for in the Financial Statements, and
(ii) obligations or liabilities incurred by the Company or either Subsidiary in
the ordinary course of business since December 31, 1998, none of which either
individually or in the aggregate has been or would be reasonably expected to
have a Material Adverse Effect.
2.10 NO VIOLATION OF LAW. Except as set forth on SCHEDULE
2.10 hereto, neither the Company nor either Subsidiary is or has been (by virtue
of any past or present action, omission to act, contract to which they are a
party or any occurrence or state of facts whatsoever) in violation in any
material respect of any applicable local, state or federal law, ordinance,
regulation, order, injunction or decree, or any other requirement of any
governmental body, agency or authority or court binding on it, or relating to
its property or business, nor, to the knowledge of the Company, will the Company
or either Subsidiary hereafter suffer or incur any loss, liability, penalty or
expense, which reasonably could be expected to cause a Material Adverse Effect,
by virtue of any such violation set forth on SCHEDULE 2.10 hereto.
2.11 LITIGATION. Except as set forth on SCHEDULE 2.11 hereto,
there is no litigation, claims, suits, actions, investigations, indictments or
information, proceedings or arbitrations, grievances or other procedures
(including grand jury investigations, actions or proceedings), product liability
or workers' compensation suits, actions or proceedings pending, or to the
knowledge of the Company, threatened, before any court, commission, arbitration
tribunal, or judicial, governmental or administrative department, body, agency
administrator or official, grand juror, or any other official forum for the
resolution of grievances, against the Company or either Subsidiary or involving
any of their properties or business. Further, there are no judgments, orders,
writs, injunctions, decrees, indictments or information, grand jury subpoenas or
civil investigative demands, plea agreements, stipulations or awards (whether
rendered by a court, commission, arbitration tribunal or judicial, governmental
or administrative department, body, agency administrator or official, grand jury
or any other official forum for the resolution of grievances) against the
Company or either Subsidiary or involving any of their properties or business.
Except as set forth on SCHEDULE 2.11 hereto, there is no action, suit,
proceeding, or formal investigation by the Company or either Subsidiary
currently pending or which the Company or either Subsidiary presently intends to
initiate.
2.12 PROPERTIES, TITLE, LIENS AND ENCUMBRANCES. Neither the
Company nor either Subsidiary owns or leases any real property except as set
forth on SCHEDULE 2.12 hereto. Except as set forth on SCHEDULE 2.12 hereto, the
Company and each Subsidiary have good and valid title to all of their tangible
properties and assets, subject
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to no mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge other than those which arise in the ordinary course of
business and will not cause a Material Adverse Effect. All of the Company's
and each Subsidiary's tangible assets and properties are, in all material
respects, in satisfactory condition and repair for the requirements of the
Company's and each Subsidiary's business as presently conducted and as
proposed to be conducted.
2.13 PATENTS AND OTHER PROPRIETARY RIGHTS. SCHEDULE 2.13
hereto contains a full and complete list of all patents and patent applications,
trademark registrations, applications for registration of trademarks, service
mark registrations, applications for registration of service marks, and
registered copyrights applied for or registered in the name of the Company or
either Subsidiary. The Company and each Subsidiary have entered into agreements
with each of their officers, employees, and consultants providing the Company or
either Subsidiary, as the case may be, to the extent permitted by law, with
title and ownership to patents, patent applications, trade secrets, and
inventions conceived, developed, reduced to practice by or at the direction of
such person, solely or jointly, during the period of employment by the Company
or either Subsidiary.
Except as described on SCHEDULE 2.13:
(a) The Company and each Subsidiary own or possess
adequate licenses or other rights to use all patents, patent applications,
trademark registrations, applications for registration of trademarks, service
mark registrations, applications for registration of service marks, trade
secrets, trade names, copyrights, inventions, drawings, designs, licenses,
concepts, computer programs, technical data, customer lists, proprietary rights
and processes, proprietary know-how or information, or other rights with respect
thereto (collectively referred to as "Proprietary Rights"), used in the business
of the Company and each Subsidiary, and the same are sufficient to conduct their
business as they have been conducted and are now being conducted. The current
operations of the Company and each Subsidiary do not infringe or misappropriate,
and, to the knowledge of the Company, no third party has asserted to the Company
or either Subsidiary that such operations infringe or misappropriate any
Proprietary Right of any third party.
(b) There are no claims, disputes, actions,
proceedings, suits or appeals pending against the Company or either Subsidiary
with respect to any Proprietary Rights of the Company or either Subsidiary and,
to the knowledge of the Company, none has been threatened against the Company or
either Subsidiary. The Company does not have knowledge of any facts which would
reasonably serve as a basis for any claim that the Company or either Subsidiary
does not have the right to use all Proprietary Rights necessary for the
development, manufacture, use, sale or other disposition of any or all products
or services presently being used, furnished or sold in the conduct of the
business of the Company or either Subsidiary or currently proposed to be used,
furnished or sold in the business of the Company or either Subsidiary.
