<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1999
Registration 333-93361
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LOUDEYE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7371 91-1908833
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Times Square Building
414 Olive Way, Suite 300
Seattle, Washington 98101
(206) 832-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Martin G. Tobias
Chief Executive Officer
Loudeye Technologies, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, Washington 98101
(206) 832-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies To:
<TABLE>
<CAPTION>
<S> <C>
William W. Ericson Nora L. Gibson
John W. Robertson Lindsay C. Freeman
Ivan A. Gaviria Angela C. Hilt
Michelle A. Gail Jennifer J. Massey
Venture Law Group Brobeck, Phleger & Harrison LLP
A Professional Corporation Spear Street Tower
4750 Carillon Point One Market St.
Kirkland, Washington 98033 San Francisco, California 94105
(425) 739-8700 (415) 442-0900
</TABLE>
---------------
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,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed Proposed
Title of Each Class of Amount maximum Maximum Amount of
Securities to be to be offering price Aggregate Registration
Registered registered(1) per share(2) Offering Price(2) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001................. 5,175,000 $10.00 $51,750,000.00 $15,180
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</TABLE>
(1) Includes 675,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
---------------
The registrant hereby amends this registration statement on that 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 this registration
statement shall become effective on the date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY , 2000
[LOGO OF LOUDEYE TECHNOLOGIES, INC.]
4,500,000 Shares
Common Stock
Loudeye Technologies, Inc. is offering 4,500,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We anticipate that the initial public offering price will be
between $8.00 and $10.00 per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "LOUD."
--------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 7.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Loudeye....................................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Loudeye has granted the underwriters a 30-day option to purchase up to an
additional 675,000 shares of common stock to cover over-allotments. FleetBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on 2000.
--------------
Robertson Stephens Chase H&Q
CIBC World Markets
The date of this prospectus is , 2000
<PAGE>
Inside Cover:
Towards top of page
Loudeye logo (originally encoding.com)
Enabling a new experience of audio and video on the Internet
Upper-section of page
Digital media services and applications to
encode, manage and distribute audio and video
Middle portion of page
Our customers are leading companies in these industries
Film Studios High Tech Industry
Record Labels Manufacturing
Stock Footage Houses Finance
Music and Video Distributors Education
Web Aggregators Government
New Media
We enable complete digital media solutions for
Online Promotions Corporate Communications
e-Commerce Education and Training
Content Acquisition and Management Marketing
Content Distribution Advertising
Gatefold:
Towards top of page
Loudeye (originally encoding.com)
Providing the digital media infrastructure to enable audio and video
on every Web page
Over 420,000 minutes of video encoded
Over 1.5 million audio files encoded
Upper section of page
Turning traditional media into digital media
Process Diagram - (illustrates parallels to traditional media and digital
media) (illustration to show the following being addressed by both Digital
media services and Digital media applications)
Starts with input source material symbols such as:
Compact disks, videos, floppy disk, tapes, cassettes, cameras
Digital Media Services
Encoding: signal acquisition, relational data capture, image capture,
encode to formats
Management: digital asset management, indexing, security, archival
storage
Distribution: e-commerce, syndication, rights management,
delivery
Digital Media Applications
Ends with content showing up on example Web pages
Towards bottom of page
Digital Media Services & Digital Media Applications
High quality, large volume, and quick turnaround
Complete digital media solutions
Format and platform independent
Flexible and reliable
1
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
----------------
TABLE OF CONTENTS
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Page
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 37
Management............................................................... 56
Certain Relationships and Related Transactions........................... 69
Principal Stockholders................................................... 71
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
Underwriters............................................................. 79
Legal Matters............................................................ 82
Experts.................................................................. 82
Change in Independent Accountants........................................ 82
Additional Information................................................... 83
Glossary of Technical Terms.............................................. 84
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Loudeye and encoding.com are our service marks; mediaupgrade.com,
myslideshow, online media syndicator, media syndicator and media syndicator pro
are our trademarks. This prospectus also includes trade dress, trade names,
trademarks and service marks of other companies. Use or display by Loudeye of
other parties' trademarks, trade dress or products is not intended to and does
not imply a relationship with, or endorsement or sponsorship of Loudeye by, the
trademark or trade dress owners.
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including "Risk Factors," and our financial
statements and notes to those statements appearing elsewhere in this prospectus
regarding our company and the common stock being sold in this offering.
Loudeye Technologies, Inc.
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
corporate markets. With the millions of hours of existing audio and video
content and the thousands of hours of new audio and video content created each
day, media owners have become increasingly aggressive in exploring new ways to
reach audiences and distribute their content. Our solution simplifies and
accelerates the process of delivering audio and video content to the Web. Our
proprietary technologies and processes enable high quality, high volume,
platform neutral processing of significant quantities of digital media. Our
customers include Atom Films, BMG Music, Disney Enterprises, Inc., EMusic.com
Inc., Hewlett-Packard Company, Kanakaris Communications, Inc., Microsoft
Corporation, Sony Music Entertainment, Inc. and Sony Trans Com.
The widespread acceptance of digital audio and video media is the next phase
in the evolution of the Internet. Media and technology companies are seeking to
leverage the Internet by creating a Web experience consistent with the quality
of traditional media such as compact disks, tapes, film, radio and television.
The development of numerous streaming media technologies and the increased
availability of high-speed access have helped to create a viable platform for
delivery of audio and video on the Internet. However, a significant factor
limiting the use of audio and video on the Internet is the lack of software
applications, facilities or processes for transforming traditional media into
Internet compatible streaming technologies that can be distributed to end users
in all formats.
Our digital media services and applications enable our customers to manage
their Web-based audio and video content. We offer complete digital media
services and applications that provide our customers with an end-to-end
solution encompassing the conversion, encoding, management and distribution of
digital media. The benefits of our solution include high quality, large volume,
accelerated time to market, format and platform independence, superior
reliability and flexibility.
We intend to enhance our leadership position in encoding technology and
services by continuing to develop superior technologies and processes through a
platform and format independent strategy. We plan to build on and expand our
capabilities to include software-based solutions that allow Web destinations
and media companies to offer complete digital media services and applications
to their end users in a complete Web environment. As new formats and
technologies emerge, we will quickly expand our services to incorporate these
new capabilities. In this way, we plan to continue to define an emerging
Internet media infrastructure layer that links audio and video content creators
and owners with millions of Internet users.
We were formed as a limited liability company in Washington in August 1997
under the name encoding.com, LLC and incorporated in Delaware in March 1998 as
encoding.com, Inc. In December 1999, we changed our name to Loudeye
Technologies, Inc. Our principal executive offices are located at the Times
Square Building, 414 Olive Way, Suite 300, Seattle, WA 98101, and our telephone
number is (206) 832-4000. Our World Wide Web site is www.loudeye.com. The
information contained on our Web site is not part of this prospectus.
4
<PAGE>
Recent Developments
In December 1999:
. We acquired Alive.com, Inc., a digital media applications developer.
. We sold $47.8 million of preferred stock to a number of investors,
including AOL, CBS, Microsoft and NBC.
. We agreed to develop a digital media clip service for Valley Media and to
jointly commercialize this service.
The Offering
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<C> <S>
Common stock offered by Loudeye....................... 4,500,000 shares
Common stock to be outstanding after the offering..... 34,259,493 shares
Use of proceeds....................................... We intend to use the net
proceeds for general
corporate purposes,
including working
capital and capital
expenditures. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol................ LOUD
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at December 31, 1999.
This number excludes outstanding or available options and outstanding warrants
to purchase an aggregate of 7,512,825 shares. See "Capitalization."
----------------
Except as otherwise noted, all information in this prospectus:
. reflects the automatic conversion of 21,063,236 shares of preferred stock
into common stock at the closing of the offering; and
. assumes that the underwriters' option to purchase additional shares is
not exercised.
5
<PAGE>
Summary Financial Data
The statements of operations data for the years ended December 31, 1997,
1998, and 1999 are derived from our audited financial statements appearing
elsewhere in this prospectus. The balance sheet data displayed in the "Pro
Forma" column reflect the effect of the conversion of all shares of outstanding
preferred stock into shares of common stock upon the closing of this offering
and the application of the net proceeds from the sale of 4,500,000 shares of
common stock offered by us at an assumed initial public offering price of $9.00
per share, after deducting the underwriting discount and estimated offering
expenses. See "Use of Proceeds" for a description of how we intend to use the
net proceeds of this offering.
The summary financial data should be read in conjunction with our financial
statements and the related notes included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See Note 2 of notes to financial statements for an explanation of
the determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
<TABLE>
<CAPTION>
Period from
August 1997
(inception) Fiscal Year Fiscal Year
through Ended Ended
December 31, December 31, December 31,
------------ ------------ ------------
1997 1998 1999
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net revenues....................... $ 10 $ 286 $ 2,645
Gross margin....................... (7) (218) (226)
Total operating expenses........... 88 1,465 11,701
Net loss........................... (95) (1,650) (11,905)
Basic and diluted pro forma net
loss per share.................... n/a $ (0.17) $ (1.56)
Weighted average shares outstanding
used to compute basic and diluted
pro forma loss per share.......... n/a 9,585,049 16,659,800
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Actual Pro Forma
------- ---------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................... $49,273 $85,857
Working capital............................................... 44,032 80,616
Total assets.................................................. 72,558 109,142
Long-term obligations, less current portion................... 1,963 1,963
Total stockholders' equity.................................... 63,272 99,856
</TABLE>
6
<PAGE>
RISK FACTORS
Any investment in our shares of common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Operations
We have a limited operating history, making it difficult for you to evaluate
our business and your investment
Loudeye was formed as a limited liability company in August 1997 and
incorporated in March 1998. We therefore have a very limited operating history
upon which an investor may evaluate our operations and future prospects.
Because of our limited operating history, we have limited insight into trends
that may emerge and affect our business. In addition, the revenue and income
potential of our business and market are unproven. Because of the recent
emergence of the Internet media infrastructure industry, none of our executives
have significant experience in this industry. As a young company, we face risks
and uncertainties relating to our ability to implement our business plan
successfully, particularly due to the early stage of the streaming media
industry. Our potential for future profitability must be considered in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, such as the Internet media infrastructure
industry, using new and unproven business models.
Because we expect to continue to incur net losses, we may not be able to
implement our business strategy and the price of our stock may decline
We have incurred net losses from operations of $13.6 million during the
period August 12, 1997 (inception) through December 31, 1999. Given the level
of our planned operating and capital expenditures, we expect to continue to
incur losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:
. successfully scale our current operations;
. introduce new digital media services and applications;
. implement and execute our business and marketing strategies;
. develop and enhance our brand;
. adapt to meet changes in the marketplace;
. respond to competitive developments in the Internet media infrastructure
industry;
. continue to attract, integrate, retain and motivate qualified personnel;
and
. upgrade and enhance our technologies to accommodate expanded digital
media service and application offerings.
We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. Additionally, we expect
to increase significantly
7
<PAGE>
our operating expenses in the near future as we attempt to expand our digital
media service and application offerings, grow our customer base, enhance our
brand image, improve our technology infrastructure and open new offices. We
expect the number of our employees to continue to grow significantly. These
higher operating costs will likely increase our quarterly net losses for the
foreseeable future. Accordingly, our ability to operate our business and
implement our business strategy may be hampered and the value of our stock may
decline.
Our quarterly financial results are subject to fluctuations which may make it
difficult to forecast our future performance and could cause our stock price to
decline
Our quarterly operating results have fluctuated in the past, and we expect
our revenues and operating results to vary significantly from quarter to
quarter due to a number of factors, including:
. variability in demand for our digital media services and applications;
. market acceptance of new digital media services and applications offered
by us and our competitors;
. introduction or enhancement of digital media services and applications
offered by us and our competitors;
. willingness of our customers to enter into volume purchase orders;
. the mix of distribution channels through which our products are licensed
and sold;
. changes in the growth rate of Internet usage;
. variability in average order size;
. changes in our pricing policies or the pricing policies of our
competitors;
. technical difficulties with respect to the use of our products;
. governmental regulations affecting use of the Internet, including
regulations concerning intellectual property rights and security
measures;
. the amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure;
. general economic conditions such as fluctuating interest rates and
inflation; and
. economic conditions specifically related to the Internet such as
fluctuations in the costs of Internet access, hardware and software and
the profitability of the Internet businesses that are our customers.
Our limited operating history and new and unproven business model further
contribute to the difficulty of making meaningful quarterly comparisons. We
expect our operating expenses to increase significantly in absolute dollars.
Our current and future levels of operating expenses and capital expenditures
are based largely on our growth plans and estimates of future revenues. These
expenditure levels are, to a large extent, fixed in the short term. Thus, we
may not be able to adjust spending in a timely manner to compensate for any
unexpected shortfall revenues and any significant shortfall in revenues
relative to planned expenditures could have an immediate adverse effect on our
business and results of operations. If our operating results fall below the
expectations of securities analysts and investors in some future periods, our
stock price will likely decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more information on our
quarterly operating results.
8
<PAGE>
Historically, we have priced our digital media services based on the
customer's projected service volumes. In the future, we plan to provide digital
media services through volume purchase orders with prices determined by
customers committing to specific service volumes and schedules and paying
nonrefundable deposits. We plan to use those volume purchase orders to schedule
time in our production facilities, to staff our operations efficiently and to
forecast revenues and cost of revenues. If our customers are not willing to do
business with us on these terms or if they do not fulfill their commitments
under volume purchase orders, our ability to forecast revenues will be
adversely affected and could contribute to increased fluctuation in our
quarterly results which could seriously harm our business.
Although we have recently achieved significant percentage increases in our
quarterly revenues, this does not mean that future quarters can be expected to
show similar percentage revenue increases.
We are dependent on the development and rate of adoption of digital media and
the delay or failure of this development would seriously harm our business
The development of commercial applications for digital media content is in
its very early stages. If widespread commercial use of the Internet does not
develop, or if the Internet does not develop as an effective medium for the
distribution of digital media content to consumers, then we will not succeed in
executing our business plan. Many factors could inhibit the growth of
electronic commerce in general and the distribution of digital media content in
particular, including concerns about the profitability of Internet-based
businesses, bandwidth constraints, piracy and privacy.
Our success depends on users having access to the necessary hardware,
software and bandwidth, or data transmission capability, to receive high
quality digital media over the Internet. Congestion over the Internet and data
loss may interrupt audio and video streams, resulting in unsatisfying user
experiences. In order to receive digital media adequately, users generally must
have multimedia personal computers with certain microprocessor requirements and
a data transmission capability of at least 28.8 Kbps as well as streaming media
software. The success of digital media over the Internet depends on the
continued roll-out of broadband access to consumers on an affordable basis.
Users typically download digital media software and install it on their
personal computers. This installation may require technical expertise that some
users do not possess. Furthermore, some information systems managers block
reception of digital media over corporate intranets because of bandwidth
constraints. Widespread adoption of digital media technology depends on
overcoming these obstacles, improving audio and video quality and educating
customers and users in the use of digital media technology. If digital media
technology fails to overcome these obstacles, our business could be seriously
harmed.
We rely on strategic relationships to promote our services and for access to
licensed technology; if we fail to maintain or enhance these relationships, our
ability to serve our customers and develop new services and applications could
be harmed
Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies
including, among others, Apple Computer, Inc., Microsoft Corporation,
RealNetworks, Inc. and Terran Interactive, Inc. and hosting and distribution
companies including, among others, Digital Island, Inc., Enron Corp. and iBEAM
Broadcasting. We rely on these relationships for licensed technology to
maintain our ability to service RealNetworks, RealMedia,
9
<PAGE>
Microsoft Windows Media and Apple Quicktime platforms and applications. Due to
the evolving nature of the Internet media infrastructure market, we will need
to develop additional relationships to adapt to changing technologies and
standards and to work with newly emerging companies with whom we do not have
preexisting relationships. We cannot be certain that we will be successful in
developing new relationships or that our partners will view these relationships
as significant to their own business or that they will continue their
commitment to us in the future. If we are unable to maintain or enhance these
relationships, we may have difficulty strengthening our technology development
and increasing the adoption of our brand and services.
If we are ineffective in managing our rapid growth, our business may be harmed
We have rapidly and significantly expanded our operations and anticipate that
further rapid expansion will be required to execute our business strategy. This
growth has accelerated since January 1, 1999; from January 1, 1999 to December
31, 1999, we have grown from 41 to 210 employees. In December 1999, we acquired
Alive.com. In addition, we have recently leased additional space and are in the
process of installing additional production equipment for our digital media
services. Integrating additional production facilities with our existing space
has placed a significant strain on our employees, management systems,
information systems, accounting systems, encoding systems and other resources.