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(c) To the knowledge of the Company, the Proprietary
Rights of the Company and each Subsidiary have not been infringed upon by
others.
(d) There are no outstanding licenses for the
Proprietary Rights of the Company and each of the Subsidiaries, nor is the
Company or either Subsidiary bound by restrictive covenants or agreements of any
kind with respect to the Proprietary Rights of any third party.
(e) To the knowledge of the Company, none of the
Company's or either Subsidiary's employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with such employee's duties to the Company.
(f) To the knowledge of the Company, neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
or either Subsidiary's business by the employees of the Company and each
Subsidiary, nor the conduct of the Company's or either Subsidiary's business as
proposed, will conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any agreement or restrictive
covenant or any judgment, decree or order of any court or administrative agency
under which any of such employees is now obligated.
2.14 TAXES. Except as set forth on SCHEDULE 2.14 hereto, all
federal, state, local and foreign tax returns and reports required to be filed
by the Company and each Subsidiary have been filed, and all taxes, interest,
assessments or deficiencies, fees and other governmental charges upon the
Company and each Subsidiary, or upon any of their properties, income or
franchises, shown in such returns and on assessments received by the Company or
either Subsidiary to be due and payable or claimed to be due and payable by any
governmental authority, have been paid (other than taxes the validity of which
are being contested in good faith and which are identified on SCHEDULE 2.14
hereto). Neither the Company nor either Subsidiary has executed or filed with
any taxing authority any agreement, waiver or consent for the extension of the
period for assessment or collection of any taxes or the audit of any tax returns
or reports. Neither the Company nor either Subsidiary is a party to any pending
action or proceeding, nor, to the knowledge of the Company, is any such action
or proceeding threatened by any governmental authority for the assessment or
collection of taxes, interest, penalties, assessments or deficiencies, and no
claim for assessment or collection of taxes, interest, penalties, assessments or
deficiencies has been asserted against the Company or either Subsidiary. No
material issue has been raised by any federal, state, local or foreign taxing
authority in connection with an audit or examination of the tax returns,
reports, business or properties of the Company or either Subsidiary which has
not been settled or resolved. Neither the Company nor either Subsidiary has
agreed to extend the statute of limitations with respect to any tax period or
the review or audit of any tax return. Neither the Company nor either
Subsidiary has made or agreed (or been required) to make any adjustment or
change in accounting method other than in accordance with generally accepted
accounting principles (which adjustments or changes have not, individually or
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in the aggregate, been material). No material special charges, penalties,
fines, liens, or similar encumbrances have been asserted against the Company
or either Subsidiary with respect to the payment or failure to pay any taxes
which have not been paid or received without further liability to the Company
or either Subsidiary. Proper and accurate amounts have been withheld by the
Company and each Subsidiary from their employees for all periods in
compliance with the withholding provisions of applicable federal, state and
local tax laws.
2.15 CONTRACTS. The Company has provided or made available to
netWorth Partners I, LLC ("netWorth") and its counsel true and complete copies
of each contract of the Company and each Subsidiary, the termination or
expiration of which reasonably could be expected to cause a Material Adverse
Effect, and each such material contract is set forth on SCHEDULE 2.15 hereto
(the "Contracts"). Except as set forth on SCHEDULE 2.15 hereto, no third party
has notified the Company or either Subsidiary of any claim, dispute or
controversy with respect to any of the Contracts nor has the Company or either
Subsidiary received notice or warning of alleged nonperformance, delay in
delivery or other noncompliance by the Company or either Subsidiary with respect
to their obligations under any of the Contracts, nor, to the knowledge of the
Company, are there any facts which exist reasonably indicating that any of the
Contracts may be totally or partially terminated or suspended by the other
parties thereto other than by their stated terms. Except as set forth on
SCHEDULE 2.15 hereto, neither the Company nor either Subsidiary has entered into
any agreement containing covenants limiting the right of the Company or either
Subsidiary to compete in any business or with any person. The Contracts are
legally binding, valid, and in full force and effect with respect to the Company
and each Subsidiary, as the case may be, and to the knowledge of the Company,
the other parties thereto. Except as set forth on SCHEDULE 2.15 hereto, neither
the Company nor either Subsidiary is in violation of any term or provision of
any Contract.
2.16 NO DEFAULTS OR CONFLICTS. Neither the Company nor either
Subsidiary is in violation of any term or provision of its Certificate of
Incorporation, Bylaws or other charter documents, or any term or provision of
any judgment to which the Company or either Subsidiary is a party, by which the
Company or either Subsidiary is bound in any respect or under which the Company
or either Subsidiary has any rights.