If we do not manage our growth effectively, our business, results of operations
and financial condition could be seriously harmed.
Our current systems are insufficient to accommodate our targeted level of
future operations. Effectively managing our expected future growth will
require, among other things, that we successfully upgrade our production
processes and systems, expand the breadth of products and services we offer,
improve our management reporting capabilities and strengthen internal controls
and accounting systems. We will also need to attract, hire and retain highly
skilled and motivated officers and employees. We must also maintain close
coordination among our marketing, operations, development and accounting
organizations. We plan to use a portion of the proceeds of this offering to add
sales offices and production facilities in New York, New York and Los Angeles,
California as well as internationally. This broad expansion will create
significant challenges for us. If we are unable to meet these challenges
effectively, our business could be harmed.
Technological advances may cause our services and applications to be
unnecessary
As more audio and video content is originally created in digital media
formats, the need for our encoding services may decrease. In addition the
enhancement of features in streaming media software applications from
Microsoft, RealNetworks and others may incorporate services and applications we
currently offer, or intend to offer, making our services or applications
unnecessary or obsolete. This could seriously harm our business.
If we are unable to scale our capacity sufficiently as demand increases, we may
lose customers which would seriously harm our business
The average volume of orders we have had to fulfill has been below our
designed capacity, and we cannot be certain that our facilities and employees
will be able to manage a substantially larger number of customer orders while
maintaining current levels of performance. If customer demand increases, our
failure to achieve or maintain high capacity for our production facilities may
cause us to lose customers or fail to gain new ones, reducing our revenues and
causing our business and financial results to suffer.
10
<PAGE>
The failure to retain and attract key technical personnel and other highly
qualified employees could harm our business
Because of the complexity of our services, applications and related
technologies, we are substantially dependent upon the continued service of our
existing product development personnel. In addition, we intend to hire
additional engineers with high levels of experience in designing and developing
software and rich media products in time-pressured environments. There is
intense competition in the Puget Sound region for qualified technical personnel
in the software and technology markets. New personnel will require training and
education and take time to reach full productivity. Our failure to attract,
train and retain these key technical personnel could seriously harm our
business.
As we continue to introduce additional applications and services, and as our
customer base and revenues continue to grow, we will need to hire a significant
number of qualified personnel in every other area of operations as well.
Competition for these personnel is also extremely intense, and we may not be
able to attract, train, assimilate or retain qualified personnel in the future.
Our failure to attract or retain qualified personnel could seriously harm our
business, results of operations and financial condition.
Finally, our business and operations are substantially dependent on the
performance of our executive officers and key employees, all of whom are
employed on an at-will basis and have worked together for only a short period
of time. We do not maintain "key person" life insurance on any of our executive
officers. The loss of Martin G. Tobias, our founder and chief executive
officer, could seriously harm our business, as could the loss of several other
key executives.
Competition may decrease our market share, revenues and gross margins which may
cause our stock price to decline
Our products and services are divided into digital media services, which is
the encoding of audio and video content for deployment over the Internet, and
digital media applications, which are applications that enable our customers to
employ digital media in their Web-based products and services.
The market for digital media services and applications is relatively new, and
we face competition from in-house encoding services by potential customers,
other vendors that provide outsourced digital media services and companies that
directly provide digital media applications. If we do not compete effectively
or if we experience reduced market share from increased competition, our
business will be harmed. In addition, the more successful we are in the
emerging market for digital media services and applications, the more
competitors are likely to emerge including turnkey Internet media application
and service providers such as Yahoo! Broadcast Services, InterVU, Inc. and V-
Stream; streaming media platform developers such as Apple, Microsoft,
RealNetworks and Liquid Audio, Inc.; and video post-production houses. Our
digital media services business may face competitive services from companies
such as Globix Corporation, Magnum Design, Sonic Foundry and STV Group, Inc.
Our digital media applications business may face competitive products from
companies like AudioSoft, AudioTruck, InterTrust Technologies Corporation,
Microsoft, RealNetworks, Versifi and Vignette Corporation.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
11
<PAGE>
aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Our business model is unproven, making it difficult to forecast our revenues
and operating results
Our business model is based on the premise that digital media content
providers and developers will outsource a large percentage of their encoding
services needs and content management needs. Our potential customers may rely
on internal resources for these needs. In addition, technological advances may
render an outsourced solution unnecessary, particularly as new media content is
created in a digital format. Market acceptance of our services will depend in
part on reductions in the cost of our services so that we may offer a more cost
effective solution than both our competitors and our customers doing the work
internally. Our cost reduction efforts may not allow us to keep pace with
competitive pricing pressures or may not lead to improved gross margins. In
order to remain competitive, we must reduce the cost of our services through
design and engineering changes. We may not be successful in reducing the costs
of our services.
Average selling prices of our services may decrease, which may harm our gross
margins
The average selling prices for our services may be lower than expected as a
result of competitive pricing pressures, promotional programs and customers who
negotiate price reductions in exchange for longer term purchase commitments or
otherwise. The pricing of services sold to our customers depends on the
duration of the agreement, the specific requirements of the order, purchase
volumes, the level of sales and service support and other contractual
agreements. We expect to experience pricing pressure in the future and
anticipate that the average selling prices and gross margins for our products
will decrease over product life cycles. We may not be successful in developing
and introducing on a timely basis new products with enhanced features that can
be sold at higher gross margins.
If we fail to enhance our existing services and applications products or
develop and introduce new digital media services, applications and features in
a timely manner to meet changing customer requirements and emerging industry
standards, our ability to grow our business will suffer
The market for Internet media infrastructure solutions is characterized by
rapidly changing technologies and short product life cycles. These market
characteristics are heightened by the emerging nature of the Internet and the
continuing trend of companies from many industries to offer Internet-based
applications and services. The widespread adoption of new Internet, networking,
streaming media or telecommunications technologies or other technological
changes could require us to incur substantial expenditures to modify or adapt
our operating practices or infrastructure. Our future success will depend in
large part upon our ability to:
. identify and respond to emerging technological trends in the market;
. develop and maintain competitive digital media services and
applications;
. enhance our products by adding innovative features that differentiate
our digital media services and applications from those of our
competitors;
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. acquire and license leading technologies;
. bring digital media services and applications to market on a timely
basis at competitive prices; and
. respond effectively to new technological changes or new product
announcements by others.
We will not be competitive unless we continually introduce new services and
applications and enhancements to existing services and applications that meet
evolving industry standards and customer needs. In the future, we may not be
able to address effectively the compatibility and interoperability issues that
arise as a result of technological changes and evolving industry standards. The
technical innovations required for us to remain competitive are inherently
complex, require long development cycles and are dependent in some cases on
sole source suppliers. We will be required to continue to invest in research
and development in order to attempt to maintain and enhance our existing
technologies and products, but we may not have the funds available to do so.
Even if we have sufficient funds, these investments may not serve the needs of
customers or be compatible with changing technological requirements or
standards. Most development expenses must be incurred before the technical
feasibility or commercial viability of new or enhanced services and
applications can be ascertained. Revenue from future services and applications
or enhancements to services and applications may not be sufficient to recover
the associated development costs.
If our systems fail and cause interruption of our services, or if our facility
is damaged, our business could be seriously harmed
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
provide high quality customer service and attract and retain customers,
suppliers, users and strategic partners. Currently, our infrastructure and
production systems are located at one site in Seattle, Washington. We depend on
our single-site infrastructure and any disruption to this infrastructure
resulting from a fire, natural disaster or other event could result in an
interruption in our service, delays in responding to customers' orders and, if
sustained or repeated, could impair our reputation and the attractiveness of
our services. We have no mirror sites or redundant systems backing up our
infrastructure in the event of serious damage or destruction.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures, break-
ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan, and we do not carry
sufficient business interruption insurance to compensate us for losses that
could occur. The occurrence of any of these conditions could seriously harm our
business.
We cannot be certain that we will be able to protect our intellectual property,
and we may be found to infringe proprietary rights of others, which could harm
our business
Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with third parties,
and invention assignment agreements with our employees and contractors. We
presently have six provisional patent applications on file with the U.S. Patent
and Trademark Office and are currently in the process of preparing and filing
six patent applications that claim priority filing dates to those provisional
patent applications. We cannot assure you that any or all of the patent
applications will be granted. We cannot assure you that measures we take to
protect our intellectual property will be
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successful or that third parties will not develop alternative solutions that do
not infringe upon our intellectual property. In addition, we could be subject
to intellectual property infringement claims by others. These claims, and any
resultant litigation, should it occur, could subject us to significant
liability for damages including treble damages for willful infringement. In
addition, even if we prevail, litigation could be time-consuming and expensive
to defend and could result in the diversion of our time and attention. Any
claims from third parties may also result in limitations on our ability to use
the intellectual property subject to these claims unless we are able to enter
into agreements with the third parties making these claims. Further, we plan to
offer our digital media services and applications to customers worldwide
including customers in foreign countries that may offer less protection for our
intellectual property than the United States. Our failure to protect against
misappropriation of our intellectual property, or claims that we are infringing
the intellectual property of third parties could have a negative effect on our
business, revenues, financial condition and results of operations.
If we fail to successfully establish our new Loudeye name or brand or if we
incur significant expenses in promoting and maintaining our name or brand, our
business could be harmed
In December 1999, we changed our name from encoding.com, Inc. to Loudeye
Technologies, Inc. to better represent the diversity of our digital media
services and applications. The importance of brand and name recognition will
increase as more companies provide outsourced encoding solutions and content
management applications. If our efforts to build our brand and name identity do
not succeed, our business, financial condition and results of operations could
be seriously harmed. These efforts have required and will continue to require,
significant expense. We cannot assure you that these efforts will be
successful. Additionally, our new Loudeye brand and name may cause confusion to
current and potential customers, which may harm our business, financial
condition and results of operations. There can be no assurance that we will be
able to enforce rights related to the Loudeye Technologies, Inc. name and
brand, that we will be free to use the name in all jurisdictions, that there
will be no challenges to the use of that name or that we will not be required
to expend significant resources in defending the use of that name.
Any failure to integrate Alive.com into our business could compromise our
growth strategy and harm our business
On December 14, 1999, we completed our acquisition of Alive.com. To execute
our business plan, we must integrate Alive.com's and our operations and
services into a cohesive, combined entity. Our acquisition of Alive.com has
increased the size of our workforce and expanded the demand on our physical
facilities. These increased demands on our management of operations increase
the risk that we will fail to gather and communicate information and ideas
effectively, including technical knowledge and expertise, throughout our
organization which could have a harmful impact on our business. In addition,
our acquisition of Alive.com is being accounted for using the purchase method
of accounting. Because most software and professional services business
acquisitions involve the purchase of significant amounts of intangible assets,
acquisitions of these businesses also result in goodwill and significant
amortization charges and may also involve charges for acquired research and
development projects. For example, as a result of our acquisition of Alive.com,
we recorded an aggregate of $15.9 million in goodwill and other intangible
assets which will be amortized over a three-year period and will reduce our
earnings and profitability for the foreseeable future.
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If standards for the secure digital delivery of recorded music and video are
not adopted, our customers' piracy concerns might not be satisfied, and they
might not use our products and services
Because some streaming media formats do not contain mechanisms for tracking
the source or ownership of digital media, users are able to download and
distribute unauthorized or "pirated" copies of copyrighted media, including
music, over the Internet. We plan to release an application that deals with
encryption techniques and security measures that may have these problems. This
piracy is a significant concern to companies who might use our digital media
services and applications, and is the reason some record companies are
reluctant to digitally deliver their recorded music over the Internet. It is
not clear how existing laws governing issues such as property ownership,
retransmission of media, encryption and data protection apply to the Internet.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and do not address the unique issues associated with
the Internet and related technologies. Changes to such laws could create
uncertainty in the marketplace that could reduce demand for our products and
services, increase our costs of doing business or otherwise impair our finance
or business prospects. If standard formats for secure digital delivery of
digital media are not adopted, pirated copies of recorded music and other media
may continue to be available on the Internet and reduce the willingness of
content providers to utilize our products and services.
We depend on a limited number of large customers for a majority of our revenues
so the loss or delay in payment from one or a small number of customers could
have a significant impact on our revenues and operating results
A limited number of large customers have accounted for a majority of our
revenues and will continue to do so for the foreseeable future. During the year
ended December 31, 1998, two customers, National Emergency Training Center and
Microsoft Corporation, accounted for 14% and 12% of our revenues, respectively.
In the year ended December 31, 1999, Kanakaris and Microsoft accounted for 13%
and 11% of our revenues, respectively. We believe that a small number of
customers may continue to account for a significant percentage of our revenues
for the foreseeable future. Due to high revenue concentration among a limited
number of customers, the cancellation or delay of a customer order during a
given quarter is likely to significantly reduce revenues for the quarter. If we
were to lose a key customer, our business, financial condition and operating
results could suffer. In addition, if a key customer fails to pay amounts it
owes us, or does not pay those amounts on time, our revenues and operating
results could suffer. If we are unsuccessful in increasing our customer base,
our business could be harmed.
The length of our sales cycle is uncertain and therefore could cause
significant variations in our operating results
Our largest customers are typically large corporations that often require
long testing and approval processes before making a purchase decision.
Therefore, the length of our sales cycle--the time between an initial customer
contact and completing a sale--has been and may continue to be unpredictable.
The time between the date of our initial contact with a potential new customer
and the execution of a sales contract with that customer ranges from less than
two weeks to more than six months, depending on the size of the customer, the
application of our solution and other factors. Our sales cycle is also subject
to delays as a result of customer-specific factors over which we have little or
no control, including budgetary constraints and internal acceptance procedures.
During the sales cycle, we may expend substantial sales and management
resources without generating corresponding revenues. Our expense levels are
relatively fixed in the short term and are based in part on our
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expectations of future revenues. As a result, any delay in our sales cycle
could cause significant variations in our operating results, particularly
because a relatively small number of customer orders represents a large portion
of our revenues.
The technology underlying our services and applications is complex and may
contain unknown defects that could harm our reputation, result in product
liability or decrease market acceptance of our services and applications
The technology underlying our digital media services and applications is
complex and includes software that is internally developed and software
licensed from third parties. These software products may contain errors or
defects, particularly when first introduced or when new versions or
enhancements are released. We may not discover software defects that affect our
current or new services and applications or enhancements until after they are
sold. Furthermore, because our digital media services are designed to work in
conjunction with various platforms and applications, we are susceptible to
errors or defects in third-party applications that can result in a lower
quality product for our customers. Because our customers depend on us for
digital media management, any interruptions could:
. damage our reputation;
. cause our customers to initiate product liability suits against us;
. increase our product development costs;
. divert our product development resources;
. cause us to lose sales; and
. delay market acceptance of our digital media services and applications.
We do not possess product liability insurance, and our errors and omissions
coverage is not likely to be sufficient to cover our complete liability
exposure.
We plan to expand our business into international markets which will require
significant resources and will subject us to new risks that may limit our
return from our international sales efforts
One of our strategies to increase our sales is to add an international sales
force and operations. This expansion will involve a significant use of
management and financial resources, particularly because we have no previous
experience with international operations. We may not be successful in creating
international operations or sales. In addition, international business
activities are subject to a variety of risks, including:
. the adoption of laws detrimental to our operations such as legislation
relating to the collection of personal data over the Internet or laws,
regulations or treaties governing the export of encryption related
software;
. currency fluctuations;
. actions by third parties such as discount pricing and business
techniques unique to foreign countries;
. political instability; and
. economic conditions including inflation, high tariffs or wage and price
controls.
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We do not possess "political risk" insurance, and any of these risks could
restrict or eliminate our ability to do business in foreign jurisdictions.
Any acquisitions we make, including our recent acquisition of Alive.com, could
disrupt our business and harm our financial condition
We may attempt to acquire businesses, technologies, services or products that
we believe are a strategic fit with our business. Except for the acquisition of
Alive.com, which was completed in December 1999, we currently have no
commitments or agreements with respect to any material acquisition and no
material acquisition is currently being pursued. If we do undertake any
transaction of this sort, the process of integrating an acquired business,
technology, service or product may result in unforeseen operating difficulties
and expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we
cannot assure you that the anticipated benefits of any acquisition will be
realized. Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt, contingent liabilities, or
amortization expenses related to goodwill and other intangible assets and the
incurrence of large and immediate write-offs, any of which could seriously harm
our business, results of operations and financial condition.
In addition, recent changes in the Financial Accounting Standards Board and
SEC rules for merger accounting may affect our ability to make acquisitions or
be acquired. For example, elimination of the "pooling" method of accounting for
mergers increases the amount of goodwill that we would be required to account
for if we acquire another company, which would have an adverse financial impact
on our future net income. Further, the reduced availability of write-offs for
in-process research and development costs under the purchase method of
accounting for mergers in connection with an acquisition could make an
acquisition more costly for us.
We have in the past experienced returns of our customers' encoded content, and
as our business grows we may experience increased returns, which could harm our
reputation and negatively affect our operating results
In the past, we have had on occasion difficulty monitoring the quality of our
service. A limited number of our customers have returned encoded content to us
for our failure to meet the customer's specifications and requirements. It is
likely that we will experience some level of returns in the future and, as our
business grows, the amount of returns may increase. Also, returns may harm our
relationship with potential customers and business in the future. If returns
increase, our reserves may not be sufficient and our operating results would be
negatively affected.
We may be liable to third parties for music, software and other content that we
encode, distribute or make available on our site
We may be liable to third parties for the content that we encode, distribute
or make available on our site:
. if the content violates third party copyright, trademark or other
intellectual property rights;
. if our customers violate the intellectual property rights of others by
providing content to us or by having us perform digital media services;
or
. if content that we encode or otherwise handle for our customers is deemed
obscene, indecent or defamatory.
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In addition, we face the risk of our customers misrepresenting to us that
they have all necessary ownership rights in the content for us to perform our
encoding services. Any alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs in defense, exposing us to
awards of damages and costs and diverting management's attention which could
have an adverse effect on our business, results of operations and financial
condition. Our customers for encoding services generally agree to hold us
harmless from claims arising from their failure to have the right to encode the
content given to us for that purpose. However, customers may contest this
responsibility or not have sufficient resources to defend claims and we have
limited insurance coverage for claims of this nature.
Because we host audio and video content on our Web site and on other Web
sites for customers and provide services related to digital media content, we
face potential liability for negligence, infringement of copyright, patent, or
trademark rights, defamation, indecency and other claims based on the nature
and content of the materials that we host. Claims of this nature have been
brought, and sometimes successfully pressed, against Internet content
distributors. In addition, we could be exposed to liability with respect to the
unauthorized duplication of content or unauthorized use of other parties'
proprietary technology. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.
We cannot assure you that third parties will not claim infringement by us
with respect to past, current or future technologies. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry segment grows. In
addition, these risks are difficult to quantify in light of the continuously
evolving nature of laws and regulations governing the Internet. Any claim
relating to proprietary rights, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements, and we can not assure you
that we will have adequate insurance coverage or that royalty or licensing
agreements will be available on terms acceptable to us or at all.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This could pose a problem at the end of
the century because these computer programs may recognize a date using "00" as
the year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 problem.
As a technology company, we are dependent, to a very substantial degree, on
the proper functioning of our computer systems. The very way in which we do
business depends not only on the proper functioning of our computer systems,
but those of all of our customers as well. Any problems associated with the
Year 2000 problem that impede our systems or those of our customers or the
Internet in general could seriously harm our business, results of operations
and financial condition.
We cannot assure you that our own systems, or those of our customers or those
of the Internet network providers or Internet service providers, will be Year
2000 compliant in a timely manner. Moreover, we cannot assure that costs
related to Year 2000 compliance will not be significant. We also cannot assure
you that customers will be able to access our Web site or other Web sites
without serious disruptions arising from the Year 2000 problem. Given the
pervasive nature of the Year 2000 problem, disruptions may occur to the
Internet as a whole or to specific industries or market segments in the entire
economy.
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Risks Related to the Internet
Our success depends on the continued growth of our customers' Internet-based
businesses and any failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition
Our business model depends on our customers developing successful businesses
based on the Internet and digital media. For our business to succeed, the use
of the Internet must continue to grow and gain widespread acceptance in order
that our customers' businesses succeed. Many factors could inhibit this growth
of the Internet including inadequate network infrastructure, inconsistent
quality of service, and unavailability of cost-effective, high-speed access to
the Internet. The failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition.
We could face additional burdens associated with government regulation of and
legal uncertainties surrounding the Internet
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
copyright and other intellectual property rights, caching of content by server
products, encryption concerns, including export controls, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, email, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect our ability to provide our products
and services and increase the costs associated with our products and services,
and may affect the growth of the Internet. These laws or regulations may
therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
digital media services and applications;
. increase our cost of doing business;
. expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
. lead to increased product and applications development costs, or
otherwise harm our business.
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Risks Related to this Offering
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business is
doing well
Although the initial public offering price will be determined based on
several factors, the market price for our common stock will vary from the
initial offering price after this offering. The market price of our common
stock may fluctuate significantly in response to a number of factors, some of
which are beyond our control, including:
. quarterly variations in operating results;
. changes in financial estimates by securities analysts;
. announcements by us or our competitors, of new products, significant
contracts, acquisitions or strategic relationships;
. publicity about our company, our digital media services and applications,
our competitors, or electronic commerce in general;
. additions or departures of key personnel;
. any future sales of our common stock or other securities; and
. stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies have been especially
volatile and many are at or near historical highs. Investors may be unable to
resell their shares of our common stock at or above the offering price. 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 be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating results.
Because there has been no prior public market for our common stock, we cannot
be certain that our stock price will not decline after this offering
Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which a market will develop or how
liquid that market might become. The initial public offering price for the
shares of our common stock will be determined by negotiations between us and
the representatives of the underwriters and may not be indicative of the prices
that will prevail in the market following this offering.
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Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed
Upon completion of this offering, our officers and directors will, in the
aggregate, beneficially own approximately 56.6% of our outstanding common
stock. As a result, these stockholders, acting together, will have the ability
to control substantially all matters submitted to our stockholders for
approval, including:
. the election or removal of our board of directors;
. the amendment of our certificate of incorporation or bylaws; and
. the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
These stockholders will have substantial influence over our management and
our affairs. Accordingly, this concentration of ownership may have the effect
of impeding a merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a tender offer
for our shares. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquiror
might otherwise pay.
Our management has broad discretion in using the proceeds from this offering,
which might not be used in ways that increase our operating results or market
value
We estimate the net proceeds from this offering to be approximately $36.6
million, after deducting estimated expenses of the offering. Our management
will have broad discretion in how we use the net proceeds of this offering,
including uses which do not increase our operating results or market value. We
currently expect to use these proceeds for general corporate purposes,
including capital expenditures and working capital. We also may use a portion
of the net proceeds for the future acquisition of companies, technology or
services that complement our business, or for strategic alliances with, or
investments in, companies that provide complementary products and services. You
will not have the opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately.
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan
We believe that the net proceeds of this offering, together with our other
existing and available funds, will be sufficient to meet our anticipated needs
for working capital, capital expenditures and business expansion through at
least the next 18 months. Thereafter, we may need to raise additional funds. We
may have to raise funds even sooner in order to fund more rapid expansion, to
develop new or enhanced services or products, to respond to competitive
pressures, to acquire complementary products, businesses or technologies or
otherwise to respond to unanticipated requirements. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced. If we raise capital
through debt financing, we may be forced to accept restrictions affecting our
liquidity, including restrictions on our ability to incur additional
indebtedness or pay dividends. We cannot assure you that additional financing
will be available on favorable terms or at all. If adequate funds are not
available or are not available on acceptable terms, we may not be able to fund
our ongoing operations and planned
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expansion, take advantage of unanticipated acquisition opportunities, develop
or enhance services and applications or respond to competitive pressures. This
inability could seriously harm our business, results of operations and
financial condition.
We have certain anti-takeover defenses that could delay or prevent our
acquisition which could reduce the value of an investment in us
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of Loudeye, even if an acquisition would be
beneficial to our stockholders. See "Description of Capital Stock" for more
information on our charter and by-law provisions.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock and could impair
our ability to raise capital through the sale of additional equity securities.
Upon completion of this offering, we will have 34,259,493 shares of common
stock outstanding with 34,934,493 shares outstanding if the underwriters'
option to purchase additional shares is exercised in full. The 4,500,000 shares
of common stock sold in this offering, which would be 5,175,000 shares if the
underwriters' option to purchase additional shares is exercised in full, will
be freely tradable without restriction or further registration under the
Federal securities laws unless purchased by our "affiliates" as that term is
defined in Rule 144. The remaining 29,759,493 shares of common stock
outstanding upon completion of this offering will be "restricted securities" as
that term is defined in Rule 144.
All of our stockholders, option holders and warrant holders are subject to
agreements that limit their ability to sell their shares of common stock. These
securityholders cannot sell or otherwise dispose of any shares of common stock
for a period of at least 180 days after the date of this prospectus without the
prior written approval of FleetBoston Robertson Stephens Inc. or us in certain
cases. When these agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144.
Because the initial public offering price will be substantially higher than the
book value per share of our outstanding common stock, new investors will incur
immediate and substantial dilution in the amount of $6.54 per share based on
the assumed offering price of $9.00
The initial public offering price will be substantially higher than the book
value per share of our common stock outstanding immediately after this offering
based on the total value of our assets less our total liabilities. Therefore,
if you purchase common stock in this offering, you will experience immediate
and substantial dilution of approximately $6.54 per share (assuming an offering
price of $9.00 per share) in the price you pay for the common stock as compared
to its book value. Furthermore, investors purchasing common stock in this
offering will own only 13% of our shares outstanding even though they will have
contributed 40% of the total consideration received by us in connection with
our sales of common stock. To the extent outstanding options to purchase common
stock are exercised, there will be further dilution. Our current shareholders
will incur an unrealized gain of $0.86 per share as a result of this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will, should,
expect, plan, anticipate, believe, estimate, predict, potential or continue,
the negative of terms like these or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined in "Risk Factors" above. These
factors may cause our actual results to differ materially from any forward-
looking statement.
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 the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,500,000 shares of common stock
we are offering hereby are estimated to be $36.6 million, assuming an initial
public offering price of $9.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $42.2 million.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets and to increase our visibility in the retail
marketplace. In addition, we plan to use approximately $2.0 million of the
proceeds to establish production and sales facilities in Los Angeles,
California and New York, New York. We have no specific plans for the remaining
proceeds. This allocation is only an estimate and we may adjust it as necessary
to address our operational needs in the future. For instance, we may also use a
portion of the net proceeds to acquire complementary technologies or
businesses; however, we currently have no commitments or agreements and are not
involved in any negotiations with respect to any transactions of this nature.
Pending use of the net proceeds of this offering, we intend to invest the net
proceeds in interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. The terms of our credit agreement
with Imperial Bank restrict our ability to pay dividends, and in the future the
terms of other credit agreements or contractual provisions may impose
restrictions or limitations on the payment of dividends.
24
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma as adjusted basis:
. The "actual" column reflects our capitalization as of December 31, 1999
without any adjustments to reflect subsequent events or anticipated
events,
. The "pro forma" column reflects our capitalization as of December 31,
1999 with adjustments to give effect to the conversion of all shares of
outstanding convertible preferred stock into 21,063,236 shares of common
stock upon the closing of this offering,
. The "pro forma as adjusted" column reflects our capitalization as of
December 31, 1999 with adjustments to give effect to (1) the receipt of
the estimated proceeds from the sale of our common stock offered hereby
after deducting the estimated offering expenses and underwriting
discounts and commissions and (2) the change in the authorized number of
shares upon the completion of this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- ----------- -----------
(Unaudited) (Unaudited)
(in thousands except share
data)
<S> <C> <C> <C>
Long-term obligations, including current
portion...................................... $ 3,094 $ 3,094 $ 3,094
Stockholders' equity:
Preferred stock; $0.001 par value; authorized
41,000,000 actual, 21,063,236 shares issued
and outstanding actual; 41,000,000 shares
authorized, no shares issued and
outstanding, pro forma; and 5,000,000 shares
authorized, no shares issued and outstanding
pro forma as adjusted....................... 58,536 -- --
Common stock; par value $0.001 per share;
100,000,000 shares authorized actual,
8,696,257 shares issued and outstanding
actual; 100,000,000 shares authorized,
8,696,257 shares issued and outstanding, pro
forma; and 100,000,000 shares authorized,
34,259,493 shares issued and outstanding pro
forma as adjusted and additional paid in
capital..................................... 22,790 81,326 117,910
Beneficial conversion feature................ 14,120 14,120 14,120
Warrants..................................... 1,159 1,159 1,159
Deferred stock compensation.................. (5,701) (5,701) (5,701)
Accumulated deficit.......................... (27,632) (27,632) (27,632)
------- ------- --------
Total shareholders' equity.................... 63,272 63,272 99,856
------- ------- --------
Total capitalization.......................... $66,366 $66,366 $102,950
======= ======= ========
</TABLE>
This table excludes the following shares:
. 6,371,772 shares of common stock issuable upon the exercise of options
under our stock option plans consisting of:
. 4,223,209 shares of common stock underlying options outstanding as of
December 31, 1999 at a weighted average exercise price of $0.97 per
share, of which 355,783 were fully vested as of December 31, 1999;
. 2,148,563 shares of common stock underlying options available for
future grants; and
. 41,053 shares issuable upon exercise of a Series C preferred stock
warrants outstanding as of December 31, 1999 with an exercise price of
$1.90.
. 650,000 shares issuable upon exercise of a common stock warrant
outstanding as of December 31, 1999 with an exercise price of $10.00 per
share.
. 200,000 shares of common stock available under our 2000 Employee Stock
Purchase Plan.
. 250,000 shares of common stock available under our 2000 Director Stock
Option Plan.
25
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $47.6
million or approximately $1.60 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding, after
giving effect to (1) the conversion of all shares of outstanding preferred
stock into 21,063,236 shares of common stock upon the closing of this offering
and (2) the receipt of the estimated proceeds from the sale of our common stock
offered hereby after deducting the estimated offering expenses and underwriting
discounts and commissions. Dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in the offering made hereby and the pro forma net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of 4,500,000 shares of common
stock offered by us hereby at the assumed initial public offering price of
$9.00 per share and after deducting the underwriting discount and estimated
offering expenses payable by us, our net tangible book value at December 31,
1999 would have been $84.2 million or approximately $2.46 per share. This
represents an immediate increase in net tangible book value of $0.86 per share
to existing stockholders and an immediate dilution of $6.54 per share to new
investors of common stock in this offering.
The following table sets forth, as of December 31, 1999, the differences
between the number of shares of our common stock purchased, the total
consideration paid and the average price per share paid by existing holders of
common stock and by the new investors, before deducting the underwriting
discounts and estimated offering expenses payable by us, at the assumed initial
public offering price of $9.00 per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $9.00
Pro forma net tangible book value per share as of December 31,
1999......................................................... $1.60
Increase per share attributable to new investors.............. .86
-----
Pro forma net tangible book value per share after the
offering...................................................... $2.46
-----
Dilution per share to new investors............................ $6.54
=====
</TABLE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price Per
Number Percentage Amount Percentage Share
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 29,759,493 86.9% $ 61,117,473 60.1% $2.05
New investors........... 4,500,000 13.1% 40,500,000 39.9% 9.00
---------- ----- ------------ ----- -----
Total................. 34,259,493 100.0% $101,617,473 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables assume no exercise of the underwriters' overallotment
option and excludes the following shares:
. 6,371,772 shares of common stock issuable upon the exercise of options
under our stock option plans consisting of:
. 4,223,209 shares of common stock underlying options outstanding as
of December 31, 1999 at a weighted average exercise price of $0.97
per share, of which 355,783 were fully vested as of December 31,
1999;
. 2,148,563 shares of common stock underlying options available for
future grants; and
. 41,053 shares issuable upon exercise of a Series C preferred stock
warrant outstanding as of December 31, 1999 with an exercise price of
$1.90.
. 650,000 shares issuable upon exercise of a common stock warrant
outstanding as of December 31, 1999 with an exercise price of $10.00 per
share.
. 200,000 shares of common stock available under our 2000 Employee Stock
Purchase Plan.
. 250,000 shares of common stock available under our 2000 Director Stock
Option Plan.
26
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data set forth below
for the period from August, 1997 (inception) to December 31, 1999 and the
selected balance sheet data as of December 31, 1999 have been derived from our
audited financial statements included elsewhere in this prospectus, which have
been audited by Arthur Andersen LLP, Independent Public Accountants. The "Pro
Forma" balance sheet data reflects the effect of the conversion of all shares
of outstanding preferred stock into shares of common stock upon the closing of
this offering and the application of the net proceeds from the sale of
4,500,000 shares of common stock offered by us at an assumed initial public
offering price of $9.00 per share, after deducting the underwriting discount
and estimated offering expenses. The historical results are not necessarily
indicative of results to be expected for any future period.