2.17 INSURANCE. The Company and each of the Subsidiaries has
policies of insurance that are valid and binding and in full force and effect,
with all premiums due thereon paid, in sufficient coverages and amounts that are
reasonable and consistent with good industry practices. Neither the Company nor
either Subsidiary has received any notice of cancellation or termination in
respect of any such policy or is in default thereunder.
2.18 PRIOR REGISTRATION RIGHTS. The Company is under no
contractual obligation to register under the Securities Act of 1933, as amended
(the "Securities Act"), any of its presently outstanding securities or any of
its securities that may subsequently be issued except as provided in the
Registration Rights Agreement.
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2.19 EMPLOYEE COMPENSATION OR BENEFIT PLANS. Except as set
forth on SCHEDULE 2.19 hereto, (i) neither the Company nor either Subsidiary is
a party to or bound by any currently effective employment contracts, deferred
compensation agreements, bonus plans, incentive plans, profit sharing plans,
retirement or other employee compensation agreements, (ii) neither the Company
nor either Subsidiary has ever maintained or contributed to any employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"),
and (iii) neither the Company nor either Subsidiary has ever contributed to any
"multi-employer plan" as such term is defined in ERISA. Subject to applicable
law and to the terms of any employment agreements set forth on SCHEDULE 2.19
hereto, the employment of each officer and employee of the Company and each
Subsidiary is terminable at the will of the Company and each Subsidiary, as the
case may be.
2.20 EMPLOYEE RELATIONS. The Company and each Subsidiary have
satisfactory relations with their respective employees. The employees of the
Company and each Subsidiary are not represented by any labor unions and, to the
Company's knowledge, no union organization campaign is in progress. The Company
is not aware that any officers of the Company (including, without limitation,
Howard A. Tullman, Stuart B. Frankel, or Scott Mitchell) or either Subsidiary
intend to terminate their employment.
2.21 BROKERS AND FINDERS. Except as set forth on SCHEDULE
2.21 hereto, neither the Company nor either Subsidiary has incurred, or will
incur, directly or indirectly, any liability for any brokerage or finders' fees
or agents commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.22 TRANSACTIONS WITH AFFILIATES. Except for transactions
relating to purchases of warrants, convertible debt, and shares of the capital
stock of the Company, regular salary payments, bonuses, options, and fringe
benefits under an individual's compensation package with the Company or either
Subsidiary, and except as set forth on SCHEDULE 2.22 hereto, none of the
officers, employees, directors or stockholders of the Company or either
Subsidiary ("affiliates") is a party to any transaction with the Company or
either Subsidiary. There have been no assumptions or guarantees by the Company
or either Subsidiary of any obligations of such affiliates.
2.23 CORPORATE DOCUMENTS. The Certificate of Incorporation
and Bylaws of the Company, as amended, are in the forms set forth as EXHIBITS
C-1 and C-2, respectively. The Certificate of Incorporation and Bylaws of each
Subsidiary, as amended, are in the forms provided to netWorth and its counsel.
The minute books of the Company and each Subsidiary heretofore provided by the
Company to netWorth and its counsel for inspection contain full, complete and
accurate records of all meetings and other corporate actions taken by the
directors and stockholders of the Company and each Subsidiary.
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2.24 REQUIRED CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, or local governmental authority or other person
or entity, on the part of the Company or either Subsidiary, is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for the consent or approval of the Company's board of
directors and stockholders (which will be obtained prior to Closing) and such
qualifications or filings under applicable federal and state securities laws as
may be required in connection with the transactions contemplated by this
Agreement, which qualification or filings will be made on a timely basis.
2.25 ENVIRONMENTAL REGULATIONS. The Company and each
Subsidiary have met and continue to meet all applicable local, state, federal
and national environmental regulations in all material respects and have
disposed of their waste products and effluents, if any, and/or have caused
others to dispose of such waste products and effluents, if any, in compliance
with all applicable state, local, federal and national environmental regulations
and in such a manner that: (1) no harm has resulted or is expected to result to
any of their respective employees or properties or to any other person or
entities or their properties, and (ii) the Company and each Subsidiary have
incurred no liability with respect thereto.
2.26 YEAR 2000 COMPLIANCE.
(a) The Company has provided to netWorth and its
counsel a true and correct copy of the Company's year 2000 compliance plan (the
"Y2K Plan"). The Company will make commercially reasonable efforts to complete
the tasks outlined in the Y2K Plan on or prior to December 31, 1999.
(b) The Company's and each Subsidiary's proprietary
computer systems and software products (exclusive of any computer systems and
software products licensed from third parties) developed or acquired by the
Company and each Subsidiary are Y2K Compliant. The Company expects the
above-referenced computer systems and software products to be Y2K Compliant
before, on and after January 1, 2000.
(c) The Company has solicited from its third party
vendors Y2K Compliance certification of the Mission Critical Systems licensed by
the Company and each Subsidiary from third party vendors. As of the date
hereof, the Company has received responses from (or responses have been made
available via website by) all such third party vendors of Mission Critical
Systems. Where any such vendor has responded with a certification of its Y2K
Compliance for any Mission Critical System, the Company is not aware of any
facts that would contradict such certification. Where any such vendor has
responded with a failure of certification of its Y2K Compliance for any Mission
Critical System, the Company has made, or will make commercially reasonable
efforts to make, such Mission Critical System Y2K Compliant or has replaced, or
will make commercially reasonable efforts to replace, such Mission Critical
Systems with Y2K Compliant systems.
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(d) "Mission Critical Systems" means computer systems
and software products owned or licensed by the Company, the failure of which
could reasonably be expected to cause (i) the Company's principal websites to
become inaccessible by their users for a period of twenty-four (24) hours or
longer, or (ii) a default pursuant to Section 19(a) of that certain Affiliation
Agreement dated November 10, 1997 between the Company and Straight Arrow
Publishers Company, L.P.
(e) "Y2K Compliant" means the ability: (i) to process
any date rollover, (ii) to process calculations or computations regardless of
the dates used in such calculations whether before, on or after January 1, 2000,
(iii) to accept and respond to two (2) digit year date input in a manner that
resolves any ambiguities as to the century to which such two (2) digit year date
input relates in an appropriate manner, and (iv) to store and display date data
in a manner that is unambiguous as to the century to which such two (2) digit
year date input relates.
2.27 AFFILIATION AGREEMENT WITH STRAIGHT ARROW PUBLISHERS
COMPANY, L.P. Simultaneously with the Closing, that certain Affiliation
Agreement between the Company and Straight Arrow Publishers Company, L.P. dated
as of November 10, 1997 shall have been extended for a "Renewal Term," under and
as defined therein, of five (5) years commencing on November 10, 2000.
2.28 FULL DISCLOSURE. No statement by the Company contained
in this Agreement, or the attached exhibits or schedules or any written
statement or certificate furnished or to be furnished to any of the Investors
pursuant to this Agreement or in connection with the transactions contemplated
hereby when read together contains any untrue statement of a material fact or
omits to state any material fact necessary to make the statements contained
therein or herein, in view of the circumstances under which they were made, not
misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS TO THE COMPANY.
Each Investor, severally and not jointly, hereby represents and warrants to the
Company as of the Effective Date as follows:
3.1 AUTHORIZATION. When executed and delivered by the
Investor, and assuming the execution and delivery by the Company, this
Agreement, the Registration Rights Agreement and the Stockholders' Agreement,
will constitute a valid and legally binding obligation of the Investor,
enforceable in accordance with its terms except as certain indemnification
provisions may be limited by principles of public policy, enforceability may be
limited by applicable laws relating to bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally and except as such enforceability is subject to general principles of
equity. The Investor has full power and authority to enter into this Agreement,
the Registration Rights Agreements and the Stockholders' Agreement.
3.2 NO CONFLICT WITH OTHER INSTRUMENTS. The execution,
delivery and performance of this Agreement, the Registration Rights Agreement
and the Stockholders'
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Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving
of notice: (i) any provision of any of charter documents of any Investor;
(ii) any provision of any judgment, decree or order to which any Investor is
a party or by which any Investor or its property is bound; or (iii) any
statute, rule or governmental regulation applicable to any Investor.
3.3 BROKERS AND FINDERS. None of the Investors has retained
any investment banker, broker, or finder in connection with the transactions
contemplated by this Agreement.
4. SECURITIES LAWS.
4.1 SECURITIES LAWS REPRESENTATIONS AND COVENANTS OF THE
INVESTORS.
(a) This Agreement, the Registration Rights Agreement
and the Stockholders' Agreement, are made with the Investors in reliance upon
each Investor's representation to the Company, which by each Investor's
execution of this Agreement each Investor hereby confirms, that the Shares to be
received by each Investor will be acquired for investment for such Investor's
own account, not as a nominee or agent, and not with a view to the direct or
indirect sale or distribution of any part thereof, and that each Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, each Investor further
represents that such Investor has no contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any of the Shares. Each of the
Investors represents and warrants to the Company that each office of such
Investor in which its investment decision was made, and the principal place of
business of such Investor (or principal residence if such Investor is an
individual), is located at the address or addresses set forth beneath its name
on EXHIBIT A hereto.
(b) Each Investor understands and acknowledges that
the Shares it is acquiring hereunder are deemed to be "restricted securities"
under the Securities Act as the offering of the Shares pursuant to this
Agreement will not be registered under the Securities Act or under any state
securities or "blue sky" laws on the grounds that the offering and sale of
securities contemplated by this Agreement are exempt from registration pursuant
to Section 4(2) of the Securities Act and such state securities or "blue sky"
laws, and that the Company's reliance upon such exemptions is predicated upon
the Investors' representations set forth in this Agreement.