See note 2 of notes to financial statements for an explanation of the
determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
<TABLE>
<CAPTION>
Period from
Aug. 12, 1997
(inception) to Fiscal Year Ended Fiscal Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statement of Operations
Data:
Revenues................. $ 10 $ 286 $ 2,645
--------- --------- ----------
Cost of revenues......... 17 504 2,871
--------- --------- ----------
Gross margin............. (7) (218) (226)
Operating expenses:
Research and
development........... 12 204 1,248
Selling and marketing.. 39 588 3,982
General and
administrative........ 37 674 3,613
Stock-based
compensation.......... -- -- 1,476
Common stock warrant
expense............... -- -- 1,124
Amortization of
intangibles........... -- -- 258
--------- --------- ----------
Total operating
expenses............ 88 1,466 11,701
--------- --------- ----------
Other income (expense)... -- 34 22
--------- --------- ----------
Net loss................. (95) (1,650) (11,905)
--------- --------- ----------
Beneficial conversion
feature................. -- -- (14,120)
--------- --------- ----------
Net loss to common
shareholders............ $ (95) $ (1,650) $ (26,025)
========= ========= ==========
Basic and diluted net
loss per share.......... n/a $ (0.41) $ (4.81)
========= ========= ==========
Basic and diluted pro
forma net loss per
share................... n/a $ (0.17) $ (1.56)
========= ========= ==========
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share................... n/a 4,039,444 5,410,507
========= ========= ==========
Weighted average shares
outstanding used to
compute basic and
diluted pro forma net
loss per share.......... n/a 9,585,049 16,659,800
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------
Actual Pro Forma
------- -----------
(Unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents............................... $49,273 $ 85,857
Working capital......................................... 44,032 80,616
Total assets............................................ 72,558 109,142
Long-term obligations, less current portion............. 1,963 1,963
Total stockholders' equity.............................. 63,272 99,856
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our financial statements and notes thereto appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements
as a result of certain factors including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this prospectus.
Overview
We are a leading provider of Internet media infrastructure services and
applications for the media entertainment and corporate markets that enable our
customers to optimize the use of digital media content over the Internet and
intranets. We provide our customers with outsourced end-to-end solutions that
include encoding services, publishing and distribution of rich media and
hosting services. To date, we have performed digital media services for over
250 customers.
We began our operations as a Washington limited liability company in August
1997 and were incorporated as a Delaware corporation in March 1998. We began
providing encoding services in 1997 for both audio and video content, and
recorded our first revenues from sales of our services in September 1997. From
inception through December 31, 1998, our operating activities related
primarily to recruiting personnel, raising capital, purchasing operating
assets, conducting research and development, building our brand and providing
encoding services. During 1999, we accelerated our investment in our research
and development capabilities, our sales and marketing organization, our
manufacturing operations and facilities, and our general and administrative
infrastructure.
Substantially all of our revenues to date have been generated by sales of
digital media services. Digital media services revenues consist primarily of
encoding services to convert audio and video content into Internet media
formats, as well as other services for deployment of media over the Internet.
These other services include digital watermarking, which protects content from
unauthorized use, distribution and management services, indexing services,
metadata collection and analysis of information related to the content, search
engine indexing, rights management and consulting services. We charge our
customers on either a time and materials basis or a fixed fee basis which
depends on a variety of factors, such as volume and type of content provided
and number and type of output formats requested. We generally recognize
digital media services revenues as the service is provided. Payment terms with
customers generally require payment within 30 days of the invoice date. In the
fourth quarter of 1999 we began requiring our customers to make a non-
refundable deposit at the time an order for endcoding services is placed.
Our digital media applications consist of a set of targeted vertical
applications based on our media application platform, such as photo albums
applications, media-enhanced auction and classified listing applications and
media-enhanced advertising and marketing applications. We anticipate digital
media application revenues will consist of licensing fees, per use charges and
maintenance and support fees. As of December 31, 1999, we had not recorded any
revenues from licensing of our digital media applications.
We market our digital media services and applications primarily to the
media, entertainment and the corporate markets through our direct sales force,
reseller and co-marketing partners and our Web
28
<PAGE>
site. We expect that sales derived through indirect channels will increase as a
percentage of total revenues as we expand our international efforts and system
integrator relationships. Historically, we have provided our services pursuant
to volume purchase agreements with prices determined by projected volume. In
the future, we anticipate providing digital media services pursuant to volume
purchase orders with prices determined based on specific committed volume and
schedules. We believe these anticipated commitments will improve our ability to
schedule production and forecast revenues.
We have recorded stock-based compensation expense related to stock options
granted below fair market value through December 31, 1999 of $6.6 million. Of
this amount, we amortized approximately $903,000 through that same period. This
amount represents the difference between the exercise price of these stock
option grants and the deemed fair value of the common stock at the time of
grant. The remaining $5.7 million will be amortized over the remaining vesting
period of the options, generally four and one-half years or less. As a result,
the amortization of stock-based compensation will impact our reported results
of operations through fiscal 2004.
We have granted approximately 220,000 options to consultants which vest on
the same terms as options granted to employees. These terms require that the
individuals continue their current consulting relationship with us in order to
continue vesting. These options are accounted for in accordance with the
provisions of SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes
option pricing model and assuming a term of five years, a risk-free interest
rate of 5.50% and expected volatility of 75%, the options are marked to fair
value at each reporting period through charges to stock-based compensation in
the statements of operations. Approximately $572,000 was recognized in stock-
based compensation expense related to these options in the year ended
December 31, 1999.
We have sustained losses and incurred negative gross margins on a quarterly
and annual basis since inception and we expect to continue to sustain losses
and incur negative gross margins for the foreseeable future as we expand our
operations and production facilities. As of December 31, 1999, we had an
accumulated deficit of $27.6 million. Our net loss was approximately $95,000
from inception to December 31, 1997, $1.6 million in fiscal year 1998, and
$26.0 million in fiscal year 1999. Included in the accumulated deficit as of
December 31, 1999 is a $14.1 million charge related to a beneficial conversion
feature associated with the sale of shares of Series D preferred stock in
December 1999. Operating losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant growth in our operating expenses in all functional areas in order
to execute our business plan. As a result, we anticipate that these operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. We expect to incur additional losses and continued
negative cash flow from operations in the future. We cannot assure you that we
will achieve or sustain profitability.
Our limited operating history makes the prediction of future operating
results difficult. In view of our limited operating history and the rapidly
evolving nature of our business, we believe that period-to-period comparisons
of our operating results, particularly for each of the years ended 1997, 1998
and 1999, are not meaningful and should not be relied upon as an indication of
future performance. Our business prospects must be considered in light of the
risks and uncertainties often encountered by early-stage companies in the
Internet-related products and services market. We may not be successful in
addressing these risks and uncertainties. We have experienced significant
percentage growth in revenues in recent periods; however, we do not believe
that prior growth rates are sustainable or indicative of future growth rates.
It is likely that in some future quarter our
29
<PAGE>
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may fall
significantly.
In December 1999, we acquired Alive.com, Inc., whose principle business is
the development of streaming media applications, in exchange for 2,508,848
shares of our common stock and the issuance of options to purchase 91,181
shares of our common stock and the assumption of liabilities, representing a
total purchase price of $15.5 million. This acquisition was accounted for using
the purchase method of accounting. We recorded intangibles and goodwill of
$15.9 million, which will be amortized on a straight-line basis over three
years.
In December 1999, we sold $47.8 million of Series D preferred stock in a
private equity placement with a number of strategic investors pursuant to the
terms of a stock purchase agreement which was entered into on December 14, 1999
as amended on December 17, 1999. These investors included AmericaOnline, Inc.,
CBS Corporation, Microsoft Corporation, National Broadcasting Company, Inc.,
Olympic Venture Partners, RRE Ventures and Wasserstein Adelson Ventures. We
issued a total of 7,510,989 shares of Series D preferred stock at price of
$6.37 per share. The Series D preferred stock will convert to common stock at a
one-to-one ratio upon the closing of this offering. The Series D preferred
stock contains substantially the same rights and preferences as the Series B
and Series C preferred stock.
Results of Operations
The following table sets forth our historical operating information as a
percentage of our total revenues represented by each item for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues.................. 100 % 100 % 100 %
Cost of revenues.......... 170 176 108
---- ---- ----
Gross margin.............. (70) (76) (8)
Operating expenses:
Research and
development............ 120 71 47
Sales and marketing..... 390 206 193
General and
administrative......... 370 236 137
Amortization of
intangibles............ -- -- 10
Stock-based
compensation........... -- -- 56
---- ---- ----
Total operating
expenses............... 880 513 443
Other income (expense),
net...................... -- 12 1
---- ---- ----
Net loss.................. (950)% (577)% (450)%
==== ==== ====
</TABLE>
Years Ended December 31, 1998 and 1999
Revenues. Revenues were approximately $286,000 and $2.6 million for the years
ended December 31, 1998 and 1999, respectively. The increase was due primarily
to an increase in the number and average size of sales of our digital media
services generated by a larger sales force in the 1999 period and, to a lesser
extent, higher prices in the 1999 period.
Cost of revenues. Cost of revenues includes cost of personnel expenses and
the allocated portion of facilities and equipment. Stock-based compensation
charges of approximately $186,000 are attributable to employees categorized
within production (cost of revenues) and are presented in a
30
<PAGE>
separate line item within the statements of operations. Cost of revenues
increased 475% to $2.9 million in 1999 from approximately $504,000 in 1998. The
increase in absolute dollars was due primarily to increased sales volumes. The
decrease in percentage terms was due to more efficient use of our production
facility and staff.
Gross margins may be affected by the volume of services provided, the mix of
distribution channels used by us, the mix of services and applications
provided, and the average order size. We typically realize higher gross margins
on direct channel sales relative to indirect channels. If sales through
indirect channels increase as a percentage of total net revenues, particularly
if international sales increase which will primarily be the result of indirect
sales, our gross margins will decrease.
Operating expenses. Operating expenses increased 680% to $11.7 million in
1999 from $1.5 million in 1998. Without the effect of $1.5 million of
stock-based compensation charges, $1.1 million in common stock warrant expense
and approximately $258,000 in amortization of intangible assets, operating
expenses for the 1999 period would have been $8.8 million, an increase of
$7.3 million, or 487% over 1998.
Research and development expenses. Research and development expenses consist
primarily of salaries and consulting fees to support development and costs of
technology acquired from third parties to incorporate into applications
currently under development. Stock-based compensation charges of approximately
$116,000 are attributable to employees categorized within research and
development and are presented in a separate line item within the statements of
operations. To date, all research and development costs have been expensed as
incurred. We believe that continued investment in research and development is
critical to attaining our strategic objectives and, as a result, expect
research and development expenses to increase significantly. Research and
development expenses increased 488% to $1.2 million from approximately $204,000
in 1998. The increase was due primarily to increases in development personnel,
travel and consulting expenses. We expect to continue to increase our level of
expenditures in future periods.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of salaries, commissions, consulting fees paid, trade show expenses,
advertising and cost of marketing collateral. Stock-based compensation charges
of approximately $306,000 are attributable to employees categorized within
sales and marketing and are presented in a separate line item within the
statements of operations. We intend to continue our aggressive branding and
marketing campaign and therefore expect sales and marketing expenses to
increase significantly. Sales and marketing expenses increased 767% to $5.1
million in 1999 from approximately $588,000 in 1998. The increases were due in
large part to growth in sales personnel, commissions and costs related to the
continued development and related to our branding and marketing campaigns, as
well as a $1.1 million noncash charge, the fair market value of common stock
warrants granted in conjunction with strategic sales agreements.
General and administrative expenses. General and administrative expenses
consist primarily of rent and nonallocated facilities charges, salaries,
general legal expenses, and recruiting and relocation charges associated with
additional headcount required for the significant ramp-up in operations. Stock-
based compensation charges of approximately $868,000 are attributable to
employees categorized within general and administrative and are presented in a
separate line item within the statements of operations. We believe that as
operations continue to increase in size and scope, that general and
administrative expenses will continue to increase proportionately. General and
administrative expenses increased 434% to $3.6 million in 1999 from
approximately $674,000 in 1998. The increase was primarily driven by the
additional facilities opened during 1999 and the
31
<PAGE>
increase in headcount in the finance, executive and administration areas plus
recruiting and relocation expenses.
Stock-based compensation. Stock-based compensation of $1.5 million through
December 31, 1999 consists of approximately $903,000 in amortization of
deferred stock compensation related to stock options granted below fair market
value through December 31, 1999 and approximately $572,000 in expense related
to marking 220,000 options granted to consultants to fair market value as of
December 31, 1999. There was no stock-based compensation in 1998.
Amortization of intangibles. Amortization of intangibles of approximately
$258,000 in 1999 includes amortization of the goodwill and identified
intangible assets recorded as part of the Alive.com acquisition, which took
place on December 14, 1999. There were no intangible assets as of December 31,
1998, and accordingly, there were no related amortization charges.
Other income (expense), net. Net other expense is a combination of earnings
on our cash and cash equivalents and short-term investments and interest
expense on working capital and equipment financing. This combined total equaled
approximately $22,000 and $34,000 in net other income in 1999 and 1998,
respectively. The decrease was due primarily to increased interest expense
resulting from higher levels of indebtedness.
Period of August 12, 1997 (Inception) to December 31, 1997 and Year Ended
December 31, 1998
Revenues. Revenues increased to approximately $286,000 in 1998 from
approximately $10,000 in 1997. The increase was due primarily to an increase in
the number and average size of sales of our encoding services generated by a
larger sales force in the 1998 period and, to a lesser extent, higher prices in
the 1998 period.
Cost of revenues. Cost of revenues includes cost of equipment, personnel
expenses and overhead. Cost of revenues increased to approximately $504,000 in
1998 from approximately $17,000 in 1997. The increase in absolute dollars was
due primarily to higher sales volume and the need to establish production
capacities to meet future growth at a rate faster than the revenue growth
during the period.
Operating expenses. Operating expenses increased to $1.5 million in 1998 from
approximately $88,000 in 1997. There were no stock-based compensation charges
in 1998 or 1997.
Research and development expenses. Research and development expenses
increased to approximately $204,000 in 1998 from approximately $12,000 in 1997.
The increase was due primarily to increases in internal development personnel,
travel and consulting expenses.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $588,000 in 1998 from approximately $39,000 in 1997. The
increases were due in large part to growth in sales personnel, commissions and
costs related to the continued development and implementation of our branding
and marketing campaigns.
General and administrative expenses. General and administrative expenses
increased to approximately $674,000 in 1998 from approximately $37,000 in 1997.
The increase was primarily a result of increased personnel and facility
expenses necessary to support our growth.
Other income (expense), net. Net other income was none and approximately
$34,000 for 1997 and 1998, respectively. The increase was due primarily to
interest income resulting from additional invested cash and cash equivalents
and short-term investments.
32
<PAGE>
Selected Quarterly Operating Results (unaudited)
The following table sets forth certain unaudited quarterly statement of
operations data for the six quarters ended December 31, 1999. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations. The quarterly data should be read in
conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three-Month Periods Ended
----------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 34 $ 179 $ 301 $ 528 $ 768 $ 1,048
Cost of revenues........ 111 349 388 530 790 1,163
------ ------ ------- ------- ------- -------
Gross margin............ (77) (170) (87) (2) (22) (115)
Operating expenses:
Research and
development.......... 57 105 142 202 318 586
Sales and marketing... 183 275 470 927 826 2,883
General and
administrative....... 231 312 422 590 804 1,797
Amortization of
intangibles.......... -- -- -- -- -- 258
Stock-based
compensation......... -- -- -- 8 196 1,272
------ ------ ------- ------- ------- -------
Total operating
expenses............. 471 692 1,034 1,727 2,144 6,796
Other income (expense),
net.................... 26 1 (10) (10) -- 42
------ ------ ------- ------- ------- -------
Net loss................ $ (522) $ (861) $(1,131) $(1,739) $(2,166) $(6,869)
====== ====== ======= ======= ======= =======
</TABLE>
Our total net revenues have increased in all quarters presented due to a
combination of external and internal factors. Internally, we have diversified
our sales channels, expanded our direct sales efforts and entered into
strategic relationships with numerous customers. Additionally, the market has
changed related to streaming media. The increase in broadband applications and
acceptance of our products and services has contributed significantly to our
continued growth in net revenues.
Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting our products, as well as
building our market presence. Research and development expenses have increased
as a result of continued enhancements to existing products and development of
new products. Sales and marketing expenses increased as a result of increased
sales personnel and commissions and an aggressive branding and marketing
campaign. The decrease in sales and marketing expenses from the quarter ended
June 30, 1999 to September 30, 1999 reflects a decision to reprioritize and
reschedule certain programs during the quarter. The trend of increasing general
and administrative expenses is due primarily to additional personnel and
facilities costs, and the amortization of intangibles related to the
acquisition of Alive.com during the quarter ended December 31, 1999.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private sales of preferred stock and common stock and contributions of capital
by our founder, and to a lesser extent, borrowings under lines of credit. Net
proceeds from these sales, contributions and lines of credit totaled $62.3
million as of December 31, 1999.
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Net cash used in operating activities was approximately $75,000 and
approximately $858,000 in 1997 and 1998, respectively. Cash used in operating
activities in 1997 was due primarily to a net loss of approximately $95,000.
For 1998, cash used in operating activities resulted primarily from a net loss
of $1.7 million and an increase of approximately $87,000 in trade accounts
receivable, largely offset by increases of approximately $292,000 in customer
deposits, approximately $274,000 in accounts payable and approximately $131,000
in other accrued expenses. Net cash used by operating activities was $4.9
million for the year ended December 31, 1999. This was primarily attributable
to a net loss of $11.9 million, an increase of approximately $856,000 in
accounts receivable, and increases in other assets of approximately $846,000
offset by depreciation expense of approximately $924,000 and other noncash
charges of $2.9 million, increases in accounts payable and accrued liabilities
of $4.8 million and an increase in customer deposits of approximately $145,000.
Net cash used in investing activities was approximately $134,000, $1.5
million and $5.0 million for the periods ended December 31, 1997 and 1998 and
1999, respectively. These expenses were primarily related to purchases of
equipment and increases in short-term investments.
Cash provided by financing activities of $3.8 million in 1998 consisted
primarily of $2.2 million in net proceeds from the issuance of Series B
preferred stock and $1.5 million in net proceeds from borrowings on long-term
debt. Cash provided by financing activities of $57.7 million for the year ended
December 31, 1999 was primarily from net proceeds of $9.3 million from the
issuance of Series C preferred stock, $3.0 million from borrowings on long-term
debt and the net proceeds of $45.5 million from the issuance of Series D
preferred stock.
Our accounts receivable at December 31, 1999 exceeded our revenues in the
fourth quarter of 1999 primarily due to the proportion of our revenue earned
late in the quarter, advance billings for encoding services for which the
related revenue was not yet recognized and, to a lesser extent, past due
payments.
As of December 31, 1999, we had $49.2 million of cash and cash equivalents.
Our principal commitments consisted of obligations outstanding under operating
leases, a note payable of approximately $861,000 under our credit facility with
Imperial Bank and seven notes payable, totaling $2.0 million, due under our
credit facility with Dominion Venture Finance LLC. Borrowings from Imperial
Bank bear interest at the lender's prime rate. The notes payable to Dominion
bear interest at rates ranging from 8.57% to 9.40%. Interest on the Imperial
Bank note is payable monthly, and the principal is due on August 30, 2002.
Interest on the Dominion Venture Finance notes is payable monthly, and the
principal is due in the third and fourth quarters of 2002. Please see note 4 to
the Financial Statements for a more complete description of the credit
facilities. Although we have no material commitments for capital expenditures,
management anticipates a substantial increase in our capital expenditures and
lease commitments consistent with anticipated growth in operations,
infrastructure and personnel.
Since our inception, we have significantly increased our operating expenses.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources.
We believe that the net proceeds from the sale of the common stock in this
offering and the amounts available under the working capital line will be
sufficient to meet our working capital and
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capital expenditure requirements for at least the next 18 months. Thereafter,
we may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
Year 2000 Computer Problem
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally
and the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems.
Based on our assesment to date, we believe that our core encoding systems
used in the generation of revenues and other software and systems used in our
business are Year 2000 compliant. We recently replaced our internal management
and other information systems with a Year 2000 compliant system. The cost
associated with the replacement of our internal management and other
information systems was approximately $200,000. We have not incurred any costs
since December 31, 1999 in connection with Year 2000 compliance. As of January
31, 2000, we are not aware of any Year 2000 related problems with our internal
or peripheral systems or software.
Computer experts have warned, however, that there may still be residual
consequences of the change in centuries. For example, programs may fail to
recognize February 29, 2000 as a leap year date as a result of an exception to
the calculation of leap years that will occur in the Year 2000 and otherwise
occurs only once every 400 years. This problem could result in miscalculations,
data corruption, system failures or disruptions of operations. If residual Year
2000 problems cause the failure of any of the technology, software or systems
necessary to provide our products or services or operate our business, we could
lose customers, suffer significant disruptions of our business, lose revenues
and incur substantial liabilities and expenses. We could also become involved
in costly litigation resulting from residual Year 2000 problems. This could
materially and adversely affect our business, financial conditions and results
of operations.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when these costs should be capitalized.
The implementation of SOP 98-1, which is effective for financial statements for
fiscal years beginning after December 15, 1998, did not have a significant
effect on our financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The
implementation of SOP 98-5 did not have a material impact on our results of
operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenues for multiple
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element arrangements by means of the "residual method" when (1) there is
vendor-specific objective evidence, or VSOE, of the fair values of all the
undelivered elements that are not accounted for by means of long-term contract
accounting, (2) VSOE of fair value does not exist for one or more of the
delivered elements, and (3) all revenue recognition criteria of SOP 97-2 and
SOP 98-9 will be effective for transactions entered into in fiscal years
beginning after March 15, 1999. We do not expect SOP 98-9 to have any effect on
our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition", to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe our revenue recognition practices are in
conformity with the guidelines in SAB No. 101.
Interest Rate Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high-quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any foreign currency or other
derivative financial instruments.
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BUSINESS
Overview
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
corporate markets. Our solution, which encompasses the encoding, or the
transformation of audio and video content into streaming media formats, as well
as the management and distribution of digital media, simplifies and accelerates
the process of delivering audio and video content to the Web. The benefits of
our services and applications include high quality, large volume, fast time to
market, format and platform independence, superior reliability and flexibility.
Our proprietary technologies and processes enable scalable processing of large
inventories of digital media.
Digital media services and applications enable our customers to manage their
Web-based audio and video content. Our customers include Atom Films, BMG Music,
Disney Enterprises, Inc., EMusic.com Inc., Hewlett-Packard Company, Kanakaris
Communications, Inc., Microsoft Corporation, Sony Music Entertainment, Inc. and
Sony Trans Com.
Industry Background
Traditional Media
The management of increasingly large inventories of audio and video content
and the ability to leverage distribution channels are constant challenges to
companies in a wide variety of global industries including corporate
communications, advertising and music and video entertainment. With the
millions of hours of existing audio and video content and the thousands of
hours of new audio and video content created each day, media owners have become
increasingly aggressive in exploring new ways to reach audiences and distribute
their content. Until recently, media and entertainment companies and other
enterprises have almost exclusively relied upon slowly evolving and inflexible
formats to deliver content to target audiences. These technologies and
standards that form the basis of traditional media and distribution, however,
are not compatible with the infrastructure supporting the Internet. Audio and
video content from compact disks and tapes, or film and video cannot be played
to a global Internet audience without significant manipulation, processing and
new technology. In order to further expand their markets and leverage the value
of their content over the Internet, these industries need to find new methods
that transfer the consistent formats and delivery methods of traditional media
into the multi-faceted and changing technologies of the Web.
The Emergence of Digital Media on the Internet
A major factor contributing to the rapid growth of the Internet is its
ability to change the way people communicate by providing capabilities that
improve traditional communication channels. Over the last few years,
significant advances in, and adoption of, streaming media technologies as well
as improved Internet infrastructure have begun to facilitate the Internet's
evolution from a mass of static, text-oriented Web pages to a highly dynamic
media environment combining text, graphics, audio and full-motion video. As a
result, the Internet is emerging as a global medium for communications,
information and transactions enabling millions of people worldwide to
communicate, engage in commerce, gather information and be entertained.
According to International Data Corporation, or IDC, there were 63 million
Internet users in the United States and 142 million users worldwide in 1998.
IDC estimates that by the end of 2003, there will be 177 million Internet users
in the United States and 502 million users worldwide.
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We believe the introduction of Internet streaming technologies and improved
access to broadband connections will increase demand for audio and video
content on the Internet and the delivery of digital media at quality and
reliability levels comparable to those of traditional media. According to
Jupiter Communications, Internet users in the United States currently spend an
average of 7.1 hours per week online as compared to 3.4 hours reading
magazines, 4.0 hours reading newspapers, 12.6 hours listening to the radio and
15.6 hours watching television. The increased momentum of audio and video
demand specifically is highlighted by the presence of over 50 million MP3
capable users today, according to Forrester Research Inc. In addition, over 140
million video digital players were downloaded by Internet users in the first
six months of 1998, according to IDC. As a result, there exists a significant
market opportunity for media, entertainment and corporate markets to expand the
creation and use of their traditional audio and video to the Internet. In
addition, new applications for digital media include application and service
promotions for electronic commerce, Web radio, advertising, and communications
within corporations and partner networks.
Challenges to the Growth of Digital Media
Before companies can deliver traditional media over the new medium of the
Internet, they must overcome several limitations of the current Internet
infrastructure. Digital media distribution over the Internet is a highly
fragmented process with a variety of evolving and competing media formats such
as Apple, AT&T, Liquid Audio, Microsoft and RealNetworks. In most cases, these
formats are incompatible with one another and providers are dedicated to the
preservation of their own proprietary format. In addition, there are a wide and
growing number of download technologies such as AVI, QuickTime and MPEG 1-n
that are used to transfer and play files from personal computers. Digital
content is also delivered in a streaming format that must support a number of
speeds, or bit rates. In order to take full advantage of the compelling
experience that Internet distribution of digital media can provide,
distributors of audio and video content must be able to distribute their
content in a manner optimized for each of these variables and must be able to
respond as the underlying Internet technologies evolve.
Companies must internally develop the ability to deliver, or hire outside
firms to migrate, their existing and newly created audio and video content onto
the Internet. The core competencies required to complete this migration process
include the following three areas:
. Media Capture. Capturing digital media involves the conversion of
content from traditional analog or digital formats to digital Internet
compatible files while maintaining the original quality. Since the
Internet is still at a formative stage of development, the formats and
technologies continue to conflict and evolve. As a result, the encoding
process for a particular item of content may need to be repeated over
time to keep pace with the introduction of new formats and the changing
preferences of online users.
. Data Management. The process of managing digital media is complex and
requires a range of processes including the creation of metadata files,
file indexing and copyright protection measures such as digital
watermarking and support for new electronic commerce models. Managing
this data effectively for archival and retrieval purposes is critical
for both internal systems and Internet search technologies so that end
users can find the content they seek.
. Distribution. Scalable and reliable methods to deliver electronic media
must be integrated with data management and encoding systems to manage
the data flow process effectively.
It is often difficult for organizations to migrate their audio and video
content onto the Internet because they often do not have the internal resources
or time, or it is not cost-effective, to develop
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the expertise necessary to address these problems without disrupting their core
business activities. Some of the most significant hurdles contributing to these
difficulties include:
. encoding is hardware and resource intensive, making it difficult to
scale in-house systems;
. access to quality equipment and trained operators is limited;
. applications enabling management, distribution and tracking of encoded
content are lacking;
. existing streaming applications encumber access to digitized media by
the entire Internet population because they only support a limited set
of proprietary formats;
. hosting companies have raw bandwidth but may not have the capability to
distribute content across multiple formats and bit rates or the ability
to integrate with data management and encoding systems; and
. current streaming media applications do not provide sophisticated search
or advanced media management tools.
Current providers of narrowly defined services and technologies fail to meet
all of the challenges associated with capturing, managing and distributing
digital media, leaving a previously unfulfilled need in the Internet media
infrastructure market. As a result, we believe companies increasingly seek a
comprehensive, technology-agnostic, outsourced solution for enabling
traditional audio and video content on the Internet.
The Loudeye Solution
We are a leading provider of Internet media infrastructure services and
applications that create an end-to-end solution for the media, entertainment
and corporate markets. Our solution helps our customers reduce the barriers
impeding delivery of audio and video content to Internet users, improve digital
media content management and leverage the value of Internet distribution
opportunities. Our solution is based on a proprietary architecture that can
scale to meet the encoding and distribution demands of large-volume and complex
digital media content. The primary elements of our solution include:
Digital Media Services. Our digital media services provide a complete suite
of services for customers who need to manage their audio and video content for
the Web. We provide project-specific and ongoing contracts for conversion,
encoding, management, and distribution through our industry leading specialized
hosting providers. Our digital media experts can provide project analysis, as
well as consulting, integration and custom application development.
Digital Media Applications. Our digital media applications leverage our
digital media services infrastructure to enable companies and Web sites to
author and deliver digital media services to their end-user customers with a
complete Web-based software solution. These solutions are delivered turnkey
from a Web-based services model and can be customized or integrated into their
existing systems.
By providing this broad range of products and services, we enable the
production, management and distribution of our customers' digital media content
over the Internet. Our solutions offer customers the following key benefits:
High Quality, Large Volume, Fast Time to Market. Our proprietary encoding
process includes a combination of innovative technologies and software, trained
media professionals and professional
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quality hardware and systems. We have developed proprietary products and
services in an automated and distributed architecture of encoding, conversion
and media enhancement systems so that we can process high volumes of digital
media while simultaneously monitoring and enhancing its quality. By building
our application platform and products on this architecture, we provide a high
quality end-user experience while maintaining the scalability required by
leading Web destinations. We have invested significant resources to provide the
physical and technical capability to manage large scale encoding projects in
the rapid time frame that Internet media customers require.
End-to-End Integrated Solution. Our suite of applications and services
provides a comprehensive solution ranging from the conversion, data entry and
encoding of content to media storage, management and distribution. We offer
customers a solution to collect and deliver new and legacy audio and video
content to and from audiences over the Internet through a single outsourced
solution provider. In addition, we provide many optional services for digital
media asset protection, search engine indexing and automated updating, content
indexing, consulting and integration services. As a result, customers receive
quality and reliable service at less expense, without the need to purchase
capital equipment, develop system expertise, train personnel, or manage an
evolving industry process.
Format and Platform Independence. We have developed proprietary processes
that allow us to encode audio and video content across several streaming media
platforms simultaneously, such as Microsoft Windows Media, RealNetworks G2,
AT&T a2b or Liquid Audio. This platform flexibility enables customers to
distribute their content to the entire Internet audience. We can also input any
of the wide variety of traditional analog formats that our customers use, such
as tape, film, compact disk, or CD, or digital video disk, or DVD, all across a
range of formats during a single production run. Given that these formats and
platforms continue to evolve, the benefits of our multiple platform approach
remain applicable as new technologies emerge. We encode our customers' content
in a parallel, rather than serial, process allowing us to rapidly and cost-
effectively deliver encoded content to customers.
Superior Reliability. By connecting our hosting facility and partner Internet
service providers, or ISPs, we provide our customers with a high performance
network connecting more than 40 Internet backbones for Internet data
transmission across over 90 geographic locations, known as points of presence,
or POPs. This system creates fewer points of failure than a single network and
can be monitored for network bottlenecks or outages so the content can be re-
routed and distributed to additional resources. Customers using our services or
applications receive the benefit of redundant and high-quality Internet
distribution without having to manage or aggregate multiple relationships.
Flexible and Easy to Implement Online Audio and Video Applications. We have
created a robust digital media application platform that allows us to develop
audio and video applications for a variety of vertical markets, including
personal photo and video content, corporate presentations, advertisements and
auctions. By integrating various existing components of our core technology
platform, we can satisfy the varied needs of individual customers quickly and
cost effectively. Our development platform and turnkey applications enable Web
destinations to offer early-market digital media applications for the consumer
and corporate markets without having to expend on significant internal
resources.
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Strategy
Our objective is to be the leading Internet media infrastructure provider of
comprehensive digital media services and applications. We seek to achieve this
objective through the following key strategies:
Leverage Leadership Position in Encoding Technology and Services. All audio
and video content must be processed in some type of encoding facility in order
to be distributed over the Internet. As an early leader in the high-end,
outsourced encoding market, we have been able to develop strong relationships
with influential customers, strategic Internet infrastructure companies and
leading streaming media industry providers. We intend to leverage these
relationships along with our leadership and industry-focused brand into
opportunities for additional products and services of managed distribution,
consulting and applications. By managing the first step in the transformation
of audio and video content onto the Internet in a dynamic technology
environment, we are in a strategic position in the streaming media industry
which we believe will enable an expansion of our technology and services as the
market matures. For example, we logically extend our conversion and encoding
services to include management and distribution applications that include
electronic commerce, rights management and syndication for digital media
publishers who want to expand their revenues and customer bases through secure
and automated distribution to partners and affiliates.