(c) Unless the Shares are registered under the
Securities Act, each Investor covenants that in no event will such Investor
dispose of any of the Shares other than pursuant to Rule 144 ("Rule 144") or
Rule 144A promulgated by the Securities and Exchange Commission ("Commission")
under the Securities Act (or any similar or analogous rule), if available,
unless and until (i) the Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) if requested
-14-
<PAGE>
by the Company, the Investor shall have furnished the Company with an opinion
of counsel satisfactory in form and substance to the Company and the
Company's counsel to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate action necessary
for compliance with the Securities Act and any applicable state, local or
foreign law has been taken. Each certificate evidencing the Shares
transferred as above provided shall bear the appropriate restrictive legend
set forth in Section 4.2 below, except that such certificate shall not bear
such legend if the transfer was made in compliance with Rule 144 (pursuant to
a provision of such rule not requiring such legend) or if the opinion of
counsel referred to above is to the further effect that such legend is not
required in order to establish compliance with any provisions of the
Securities Act.
(d) Each Investor represents that: (i) the Investor is
an "Accredited Investor" as that term is defined in Regulation D promulgated by
the Commission under the Securities Act and has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of the Investor's prospective investment in the Shares. If other than an
individual, such Investor also represents that, if it has been organized for the
purpose of acquiring the Shares, all of the equity owners of the Investor are
"Accredited Investors"; (ii) the Investor has received all the information
requested by it from the Company and considered necessary or appropriate for
deciding whether to purchase the Shares and has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering and sale of the Shares and the other transactions
contemplated herein; (iii) the Investor has the ability to bear the economic
risks of such Investor's prospective investment in the Shares; and (iv) the
Investor is able, without materially impairing its financial condition, to hold
the Shares for an indefinite period of time and to suffer complete loss on its
investment.
4.2 LEGENDS.
(a) All certificates for the Shares shall 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.
-15-
<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 Stockholders' Agreement,
dated as of May 4, 1999, among the Company and the Stockholders
named therein, a copy of which is on file at the principal
executive office of the Company.
(b) The certificates evidencing the Shares shall also
bear any legend required pursuant to any other state, local or foreign law
governing such securities.
4.3 BLUE SKY COMPLIANCE. The Company will use its best
efforts to qualify the Shares for offer and sale to each Investor under, or to
ensure the availability of exemptions from the registration or qualification
requirements of, all applicable state securities or blue sky laws.
5. CONDITIONS OF INVESTORS' OBLIGATIONS AT THE CLOSING. The
obligations of the Investors under this Agreement to purchase the Shares at the
Closing are subject to the fulfillment at or before the Closing of each of the
following conditions, any of which may be waived in writing by netWorth:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true, correct and
complete on and as of the Closing with the same effect as if made on and as of
the Closing.
5.2 PERFORMANCE. The Company shall have performed or
fulfilled all agreements, obligations and conditions contained herein required
to be performed or fulfilled by the Company before the Closing.
5.3 BLUE SKY COMPLIANCE. The offer and sale of the Shares to
the Investors shall be in compliance with all applicable state securities or
blue sky laws.
5.4 BOARD OF DIRECTORS. The Certificate of Incorporation and
Bylaws shall provide for a Board of seven (7) members, and immediately upon the
Closing the Board of Directors will consist of Howard A. Tullman, Matthew S.
Kaplan, Thomas Cohen, Joseph Gleberman, Robert Gheewalla, and Burton B.
Goldstein, Jr. as the director designated by netWorth.
5.5 PROCEEDINGS SATISFACTORY. All corporate and legal
proceedings taken by the Company in connection with the transactions
contemplated by this Agreement and all documents and papers relating to such
transactions shall be satisfactory to the Investors, in the reasonable exercise
of the judgment of the Investors. The Company shall have delivered to the
Investors a certificate dated as of the Closing, signed by an officer of the
Company, certifying that the conditions set forth in Sections 5.1 and 5.2 have
been satisfied.
-16-
<PAGE>
5.6 LEGAL OPINION. At or before Closing, netWorth shall have
received an opinion from Freeborn & Peters, counsel to the Company,
substantially in the form of EXHIBIT C.
5.7 REGISTRATION RIGHTS AGREEMENT. The Company and the
Investors shall have entered into the Amended and Restated Registration Rights
Agreement in the form attached hereto as EXHIBIT D (the "Registration Rights
Agreement").
5.8 STOCKHOLDERS' AGREEMENT. The Company, the Investors and
the other stockholders of the Company shall have entered into the Amended and
Restated Stockholders' Agreement in the form attached hereto as EXHIBIT E (the
"Stockholders' Agreement").