Utilize Core Technologies and Expertise to Advance Streaming Media
Applications. We plan to leverage our core infrastructure and expertise in high
quality and high capacity digital media systems into leading applications that
address a variety of end-to-end solutions. We believe that by building and
managing a leading applications platform for digital media, we can deploy
applications that address the complete cycle of capture, management and
distribution more efficiently and cost effectively than our competitors. We
believe our brand identity in the streaming media industry, together with our
industry-leading customers, gives us significant credibility. We also believe
our industry specific knowledge and streaming media consulting group will allow
us to effectively implement and integrate our applications into existing
systems.
Expand Superior Technologies and Processes. We will continue to leverage
technology and sophisticated processes to further distance ourselves from
alternative approaches that employ labor-intensive, non-automated processes.
Given the rapidly changing requirements of this evolving industry, there are
advantages in building complete systems that are optimized, tested and managed
for high quality and high volume output. This strategy allows us to be the
single, outsourced solution for digital media services and applications for our
target customers. We plan to invest significantly in expanding our research and
development efforts and building our intellectual property focused on Internet
media infrastructure.
Rapidly Deploy Format and Platform Independent Solutions. Because owners and
distributors of content require flexibility in the ability to distribute media
in the variety of competing streaming formats, we plan to maintain platform
neutrality among the expanding number of digital media technologies. Thus, we
intend to maximize flexibility for our customers as they leverage our
technology to reach their markets. Our strategy of developing solutions
independent of the underlying streaming format technology providers places us
in a strategic position to rapidly respond to customers' needs and changing
developments in streaming media technologies and provide our customers with
technologically advanced solutions. In addition, we are able to rapidly develop
solutions by leveraging and reusing components of our leading production and
distribution technologies and processes across our suite of digital media
services and applications.
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Target Major Media Centers Around the World. We believe that we are well
positioned to leverage our current customer base in order to provide digital
media services and applications to all major media and entertainment companies.
In addition to expanding our presence in the United States, we plan to pursue
the opportunity for providing digital media services to international media and
entertainment companies. We have also developed relationships and plan to
expand our application services to international markets through original
equipment manufacturers, or OEM, agreements with target customers who are
capable of working with our application platform and tools to localize the
solution and interface for regional markets.
Enable Strategic Internet Infrastructure Layer. Our digital media services
and applications support the emerging media Internet infrastructure layer. This
media infrastructure layer links content creators and hosting companies,
providing final delivery of streaming media content to the consumer. By
enabling this infrastructure, we provide a critical role in the streaming media
product cycle that is distinct from the core businesses of our customers and
partners. We plan to maintain a leadership role as a mission-critical enabler
focused on technology trends in the streaming media industry.
Leverage Platform Agnostic Position with Our Streaming Media Consulting
Services. With so many competing and conflicting standards and technologies in
the streaming media market, our customers typically need help and guidance in
the design and implementation of their digital media solutions. Our expert team
of consultants and integrators continue to work with and receive training
across all platforms. This knowledge and focus establishes a credibility that
helps differentiate our offering from single platform providers and is valued
by our customers.
Pursue Strategic Alliances and Acquisitions. We will continue to look to
outside technology companies to expand and enhance our products and services.
We focus our research and development efforts on improving and expanding upon
capabilities that we believe do not currently exist in the market. We
continuously look for components and technologies to augment our solutions
through partnering with industry leaders outside of our core area of expertise.
We intend to acquire companies or technologies in order to further expand our
proprietary products and services.
Products and Services
Our products and services are divided into two categories, digital media
services and applications.
Digital Media Services
We encode audio and video content and provide other value-added services for
deployment of streaming media over the Internet. Typical digital media service
projects involve conversion from thousands of analog source media and encoding
of tens of thousands of audio compact disks and then encode those files into
hundreds of thousands of format specific digital files. Once content has been
encoded, we provide watermarking, encryption and other digital rights
management technologies to our customers to protect and manage their content. A
file created from the source materials containing specified database and
attribute data relating to a particular piece of content is then linked to that
content as part of the overall encoding process. For example, a 15-minute short
film on video tape format may be encoded into more than nine different output
files, supporting three different distribution formats, optimized for three
different baud rates, encrypted and appended with information relating to the
participants involved in producing the film.
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Encoding Services. We convert our customers' content from virtually all
commercially available input formats, and from traditional analog or digital
media to virtually all commercially available streaming media formats for
distribution over the Internet at a variety of bit rates. Customers deliver
their source content to us through a variety of means including satellite
transfer, source tapes, compact disks and electronic file transfer.
The following table illustrates some of the wide variety of input formats,
output formats and bit rates we support.
Input Formats Output Formats Bit Rates
AVI Apple QuickTime 28.8 kbps
Beta SP AT&T a2b 56.6 kbps
CD-R Cinepak ISDN
DAT Emblaze DSL
D1 & D2 Intel Indeo T1
DigiBeta JPEG Cable Modem
DVCAM Liquid Audio Broadband
DVD Microsoft Windows Media
Hi-8 MP3
LaserDisc MPEG
MiniDisc RealNetworks G2
NTSC
PAL
VHS
VHS-C
WAV
Distribution and Management. We provide turnkey audio and video solutions for
management and distribution. Our customers can store video and audio clips at
our hosting facility or at hosting or managed distribution facilities provided
by our partners such as Enron, iBEAM, Digital Island and InterVU. We have built
our own data centers and manage all aspects of servers and connectivity
directly to global Internet service providers. We believe this strategy is
superior in terms of quality control, scalability and cost control over time
versus a co-location strategy. We use our internal hosting capabilities for
managing our own applications and key customers with specific requirements. The
primary distribution strategy is to service our customers through adding value
to our hosting partner network that allows for higher capacity and more
efficient routing across the global Internet.
Digital Watermarking. We provide customers with the ability to protect their
digital content by utilizing established vendors such as Verance Technologies
who focus on watermarking applications. Through this technology, information
can be embedded within digital audio or video without degrading the quality,
providing copyright and intellectual property protection. We have developed
proprietary technology to apply these watermarking technologies to audio and
video in a scalable, cost-effective manner, making the technology practical for
large-scale deployment.
Indexing. Through relationships with companies such as Excalibur Technologies
Corporation, we can provide turnkey applications for scalable, automated and
content-based indexing of digital media content. This service prepares a
customer's content for these sophisticated digital media library systems that
can be used for internal asset management or end-user file management and
search.
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Metadata Collection and Analysis. We offer customers the ability to record
and utilize a wide array of metadata relating to the encoded content, such as
artist, title, style, universal product code, album and track data and other
data that a particular customer may find useful for their particular content.
These metadata files enable customers to leverage their traditional content
over the Internet by allowing them to track and manage their digital media
content more efficiently.
Search Engine Indexing. We offer customers the ability to automatically
update the major rich media search engines, which include the traditional
internet portals such as Yahoo! and Alta Vista and specialized Internet media
portals which allow customers to find digital media content. These updates
provide consumers with access to our customers' most current digital media
content.
Rights Management. By integrating technologies and third party solutions such
as Recripicol, Inc. and Intertrust, we can provide services to our customers
who want to secure their digital assets with certification and authentication
systems that help to prevent unauthorized copying and distribution of content
or piracy.
Consulting Services. Our consulting services group helps companies create and
integrate digital media technologies and applications into key business
processes in order to increase the overall effectiveness, productivity and
profitability of the organization. Our consulting services group specializes in
enterprise-wide Internet application development for initiatives such as
distance learning and training, digital media asset management and aggregation,
digital media electronic commerce and in-house encoding and distribution
systems. The team has a broad range of cross-platform technical expertise
specific to the streaming media industry including, Web development tools and
systems, database application programming interfaces, or APIs, and streaming
server formats and integration layers. Specific areas of expertise include:
. project requirements and implementation analysis;
. project timing and resource management;
. system design and deployment;
. digital media and information security;
. custom development of Internet/intranet streaming media applications;
. legacy system integration;
. database design and development;
. digital media Web and user interface design;
. hosting and storage management;
. streaming server integration and implementation; and
. volume encoding of audio and video content.
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Digital Media Applications
We have developed a software applications platform based on our encoding
infrastructure that enables companies and Web sites to easily incorporate
digital media into their own Web-based products and services. The platform
enables developers to build custom media input modules, as well as full custom
turnkey solutions. We sell a set of targeted vertical applications based on our
media application platform, such as online photo albums, media-enhanced auction
and classified listings and media-enhanced advertising and marketing. The
foundation for our media application platform has interfaces that allow content
to be input in any form, including still digital images, analog video tapes,
digital video, telephony-based audio, digital audio files and compact disk
audio. In addition, our media application platform allows content to be
packaged and converted into a variety of streaming media formats via our
encoding services and hosted in a central media repository. By basing our
vertical applications on an extensible, flexible platform, we are able to
respond rapidly to market opportunities and provide customized digital media
applications for Web sites or other customers that want to implement digital
media, as well as create custom solutions for customers via our consulting
services group.
The following diagram illustrates our applications platform upon which we
build our custom media applications and custom turnkey solutions.
[LOGO APPEARS HERE]
Our applications are deployed on an application services provider, or ASP,
basis whereby the software runs on equipment managed and monitored by us. Our
customers have flexibility and options to choose their individual level of
customization or integration. Where there is enough customer demand, we intend
to license components of the technology directly to corporations to run on
their own hardware and in their own facilities.
Our recent acquisition of Alive.com, a multimedia applications developer,
provides us additional technology components to add to our existing platform in
order to provide increased levels of
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customization in applications development. In addition, we added approximately
20 developers to our internal development resources enabling us to deliver a
larger set of media applications and functionality in a faster timeframe.
We currently provide the following software solutions from our application
platforms:
MediaUpgrade. We believe MediaUpgrade is the first Web-based application to
allow publishers of Web content to simply and conveniently transform legacy
source files, such as AVI, Quicktime and WAV files, to a variety of streaming
media formats. MediaUpgrade is targeted at small- and medium-sized professional
publishers that have regular encoding needs, providing a fully automated
encoding, hosting, management and publishing solution for content. MediaUpgrade
offers users a number of features and benefits:
. fully automated and secure Web-based interface for content uploading,
review and management;
. electronic commerce, tracking and report-generation capabilities for
streaming media content;
. integrated hosting of content as part of the service; and
. support for all leading digital media file formats through a single
browser based interface, without specialized desktop software for each
format.
MySlideShow. MySlideShow is a Web-based application that enables professional
and consumer end-users to create streaming slideshows and presentations from
digital photographs and standard non-streaming presentations. In a fully
automated process, end-users upload digital photos, images or traditional non-
streaming presentations, annotate the slides with words and music, choose for
the slideshow to be public or private and receive an e-mail with a link to
their hosted presentation fully assembled into a Web page. The primary
customers for MySlideShow are Web sites and portals that service consumers and
professional users and want to add Internet media creation and management to
their site. The features and benefits of the application include:
. increase of Web site "stickiness" and usage by allowing users to easily
create and share online slideshows with friends and family;
. easy integration and implementation into customer Web sites, with media
hosting at our facilities;
. simple download and installation process for end-users; and
. greater advertising inventory through targeted interstitial advertising
as well as banner ads.
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Customers
The following table lists our media and entertainment customers and our
corporate and government customers for which we have performed significant
digital media services.
<TABLE>
<CAPTION>
Media & Entertainment Corporate & Government
--------------------- ----------------------
<S> <C>
A2B Music 2 Wire
Always Independent Films Ackerman McQueen
Atom Films Cancer Education
Beatnik, Inc. Digital Lava, Inc.
BMG Music Efficient Marketing
Cineports Federal Emergency Management Agency
Collegemusic.com Fuji Films
Columbia TriStar Interactive Golfspan.com
Deo.com Hewlett Packard Company
Disney I Feel Good Network Corporation
Eclips Network 24 Communications
EMI OnHealth Network Company
EMusic.com Inc. Pile and Company
EnergyFilm Qwest Communications
Experience Music Project Radio Active Media Partners
FEG-TV LLC School Improvement.net
GMN Classical 3Com Corporation
Kanakaris Communications, Inc. VDAT
Kataweb Wonderware
Mainely A Cappella
MetallicaClub
MeTV.com
Microsoft Corporation
Mjuice.com
MountainZone.com
MovieHead.com, Inc.
MyMusic Library.com
Online Music Company
Razor and Tie
Screenplay
Sony Music Entertainment Inc.
Sony Trans Com
TV Interactive
TVT Records
XOOM.com, Inc.
</TABLE>
In addition to customers with whom we have a direct relationship, we have
established a variety of relationships with other streaming media companies and
system integrators.
In 1998, two customers, National Emergency Training Center and Microsoft
Corporation, accounted for 14% and 12% of our revenues, respectively. In 1999,
Kanakaris and Microsoft accounted for 13% and 11% of our revenues,
respectively.
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Strategic Relationships and Corporate Investors
We have established a number of key strategic relationships to strengthen our
technology development, increase the adoption of our products and services and
increase the awareness of our brand. We have entered into significant
agreements with the following companies:
Streaming Media Platform and Technology Alliances
. Microsoft. We work closely with Microsoft on deployment of the Windows
Media platform and related servers and applications. We are also one of
four members of Microsoft's Net Credits program, which provides encoding
services to customers for the Windows Media platform; the other members
of the program provide hosting services. We are a member of the Windows
Media Broadband Jumpstart program, where Microsoft has partnered with
leading digital media service providers to provide encoding and hosting
for broadband content at a discount to increase the adoption and
availability of broadband content. We have a full-time account
representative managing the strategic partnership.
. RealNetworks. We have a reseller partnership which generates customer
referrals from RealNetworks, a streaming media software company. We have
engaged in a number of joint marketing efforts with RealNetworks.
. Terran Interactive. We plan to work closely with the Media Cleaner Pro
engineering team from Terran Interactive, a developer of multimedia
compression tools, to customize and develop the Media Cleaner Pro
product line for our automated encoding production system. We believe we
are the only digital media service provider for streaming media to work
with Terran in this fashion.
Hosting and Distribution Alliances
. Digital Island, Inc. We have an agreement whereby Digital Island resells
our digital media services and is a member of our integrated
distribution network for the delivery of digital media.
. Enron Corp. We have a letter of intent with Enron whereby Enron would
resell our digital media services and is a member of our integrated
distribution network for the delivery of digital media. We believe we
are also the only encoding solutions provider integrated into Enron's
Media Transport video overlay network service which allows broadcast
networks and production studios to submit analog video content in a
secure, point to point manner to be encoding, managed and distributed
for Webcasting by us.
. iBEAM. We have an agreement whereby iBEAM resells our digital media
services and is a member of our integrated distribution network for the
delivery of digital media.
. InterVU. We have an agreement whereby InterVU resells our digital media
services and is a preferred member of our integrated distribution
network for the delivery of digital media.
Business Development Alliances
. Valley Media, Inc. We have an agreement with Valley Media to encode
their entire music catalog, which currently consists of over 150,000
commercial music compact disks. We will use this library of encoded song
files to jointly create a digital media clip service and jointly explore
other business opportunities. In connection with this agreement, we
issued Valley Media a one-year warrant to acquire 650,000 shares of our
common stock at an exercise price of $10.00 per share.
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Corporate Investors. In addition to preexisting industry and commercial
relationships, America Online, Inc., CBS, Inc., Microsoft Corporation and
National Broadcasting Company, Inc. among others recently invested an aggregate
of $15.0 million in our $47.8 million December 1999 Series D preferred stock
financing which was sold at a per share price of $6.37.
Research and Development
We are focused on improving our digital media services and application
through research and development. We believe that a strong emphasis on
automation and product development are essential to our strategy of continuing
to enhance and expand our capabilities.
Since inception, we have focused our efforts on building the most efficient,
scalable and quality based encoding process through superior hardware and
software. Software built to optimize encoding, combined with our expertise
learned through our automated encoding process has provided a platform upon
which we build superior digital media products and services.
Our team of developers, quality assurance engineers and program managers were
recruited from top Internet and streaming media companies, including
RealNetworks, Microsoft, Starwave and Intel. Within our development team, we
have a combined experience level of over 50 years in Java development and
database development, and significant experience in internet software
development. In addition, we have recruited senior management with significant
experience in the area of internet development, streaming media and networking.
Our core team of developers is focused in the following areas:
. digital media services, which focuses on automating capture and
encoding;
. media management which focuses on building a core component layer for
streaming media online applications; and
. media distribution and syndication, which focuses on building our
distribution and business rules application.