5.9 AGREEMENT WITH STRAIGHT ARROW PUBLISHERS COMPANY, L.P.
Simultaneously with the Closing, that certain Affiliation Agreement with
Straight Arrow Publishers Company, L.P. ("Rolling Stone") dated as of November
10, 1997 shall have been extended for a "Renewal Term," under and as defined
therein, of five (5) years commencing on November 10, 2000, and Rolling Stone
shall have acknowledged the foregoing extension in writing.
5.10 APPROVAL OF MELLON VENTURES, L.P. Mellon Ventures, L.P.
shall have received the approval of its General Partner to enter into this
Agreement and to consummate the transactions contemplated hereby.
5.11 SMALL BUSINESS CONCERN. The Company shall execute and
deliver the documents attached hereto as EXHIBIT F concerning its status as a
"small business concern" within the meaning of Section 121.301(c) of Title 13 of
the United States Code of Federal Regulations.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The
obligations of the Company under this Agreement are subject to (a) the
representations and warranties of the Investors contained in Sections 3 and 4
having been satisfied and being true, correct and complete on and as of the
Closing with the same effect as if made on and as of the Closing, and (b)
obtaining the consent of the board of directors and the consent, in accordance
with the General Corporation Law of the State of Delaware, of the stockholders
of the Company to the adoption of the Certificate of Incorporation and the
execution and delivery of this Agreement, the Registration Rights Agreement, and
the Stockholders' Agreement.
7. MISCELLANEOUS.
7.1 SURVIVAL OF WARRANTIES. The warranties and
representations of the parties contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing.
-17-
<PAGE>
7.2 NOTICES. All notices, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, three business days after mailing if mailed by certified mail,
return receipt requested, one business day after delivery by sender to reputable
overnight courier service, or one business day after telecopied, telegraphed or
telexed (transmission confirmed), or otherwise actually delivered (i) if to the
Company, at Tunes.com Inc., 640 N. LaSalle Street, Suite 560, Chicago, Illinois
60610, Attn: Howard A. Tullman (with a copy to Freeborn & Peters, 311 South
Wacker Drive, Suite 3000, Chicago, Illinois 60606, Attn: Michael E. Shabat,
facsimile number: 312-360-6575), and (ii) if to any Investor, at such Investor's
address as set forth on EXHIBIT A, or at such other address as the Company or
such Investor may designate in writing to the other parties.
7.3 SEVERABILITY AND GOVERNING LAW. Should any Section or
any part of a Section within this Agreement be rendered void, invalid or
unenforceable by any court of law for any reason, such invalidity or
unenforceability shall not void or render invalid or unenforceable any other
Section or part of a Section in this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
applicable to contracts entered into and wholly to be performed within the State
of Delaware by Delaware residents.
7.4 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
7.5 CAPTIONS AND SECTION HEADINGS; KNOWLEDGE. Section titles
or captions contained in this Agreement are inserted as a matter of convenience
and for reference purposes only, and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof. As used in
this Agreement, the term "to the knowledge of the Company" shall refer to the
knowledge or awareness of the officers of the Company and shall be deemed for
all purposes to include the knowledge or awareness which any such officer would
have obtained after making a good faith inquiry of those employees of the
Company with principal and/or day-to-day operational responsibility with respect
to a particular matter.
7.6 SINGULAR AND PLURAL, ETC. Whenever the singular number
is used herein and where required by the context, the same shall include the
plural, and the neuter gender shall include the masculine and feminine genders.
7.7 AMENDMENTS AND WAIVERS. This Agreement may be amended
only by a written instrument signed by the Company and by the Investors owning
at least 66.67% of the outstanding shares of Common Stock issued or issuable
upon conversion of the Shares. No failure to exercise and no delay in
exercising, on the part of any party, any right, remedy, power or privilege
hereunder, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
-18-
<PAGE>
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law. The failure of any party to insist upon a strict performance of
any of the terms or provisions of this Agreement, or to exercise any option,
right or remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
any party of any term or provision of this Agreement shall be deemed to have
been made unless expressed in writing and signed by such party.
7.8 SUCCESSORS AND ASSIGNS. All rights, covenants and
agreements of the parties contained in this Agreement shall, except as otherwise
provided herein, be binding upon and inure to the benefit of their respective
successors and assigns.
7.9 EXPENSES. Upon the Closing, payment shall be made by the
Company to (i) Alston & Bird LLP, counsel to netWorth, for the fees and expenses
incurred in connection with the transactions contemplated by this Agreement,
(ii) netWorth, for other fees and expenses they incurred in connection with the
transactions contemplated by this Agreement, and (iii) Sidley & Austin, counsel
to the GSCP Stockholders (as defined in the Registration Rights Agreement), for
the fees and expenses incurred in connection with the transactions contemplated
by this Agreement; provided that the Company shall not be required to pay more
than an aggregate of $40,000 for such fees and expenses under Section 7.9(i).
7.10 FURTHER ASSURANCES. Each party hereto agrees to do all
acts and to make, execute and deliver such written instruments as shall from
time to time be reasonably required to carry out the terms and provisions of
this Agreement.
7.11 PUBLIC ANNOUNCEMENTS. The Company and the Investors will
consult with each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable law, will not issue any such
press release or make any such public statement prior to such consultation.
7.12 RIGHT OF FIRST OFFER. Subject to the terms and
conditions specified in this Section 7.12, each time the Company proposes to
offer any shares of, or securities convertible into or exercisable for any
shares of, any class of its capital stock ("New Shares"), the Company shall
first make an offering of such New Shares to each Investor holding more than
300,000 shares of Preferred Stock (for purposes of this Section 7.12, a "Major
Holder"), subject to adjustments for stock dividends, stock splits,
reclassifications and the like, in accordance with the following provisions:
(a) The Company shall give notice (the "Notice") to all Major
Holders stating (i) its bona fide intention to offer such New Shares, (ii) the
number of such New Shares to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such New Shares.
-19-
<PAGE>
(b) By written notice to the Company, within 15 calendar days
after the giving of the Company's Notice, a Major Holder may elect to purchase
or obtain, at the price and on the terms specified in the Notice, up to that
portion of such New Shares which equals the proportion that the number of shares
of Common Stock issued and held and issuable upon conversion of the Preferred
Stock then held by such Major Holder bears to the total number of shares of
Common Stock of the Company then outstanding (assuming full conversion of all
convertible securities) ("Pro Rata Share").
(c) If all New Shares referred to in the Notice which Major
Holders are entitled to obtain pursuant to Subsection 7.12(b) are not elected to
be obtained as provided in Subsection 7.12(b) hereof, the Company may, during
the 60-day period following the expiration of the 15-day period provided in
Subsection 7.12(b) hereof, offer the remaining unsubscribed portion of such New
Shares to any person or persons at a price not less than, and upon terms no more
favorable than, those specified in the Notice. If the Company does not enter
into an agreement for the sale of the New Shares within such 60-day period, the
rights provided to Major Holders hereunder shall be deemed to be revived and
such New Shares shall not be offered unless first reoffered to the Major Holders
in accordance herewith.
(d) The right of first offer in this Section 7.12 shall not
be applicable to:
(i) shares of Common Stock issuable or issued to
employees, advisors, consultants or outside directors of the Company
directly or pursuant to a stock option plan or restricted stock plan
approved by the Board of Directors of the Company;
(ii) securities issued or issuable upon conversion of
the securities set forth in Section 2.2 hereof; or
(iii) securities issued or issuable in connection with a
merger, acquisition or consolidation.
(e) The right of first offer set forth in this Section 7.12
may not be assigned or transferred, except that such right is assignable by each
Major Holder to any wholly-owned subsidiary or parent of, or to any corporation
or entity that is, within the meaning of the Securities Act, controlling,
controlled by or under common control with, any such Major Holder.
(f) All rights of first offer granted under this Section 7.12
shall automatically terminate immediately prior to the closing of the Company's
initial public offering of securities (and such right of first offer shall not
apply to such offering).
(e) For purposes of this Section 7.12, "Preferred Stock"
means the Company's Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock,
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Series C Convertible Preferred Stock, Series D Convertible Preferred Stock
and Series E Stock.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
THE COMPANY:
TUNES.COM INC.
By: /s/ Stuart B. Frankel
-----------------------------------
Name: Stuart B. Frankel
---------------------------------
Title: Chief Financial Officer
--------------------------------
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/ Eve M. Gerriets
-----------------------------------
Its: Vice President
----------------------------------
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/ Eve M. Gerriets
-----------------------------------
Its: Vice President
----------------------------------
-22-
<PAGE>
GOLDMAN SACHS & CO. VERWALTUNGS GMBH, a
company organized under the laws of
Germany
By: /s/ Eve M. Gerriets
-----------------------------------
Its: Registered Agent
----------------------------------
By: /s/ Richard A. Friedman
-----------------------------------
Its: Managing Director
----------------------------------
STONE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., General
Partner
By: /s/ Eve M. Gerriets
-----------------------------------
Its: Vice President
----------------------------------
BRIDGE STREET FUND 1997, L.P., a Delaware
limited partnership
By: Stone Street Asset Corp., Managing
General Partner
By: /s/ Eve M. Gerriets
-----------------------------------
Its: Vice President
----------------------------------
-23-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
SBIC PARTNERS II, L.P.
By: Forrest Binkley & Brown L.P.,
General Partner
By: /s/ Jeffrey J. Brown
------------------------------
Jeffrey J. Brown
Office of the President
-24-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
THE BENAROYA COMPANY, LLC
By: /s/ Larry R. Benaroya
-----------------------------------
Name: Larry R. Benaroya
---------------------------------
Title: Manager
--------------------------------
-25-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
IT CAPITAL LTD.