In addition, an application development team is focused on the fast
development of online applications, such as myslideshow and media upgrade,
based on the core components developed by the development team.
All of our product development efforts are undertaken using a structured
process developed within Loudeye. This process involves several functional
groups at all levels within our organization and is designed to provide a
framework for defining and addressing the activities required to bring product
concepts and development projects to market successfully.
Our research and development expenses were approximately $12,000 in 1997,
approximately $204,000 in 1998 and approximately $1.2 million in 1999. As of
December 31, 1999, approximately 48 employees were engaged in ongoing
engineering and production development work for our services, solutions and
applications.
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Operations and Technology
Our production operation is an efficient, highly automated process, optimized
to produce high volumes of audio and video encoding. The production personnel
are organized into functional teams which include project management, quality
assurance, process traffic, data capture, audio encoding, video encoding,
process research and development and engineering support.
The production system is a combination of hardware and software, developed by
our research and development organization and consists of a highly distributed
encoding system. It is designed to automate the time consuming, error prone
steps inherent in a complex encoding operation.
The production system hardware is centered around a Silicon Graphics Origin
2000 file server, housing over 11 Terabytes of RAID 5 storage. The file server
stores capture files and encoded files for both audio and video. Our
distributed computing system, which performs the audio and video capture and
encode operations, includes an array of over 100 dual Intel Pentium(R)
processors and Apple Macintosh G4s.
The encoding workflow is divided into a separated audio and video process,
staffed with technicians trained for the specific encoding function.
Audio Capture Process
The audio encoding process begins by capturing the content description
information and attributes, or metadata. A range of information, including data
on artists or speakers, track or topic titles, and copyright information, is
collected along with any related images or graphics which are all captured
electronically and entered into the centralized production database. The
collection of metadata can be managed through an automated or manual process
depending on the complexity of the data. The data is then checked for accuracy
and merged as an embedded file as part of the encoded song file delivered to
the customers.
Audio files are captured using our proprietary capture stations. The audio
capture process covers a broad spectrum of media formats and can be automated
or managed as a manual system depending on volume and complexity of the
project. Also, to significantly increase the audio capture process, additional
capture stations can be inserted into the production system architecture and
immediately begin capturing files.
The production system has a queue that knows about the files to be encoded.
To encode a file, the software locates available computing resources on the
network and requests that the resource perform the encoding work. The software
monitors the encoding operation and reports results to the control database.
The capture file and metadata are automatically encoded into all of the
streaming formats and bit rates specified by the production system job
management software and database. If required, the encoded files can be
automatically watermarked and indexed during the encoding operation. The
resulting encoded files are checked for quality and then delivered to the
customer as a collection of files or automatically routed to our partner
hosting services for direct delivery as a hosted stream, over the Internet.
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Video Capture Process
The video encoding process begins with the conversion of the customer's
source material from of wide variety of input formats, such as SVHS and Betacam
SP, using commercial grade video tape decks into a digital file. As with the
audio process, capture and quality control levels from the source can be highly
automated or manually managed depending on customer requirements and complexity
of the project. The video signals are routed through preprocessing stations to
optimize the quality of the content prior to encoding.
After capture, the video files are rendered and encoded in a single parallel
operation into to all the formats and bit rates required by the customer. If
required, the encoded files can be automatically watermarked and indexed during
the encoding operation. The encoded video is checked for quality and delivered
to the customer or hosted directly on the Internet.
This encoding architecture creates an automated and highly scalable system.
As capacity demands grow, additional computing resources can be added with
little or no configuration effort, allowing us to rapidly respond to increased
encoding demands.
Sales and Marketing
We have implemented an integrated marketing campaign that consists of direct
sales, reseller and co-marketing partners, trade show and conference
participation and speakers program, our Web site, direct and email marketing
programs, monthly newsletter, Internet promotions and sponsorships and embedded
branding initiatives with customers and partners who promote our logo on the
application or next to the streaming media being delivered. Each of these
programs are deployed at various levels across the following target markets:
Media and Entertainment. We target prominent companies in this category with
a dedicated direct sales force. Smaller companies are primarily contacted
through partnerships with hosting companies, integrators and resellers. The
following outlines important vertical markets and applications in the media and
entertainment industry:
<TABLE>
<S> <C>
Markets Applications
------- ------------
Film Studios ) Product Promotions
)
Record Labels ) Business to Business
)
Stock Footage Houses ) Downloads
)
Music Distribution/Aggregate ) Electronic Marketing
)
Video Distribution/Aggregate ) Web Communities
)
New Media ) Content Acquisition
</TABLE>
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<PAGE>
Corporate. We target Fortune 1000 accounts with our direct sales force and
our consulting services group. In addition, we work with several of the large
and established system integrators, such as Andersen Consulting and KPMG who
are expanding their practices to include digital media groups. The following
outlines important industry markets and applications for the corporate segment:
<TABLE>
<S> <C>
Markets Applications
------- ------------
High Tech Product Promotions
Finance Rich Media Advertising
Education Electronic Commerce
Manufacturing Distance Learning & Training
Industrial/Aerospace Corporate Communications
Government Electronic Marketing
</TABLE>
For smaller corporate customers, we provide customized and vertical
applications to third parties who bundle various services to make-up a complete
solution for small to medium sized businesses. We target these third parties
with a direct sales force with special expertise in supporting the
applications.
Consumer. To address this mass-market opportunity, we use our direct sales
force and business development resources to deliver customized and vertical
applications to Web destinations that need streaming media solutions for their
end-users.
Industry Organizations. We maintain an active presence in industry standards
and initiatives that help to mature and grow the streaming media industry. We
are a founding and active member of Secure Digital Music Initiative, or SDMI,
which includes the Recording Industry Association of America, or RIAA, and its
members and is working to create a specification for the secure digital
delivery and sale of music and help in the exposure and credibility of that
help to advance the growth. We also work closely with the quality standards
boards such as the Motion Picture Association of America, or MPAA. Our Seattle,
Washington production and encoding facility is approved by the MPAA.
As of December 31, 1999, we had 17 people in our sales organization and 19 in
our marketing organization, all of which were in the United States. We intend
to increase the size of our direct sales force and to establish additional
sales offices domestically and internationally. The direct sales force
primarily serves the large institutional customers and a telemarketing team
focuses on smaller accounts and lead generation. We have also developed a
network of over 20 resellers, whose efforts are coordinated by four sales
people and one marketing person all dedicated to the reseller channel. There
are two additional sales representatives dedicated respectively to servicing
our relationships with RealNetworks and Microsoft.
Competition in our Industry
We face competition from in-house encoding services by potential customers,
other vendors that directly address the outsourced encoding services market and
companies that directly address the digital media applications market. We
compete on the basis of service quality, ability to handle a wide range of
input and output formats, capacity of our recently expanded production
facilities, turnaround time, and price and breadth of products and services
offered, which include encoding, hosting, consulting and applications.
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Our most significant competition has been from potential customers who choose
to invest in the resources and equipment to digitally encode their media
themselves on an in-house basis. In-house service is expected to remain a
significant competitor to our services, although we believe that as the volume
of content requiring optimized encoding continues to increase, companies that
currently encode their media in-house will see a significant economic advantage
to outsourcing to a third-party expert for encoding and other value-added
services.
There are a small number of companies who are providing outsourced encoding
solutions today, such as Globix, Magnum Design, Sonic Foundry and STV. We also
anticipate that as the market for outsourced encoding services continues to
grow, it will see competition from turn-key streaming media network providers
such as InterVU, V-Stream and Yahoo! Broadcast Services; streaming media
platform developers such as Apple, Liquid Audio, Microsoft and RealNetworks and
from video post-production houses. There are a number of companies that are
developing Internet media applications that will potentially compete with our
applications, such as Audiosoft, AudioTrack, InterTrust, Microsoft,
RealNetworks, Versifi and Vignette.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Proprietary Rights and Intellectual Property
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not yet have any issued patents, but are in the
processes of filing six patent applications that claim priority to six
previously filed provisional applications. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. In addition, other
parties may breach confidentiality agreements or other protective contracts we
have entered into and we may not be able to enforce our rights in the event of
these breaches. Furthermore, we expect that we will increase our international
operations in the future and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States.
The streaming media, digital media and software industry is characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. Although we attempt to avoid infringing known proprietary
rights of third parties in our product development efforts, we expect that we
may be subject to legal proceedings and claims for alleged infringement by us
or our licensees of third party proprietary rights, such as patents, trademarks
or copyrights, by us or our licensees from time to time in the ordinary course
of business. Any claims relating to the infringement of third party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
license agreements which are not advantageous to us. In addition, parties
making these claims may be able to obtain an injunction, which could prevent us
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from providing our products or services in the United States or abroad. Any of
these results could harm our business. We may increasingly be subject to
infringement claims as the number of products and competitors in our industry
grow and the functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
Governmental Regulation
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
encryption concerns, including export contents, copyright and other
intellectual property rights, caching of content by server products, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, email, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect our ability to provide our products
and services and increase the costs associated with our products and services,
and may affect the growth of the Internet. These laws or regulations may
therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
products and services;
. increase our cost of doing business;
. expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
. lead to increased product and applications development costs, or
otherwise harm our business.
Employees
As of December 31, 1999, we had a total of 210 employees, of which 48 were in
research and development, 36 were in sales and marketing, 83 were in
production, 8 were in professional services and product support and 35 were in
finance and administration. None of our employees are subject to a collective
bargaining agreement. We consider our relations with our employees to be good.
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Facilities
We are headquartered in Seattle, Washington where we lease approximately
21,125 square feet under a lease that expires on October 31, 2004. We have
exercised the option provided in the lease and will occupy an additional 14,056
square feet of space in the second quarter of 2000. In addition, we have three
other Seattle, Washington locations: a 6,000 square foot space under a lease
that expires on September 1, 2003, a 15,654 square foot space under a lease
that expires August 31, 2004 and a 9,000 square foot space under a lease that
expires November 15, 2004. We recently leased an additional location in Santa
Monica, California of approximately 4,632 square feet under a lease that
expires January 1, 2005.
Legal Proceedings
We are not currently subject to any material legal proceedings.
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MANAGEMENT
Executive Officers, Key Employees and Directors
The following table sets forth information with respect to our executive
officers, key employees and directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Martin G. Tobias............ 35 Chief Executive Officer and Chairman of the
Board of Directors
David C. Bullis............. 47 President and Chief Operating Officer
Larry G. Culver............. 50 Chief Financial Officer
Thomas S. Hodge............. 45 Vice President, General Counsel
Michael D. McHenry.......... 43 Vice President, Sales
Douglas F. Schulze.......... 40 Vice President, Marketing
James L. Van Kerkhove....... 50 Vice President, Production
David L. Weld, Jr. ......... 36 Senior Vice President, Product Development
Jeffrey R. Brown............ 37 Vice President, Operations and New Business
Implementation
Beverley J. Kite............ 30 Vice President, Core Development
Mark J. Richardson.......... 32 Vice President, Application Development
Brent D. Shepherd........... 39 Vice President, Consulting Services Group
Stuart J. Ellman (1)(2)..... 33 Director
Johan Liedgren (2).......... 35 Director
Charles P. Waite, Jr. 44 Director
(1)(2).....................
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors
(2) Member of Audit Committee of the Board of Directors
Executive Officers
Martin G. Tobias, our founder, has served as our chief executive officer and
chairman of our board of directors since our inception. From 1991 to 1997, he
worked for Microsoft Corporation, a software company, in several positions,
most recently as electronic software distribution strategy manager for the U.S.
channel policies group of Microsoft. Mr. Tobias is a director of
SoftwareBuyLine, Inc. Mr. Tobias holds a B.A. from Oregon State University.
David C. Bullis has served as our president and chief operating officer since
July 1999. From May 1998 to February 1999, he served as chief executive officer
and president of Data I/O Corporation, an electronic manufacturing company.
From June 1990 to April 1998, Mr. Bullis served as senior vice president and
general manager of Synopsys, Inc., a design automation company. Mr. Bullis
holds a B.S. from Iowa State University and an M.S. from Colorado State
University.
Larry G. Culver has served as our chief financial officer since August 1999.
From February 1999 to August 1999, he served as senior vice president of
finance and operations and chief financial officer of Metawave Communications
Corporation, a cellular technology company. From July 1998 to January 1999, Mr.
Culver served as senior vice president of finance and operations and chief
financial officer for Metapath Software Corporation, a cellular software
solutions company, which was acquired by Mobile Systems International Holding,
Ltd. in December 1998. From 1991 to May 1998, Mr. Culver served as executive
vice president, chief operating officer and chief financial officer for
CellPro, Inc., a biotechnology company. Mr. Culver holds a B.S. from the
University of Wisconsin, Stout and an M.B.A. from the University of Wisconsin,
Oshkosh.
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<PAGE>
Thomas S. Hodge has served as our vice president and general counsel since
January 2000. From October 1994 to January 2000, he was a shareholder in the
Seattle office of Heller Ehrman White & McAuliffe LLP, an international law
firm, where he practiced corporate and securities law. From 1980 to October
1994, Mr. Hodge practiced corporate and securities law with Bogle & Gates LLP.
Mr. Hodge holds a B.A. from Houghton College and a J.D. from the University of
Virginia.
Michael D. McHenry has served as our vice president of sales since September
1998. From October 1997 to September 1998, he served as vice president of sales
of iCat Corporation, an electronic commerce company, which was acquired by
Intel in February 1999. From October 1995 to October 1997, Mr. McHenry served
as regional vice president of sales of Giga Information Group, Inc., an
electronic commerce advisory company. From 1993 to October 1995, Mr. McHenry
served as regional sales manager of FourGen Software, Inc., a software company.
Mr. McHenry holds a B.S. from the University of Oregon.
Douglas F. Schulze has served as our vice president of marketing since
October 1999. From December 1998 to October 1999, he served as general manager
of the Intel e-Commerce division of iCat Corporation. From March 1998 to
December 1998, he served as iCat Corporation's senior vice president of sales
and marketing, and from August 1996 to March 1998, he served as iCat's vice
president of business development. From 1993 to August 1996, Mr. Schulze served
as vice president of marketing for Excalibur Technologies Corporation, a
software company. Mr. Schulze holds a B.A. from California State Polytechnic
University, Pomona.
James L. Van Kerkhove has served as our vice president of production since
November 1999. From February 1999 to November 1999, he served as vice president
of the assembly products group of Johnson Matthey Electronics, Inc., a
manufacturing company, and from July 1998 to January 1999, he served as vice
president of manufacturing of Johnson Matthey Electronics. From 1990 to April
1998, Mr. Van Kerkhove worked for Mitsubishi Silicon America Corporation, a
manufacturing company, in several positions, most recently as executive vice
president of operations. Mr. Van Kerkhove holds a B.S. from Cornell University
and an M.B.A. from Rochester Institute of Technology.
David L. Weld, Jr. has served as our senior vice president of product
development since December 1999. From March 1998 to December 1999, Mr. Weld
served as president and chief executive officer of Alive.com, Inc., a media
application software company, which we acquired in December 1999. From January
1997 to November 1997, Mr. Weld served as president of the information
applications division of Verity, Inc., a knowledge management software company.
From April 1996 to January 1997, Mr. Weld served as chief executive officer of
Cognisoft, a knowledge management software company, which was acquired by
Verity in 1997. From 1991 to April 1996, Mr. Weld worked for Microsoft in
several positions, most recently as group manager of the Microsoft Network. Mr.
Weld holds both an A.B. and an M.B.A. from Dartmouth College.
Key Employees
Jeffrey R. Brown has served as our vice president of operations and new
business implementation since December 1999. From March 1998 to December 1999,
he served as chief operating officer and senior vice president of Alive.com.
From January 1997 to October 1997, Mr. Brown served as vice president of
quality of the information applications division of verity. From November 1996
to January 1997, Mr. Brown served as vice president of quality of Cognisoft.
From 1987 to October 1996, Mr. Brown worked for Microsoft in several positions,
most recently as test manager of content technology for the Microsoft Network.
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Beverley J. Kite has served as our vice president of core development since
December 1999. From October 1998 to December 1999, she served as vice president
of development. From 1996 to October 1998, Ms. Kite served as an engineering
manager for Starwave Corporation, an Internet technology company. From 1995 to
1996, Ms. Kite served as a senior developer for Midcom, Inc. a
telecommunications company. From 1994 to 1995, Ms. Kite served as a consultant
for Computer People, Inc., a computer consulting company. Ms. Kite holds a
B.S.C. from Demontfort University in England.