By: /s/ David A. Seton
-----------------------------------
Name: David A. Seton
---------------------------------
Title: Managing Director
--------------------------------
-26-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ James Ryffel
-----------------------------------
James Ryffel
-27-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Scot C. Hollmann
-----------------------------------
Scot Hollmann
-28-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Paul Greenwell
-----------------------------------
Paul Greenwell
-29-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series E
Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Brent Clum
-----------------------------------
Brent Clum
-30-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Norman Leben
-----------------------------------
Norman Leben
-31-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ David Solomont
-----------------------------------
David Solomont
-32-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
NEW SUMMIT PARTNERS
By: /s/ Barbara Garcia
-----------------------------------
Name: Barbara Garcia
---------------------------------
Title: Partner
--------------------------------
-33-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
AMERICAN HIGH GROWTH EQUITIES RETIREMENT
TRUST
By: /s/ Brad Butler
-----------------------------------
Name: Brad Butler
---------------------------------
Title: Trustee
--------------------------------
-34-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
C.B. EQUITIES RETIREMENT TRUST
By: /s/ Abbey Butler
-----------------------------------
Name: Mr. Abbey Butler
---------------------------------
Title: Trustee
--------------------------------
-35-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Joel T. Comiteau
-----------------------------------
Joel Comiteau
-36-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ John Wineapple
-----------------------------------
John Wineapple
-37-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
TUNABLE SIMON, L.L.C.
By: IPPnet, L.L.C., its managing member
By: IPP99 PRIVATE EQUITY, L.L.C.,
its managing member
By: WESKIDS III, L.L.C., its
managing member
By: Mark J. Butler, its Vice
President and CFO
/s/ Mark J. Butler
------------------------
-38-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Lawrence Burstein
-----------------------------------
Lawrence Burstein
-39-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Series
E Convertible Preferred Stock Purchase Agreement as of the day and year first
above written.
By: /s/ Steven Millner
-----------------------------------
Steven Millner
-40-
<PAGE>
Subsidiaries of Tunes.com Inc.:
Tunes Acquisition Corp., a Delaware corporation
JAMtv Interactive Services Corporation, an Illinois corporation
<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 the Registration Statement (Form S-1) and related
Prospectus of Tunes.com Inc.
/s/ Ernst & Young LLP
Chicago, Illinois
June 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 6-MOS YEAR YEAR 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 MAR-31-1998
MAR-31-1999
<PERIOD-START> JUL-02-1996 JAN-01-1997 JAN-01-1998 JAN-01-1998
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<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 MAR-31-1998
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<CASH> 561,407 2,674,236 4,251,082 5,093,860
4,052,653
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 130,016 385,720 55,938
597,774
<ALLOWANCES> 0 0 (17,000) 0
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<INVENTORY> 0 0 0 0
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<CURRENT-ASSETS> 578,865 3,892,408 5,993,997 6,656,189
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<PP&E> 29,857 840,430 1,712,802 1,048,359
1,791,601
<DEPRECIATION> (475) (131,185) (498,636) (194,054)
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<TOTAL-ASSETS> 634,066 5,601,653 11,413,172 8,273,323
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<CURRENT-LIABILITIES> 100,663 513,500 2,754,192 749,494
2,030,933
<BONDS> 0 0 160,507 0
139,811
0 8,430,108 22,116,439 12,689,727
22,652,610
0 0 0 0
0
<COMMON> 0 11,505 13,405 11,505
13,405
<OTHER-SE> 533,403 (3,353,460) (13,631,371) (5,177,403)
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<TOTAL-LIABILITY-AND-EQUITY> 634,066 5,601,653 11,413,172 8,273,323
10,773,064
<SALES> 0 150 193,225 824
86,924
<TOTAL-REVENUES> 0 564,694 2,484,655 454,301
976,719
<CGS> 0 100 167,345 402
85,088
<TOTAL-COSTS> 0 1,267,521 4,045,056 991,376
984,199
<OTHER-EXPENSES> 233,950 2,933,788 11,903,743 1,167,063
3,920,651
<LOSS-PROVISION> 0 0 17,000 0
0
<INTEREST-EXPENSE> 0 0 9,438 220
6,078
<INCOME-PRETAX> (216,597) (3,522,035) (13,036,448) (1,636,760)
(3,895,081)
<INCOME-TAX> 0 0 0 0
0
<INCOME-CONTINUING> (216,597) (3,522,035) (13,036,448) (1,636,760)
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<DISCONTINUED> 0 0 0 0
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<EXTRAORDINARY> 0 0 0 0
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<CHANGES> 0 0 0 0
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<NET-INCOME> (216,597) (3,522,035) (13,036,448) (1,636,760)
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<EPS-BASIC> 0 (3.38) (12.35) (1.60)
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<EPS-DILUTED> 0 (3.38) (12.35) (1.60)
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