Mark J. Richardson has served as our vice president of application
development since December 1999. From March 1998 to December 1999, he served as
vice president of product development of Alive.com. From January 1997 to
November 1997, Mr. Richardson served as vice president of technology of the
information applications division of Verity. From April 1996 to January 1997,
Mr. Richardson served as senior software engineer of Cognisoft. From 1989 to
1995, Mr. Richardson worked for Microsoft in several positions, most recently
as a performance lead for Windows NT. Mr. Richardson holds a B.S. from the
University of Akron.
Brent D. Shepherd has served as our vice president of the consulting services
group since July 1999. From 1994 to July 1999, he worked for Mosaix Inc., a
customer relationship management company, in several positions, most recently
as vice president of enterprise customer management consulting. Mr. Shepherd
holds a B.A. from the University of Montana.
Directors
Stuart J. Ellman has served as one of our directors since August 1999. Mr.
Ellman has served as general partner of RRE Ventures II LP, a venture capital
firm, since co-founding RRE Ventures in 1994. Mr. Ellman serves as a director
of Watchguard Technologies, Inc., an internet security company, and several
private companies. Mr. Ellman holds a B.A. from Wesleyan University and an
M.B.A. from Harvard Business School.
Johan Liedgren has served as one of our director of Loudeye since April 1998.
Since October 1997, Mr. Liedgren has served as chief executive officer of
Honkworm, International, an entertainment studio. From January 1994 to August
1997, he worked for Microsoft Corporation in several positions, most recently
as director of channel policy. Mr. Liedgren serves as a director of
Netsolutions of Sweden. Mr. Liedgren attended the University of Stockholm in
Sweden.
Charles P. Waite, Jr. has served as one of our directors since June 1998. Mr.
Waite has served as a general partner of Olympic Venture Partners LP, a venture
capital firm, since 1987. Mr. Waite serves as a director of Verity, Watchguard
and several privately held companies. Mr. Waite holds an A.B. from Kenyon
College and an M.B.A. from Harvard Business School.
Board Composition
Our bylaws currently provide for a board of directors consisting of five
directors. Following the closing of the offering, our amended and restated
certificate of incorporation will provide for the division of our board of
directors into three classes, as nearly as equal in size as possible, with
staggered three year terms. Messrs. Tobias and Waite will serve for an initial
term of three years, Mr. Ellman will serve for an initial term of two years and
Mr. Liedgren will serve for an initial term of one year.
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Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Stuart Ellman and Charles Waite.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent accountants, and our compliance with
legal matters that have a significant impact on our financial reports. The
current members of the audit committee are Stuart Ellman, Johan Liedgren and
Charles Waite.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
the members of the compensation committee is currently, or has even been at any
time since our formation, one of our officers or employees. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more officers serving as a
member of our board of directors or compensation committee.
Director Compensation
We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock option plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. See "Stock Plans" for a description of option
grants under the 1998 stock plan. In addition, following the closing of this
offering, directors will be participating in the 2000 director stock option
plan.
Executive Compensation
The following table sets forth certain compensation awarded to, earned by, or
paid to our chief executive officer, and our one other most highly compensated
executive officer whose total cash compensation exceeded $100,000 during the
year ended December 31, 1999, collectively, the "named officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long-Term Compensation
---------------- -----------------------
Securities
Underlying All Other
Salary Bonus Options Compensation
Name and Principal Position ($) ($)(1) (#) ($)(2)
--------------------------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Martin G. Tobias, Chief Executive
Officer............................. $129,167 -- -- $4,087
Michael D. McHenry, Vice President of
Sales............................... 103,333 $75,000 350,000 6,427
</TABLE>
- --------
(1) Bonus represents the amount paid to the employee in 1999.
(2) Consists of health insurance premiums paid by us.
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Option Grants
The following table shows certain information regarding stock options granted
to the named officers during the year ended December 31, 1999. No stock
appreciation rights were granted to these individuals during the year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
Percentage Price
Number of of Total Appreciation
Shares Options for Option
Underlying Granted to Exercise Term(4)
Options Employees Price Expiration -------------
Name Granted(2) in 1999(3) per Share Date 5% 10%
---- ---------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Martin G. Tobias(1)... -- -- -- -- -- --
Michael D. McHenry.... 25,000 0.6% $0.25 6/10/09 $3,931 $9,961
</TABLE>
- --------
(1) Mr. Tobias did not receive any stock option grants during the year ended
December 31, 1999.
(2) The exercise price per share of each option was equal to the fair market
value on the date of grant as determined by the board of directors at such
time.
(3) Based on an aggregate of 4,357,231 options granted by us during the year
ended December 31, 1999 to our employees, including our executive officers.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the SEC and do not represent our estimate or projection of
future common stock prices.
Option Exercises and Holdings
There were no option exercises by the named officers in 1999. The following
table provides certain information concerning the shares of common stock
represented by outstanding stock options held by the named officers as of
December 31, 1999.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option
Values
<TABLE>
<CAPTION>
Number of
Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31, 1999
1999(1) ($)(2)
--------------- -------------------
Name Vested Unvested Vested Unvested
---- ------ -------- -------- ----------
<S> <C> <C> <C> <C>
Martin G. Tobias............................ -- -- -- --
Michael D. McHenry.......................... 40,625 309,375 $363,187 $2,761,063
</TABLE>
- --------
(1) All options granted under the 1998 Stock Option Plan, the Alive 1998 Stock
Option Plan and the 2000 Plan (for grants prior to the closing of this
offering) may be exercised prior to full vesting, subject to the optionee's
entering into a restricted stock purchase agreement with us with respect to
any unvested shares. Under such agreement, the optionee grants us an option
to repurchase any unvested shares at their original purchase price in the
event the optionee's employment or consulting relationship with us is
terminated. Our right of repurchase lapses as the shares vest in accordance
with the vesting schedule of the exercised options.
(2) Based on an assumed initial public offering price of $9.00 per share, minus
the exercise price, multiplied by the number of shares underlying the
option.
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Stock Plans
1998 Stock Option Plan. Our 1998 stock option plan provides for the grant of
incentive stock options to employees (including employee directors) and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 1998 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors originally adopted and our stockholders approved the 1998 stock
option plan in March 1998 in March 1998. The 1998 stock option plan was amended
in September and November 1999 by the board of directors and our stockholders.
The 1998 stock option plan reserved 4,660,000 shares of common stock for stock
option grants under the 1998 stock option plan. Unless terminated earlier by
the board of directors, the 1998 stock option plan shall terminate in March
2008. As of December 31, 1999, options to purchase 3,778,928 shares of common
stock were outstanding at a weighted average exercise price of $0.50 per share
and 734,936 shares had been issued upon early exercise subject to our right to
repurchase pursuant to restricted stock purchase agreements, 143,273 shares had
been issued upon exercise of outstanding vested options, and 2,863 shares
remained available for future grant.
The 1998 stock option plan may be administered by the board of directors or a
committee appointed by the board of directors. The administrator determines the
terms of options granted under the 1998 stock option plan, including the number
of shares subject to the option, exercise price, term and exercisability.
Incentive stock options granted under the 1998 stock option plan must have an
exercise price of at least 100% of the fair market value of the common stock on
the date of grant and at least 110% of such fair market value in the case of an
optionee who holds more then 10% of the total voting power of all classes of
our stock. Nonstatutory stock options granted under the 1998 stock option plan
must have an exercise price of at least 85% of the fair market value of the
common stock on the date of grant and at least 110% of such fair market value
in the case of an optionee who holds more then 10% of the total voting power of
all classes of our stock. Payment of the exercise price may be made in cash or
such other consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed ten
years or five years in the case of an incentive stock option granted to a
holder of more than 10% of the total voting power of all classes of our stock.
No option may be transferred by the optionee other than by will or the laws of
descent or distribution. Each option may be exercised during the lifetime of
the optionee only by such optionee or permitted transferee. The administrator
determines when options become exercisable. Options granted under the 1998
stock option plan generally must be exercised within three months after the
termination of the optionee's status as an employee, director or consultant of
Loudeye, within six months if such termination is due to the death of the
optionee, or within twelve months if such termination is due to the disability
of the optionee, but in no event later than the expiration of the option's
term. Options granted under the 1998 stock option plan generally vest over a
four and half year period at a rate of 12.5% of the total number of shares
subject to the option nine months after the date of grant, an additional 12.5%
of the total number of shares subject to the option 18 months after the date of
grant, with the remaining shares vesting in equal quarterly installments
thereafter.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 1998 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our
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acquiror did not agree to assume or substitute outstanding awards or replace
such awards with a cash incentive program, then the vesting of such awards will
accelerate in full upon the closing. If we experience a change in control event
and the position of an executive officer is terminated within twelve months of
the change of control event, vesting will accelerate with respect to 100% of
the executive officer's options. Outstanding awards, as well as the number of
shares remaining available for issuance under the plan, will adjust in the
event of a stock split, stock dividend or other similar change in our capital
stock. The board of directors has the authority to amend or terminate the 1998
stock option plan provided that no action that impairs the rights of any holder
of an outstanding option may be taken without the holder's consent. In
addition, we will obtain stockholder approval for any such amendments to the
extent required by applicable law.
Alive.com, Inc. 1998 Stock Option Plan. In connection with the Alive.com
merger, we will assume the Alive.com, Inc. 1998 stock option plan. Upon closing
of the merger, options outstanding under the Alive.com plan became options to
purchase an aggregate of 91,181 shares of our common stock. The terms of the
Alive.com options are similar to the terms of options issuable under our 1998
stock plan, except that options granted under the 1998 Alive.com stock option
plan generally vest over a four year period at a rate of 25% of the total
number of shares subject to the option one year after the date of grant, with
the remaining shares vesting in equal quarterly installments thereafter. In
addition, in the event of a sale of all or substantially all of our assets or
our merger with or into another corporation, or other change in control event,
the Alive.com, Inc. 1998 stock option plan provides for 100% acceleration of
vesting for options granted prior to March 18, 1999 and 50% vesting for options
granted after March 18, 1999 if the optionee had been employed by Alive.com for
more than six months. If Alive.com's executive officers are terminated within
six months of a change of control event, the 1998 Alive.com stock option plan
provides 100% acceleration of vesting.
As of December 31, 1999, 89,981 options to purchase shares of common stock
were outstanding under the Alive plan at a weighted average exercise price of
$0.86 per share and 1,200 shares had been issued upon exercise of outstanding
options since the date of the merger.
2000 Stock Option Plan. Our 2000 stock option plan provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 2000 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. The 2000
stock option plan was originally adopted by our board of directors in December
1999 and will be approved by our stockholders prior to completion of this
offering. The 2000 stock option plan provides for this issuance of options and
rights to purchase up to 2,500,000 shares of our common stock, plus an
automatic annual increase on the first day of each of our fiscal years
beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser 5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, 2,500,000 shares or a lesser number of shares as our board of directors
determines. Unless terminated earlier by the board of directors, the 2000 stock
option plan will terminate in December 2009.
As of December 31, 1999, 354,300 options to purchase shares of common stock
were outstanding under the 2000 stock option plan at a weighted average
exercise price of $6.00 per share, no shares had been issued upon exercise of
outstanding options or pursuant to stock purchase rights, and 2,145,700 shares
remained available for future grant.
The 2000 stock option plan may be administered by the board of directors or a
committee of the board, each known as the administrator. The administrator
determines the terms of options and stock
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purchase rights granted under the 2000 stock option plan, including the number
of shares subject to the award, the exercise or purchase price, and the vesting
and/or exercisability of the award and any other conditions to which the award
is subject. No employee may receive awards under the plan for more than
2,500,000 shares in any one calendar year. Incentive stock options granted
under the 2000 stock option plan must have an exercise price of at least 100%
of the fair market value of the common stock on the date of grant. Generally,
the plan does not impose restrictions on the exercise or purchase price
applicable to nonstatutory stock options and stock purchase rights, although we
expect that nonstatutory stock options and stock purchase rights granted to our
chief executive officer and our four other most highly compensated officers
will generally equal at least 100% of the grant date fair market value. Payment
of the exercise or purchase price may be made in cash or any other
consideration allowed by the administrator.
With respect to options granted under the 2000 stock option plan, the
administrator determines the term of options, which may not exceed 10 years, or
5 years in the case of an incentive stock option granted to a holder of more
than 10% of the total voting power of all classes of our stock. Generally, an
option is nontransferable other than by will or the laws of descent and
distribution, and may be exercised during the lifetime of the optionee only by
such optionee. In certain circumstances, the administrator has the discretion
to grant nonstatutory stock options with limited transferability rights. Stock
options are generally subject to vesting, meaning that the optionee earns the
right to exercise the option over a specified period of time only if he or she
continues to provide services to us over that period. Shares of stock issued
pursuant to stock purchase rights granted under the 2000 stock option plan are
generally subject to a repurchase right exercisable by us upon the termination
of the holder's employment or consulting relationship with us for any reason
(including death or disability). This repurchase right will lapse in accordance
with terms established by the administrator at the time of grant.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 2000 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our acquiror did not agree to assume or
substitute outstanding awards or replace such awards with a cash incentive
program, then the vesting of such awards will accelerate in full upon the
closing. Outstanding awards,the number of shares remaining available for
issuance under the plan, the number of shares added to the plan each year under
the plan's evergreen provision and the annual per-employee share limit will
adjust in the event of a stock split, stock dividend or other similar change in
our capital stock. The administrator has the authority to amend or terminate
the 2000 stock option plan, but no action may be taken that impairs the rights
of any holder of an outstanding option or stock purchase right without the
holder's consent. In addition, we must obtain stockholder approval of
amendments to the plan as required by applicable law.
2000 Director Stock Option Plan. The 2000 director stock option plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. It will
become effective upon the date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 2000 director stock
option plan, all of which remain available for future grants. The 2000 director
stock option plan provides for the grant of nonstatutory stock options to our
nonemployee directors. The 2000 director stock option plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the board of directors. To the extent they
arise, it is expected
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that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which a
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in December 2009.
The 2000 director stock option plan provides that each nonemployee director
at the time of completion of this offering will automatically receive an option
to purchase 20,000 shares of our common stock. In addition, the 2000 director
stock option plan provides that each person who becomes a nonemployee director
after the completion of this offering will be granted a nonstatutory stock
option to purchase 20,000 shares of common stock on the date on which such
individual first becomes a member of our board of directors. On the date of
each annual stockholders meeting, each nonemployee director who will continue
serving on the board following the meeting and who has been a director of
Loudeye for at least six months prior to the meeting date will be granted an
option to purchase 7,500 shares of common stock.
All options granted under the 2000 director stock option plan will have a
term of ten years and an exercise price equal to the fair market value of on
the date of grant (except for options granted on the date of this offering
which will have an exercise price equal to the price at which shares are first
sold to the public in the offering) and will be nontransferable. All initial
options granted under the 2000 director stock option plan shall vest as to 25%
of the shares underlying the option on each of the first four anniversaries of
the date of the option grant. The subsequent options to purchase 7,500 shares
granted under the director plan shall vest as to 100% of the shares underlying
the option on the first anniversary of the date of the option grant. If a
nonemployee director ceases to serve as a director for any reason other than
death or disability, he or she may, but only within 90 days after the date he
or she ceases to be a director, exercise options granted under the director
plan. If he or she does not exercise the option within such 90-day period, the
option will terminate. If a director's service terminates as a result of his or
her disability or death, or if a director dies within three months following
termination for any reason, the director or his or her estate will have
12 months after the date of termination or death, as applicable, to exercise
options that were vested as of the date of termination. In addition, if we
determine that a director has engaged in fraud, embezzlement or similar acts
against us, or if a director has disclosed information that is confidential to
us or engaged in any conduct constituting unfair competition against us, we
have the right to suspend or terminate that director's right to exercise an
option under the 2000 director stock option plan.
If we are acquired by another corporation, each option outstanding under the
2000 director stock option plan will be assumed or equivalent options
substituted by our acquiror, unless our acquiror does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any acquisition, each director holding options under the 2000
director stock option plan will have the right to exercise his or her options
immediately before the consummation of the transaction as to all shares
underlying the options, including shares which would not have been vested and
exercisable but for the acquisition. Outstanding awards, the number of shares
remaining available for issuance under the plan and the number of shares
subject to the automatic director option grants as provided in the plan will
adjust in the event of a stock split, stock dividend or other similar change in
our capital stock. Our board of directors may amend or terminate the director
plan as long as such action does not adversely affect any outstanding option.
We will obtain stockholder approval for any amendment to the plan to the extent
required by applicable law.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior
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to completion of this offering. A total of 200,000 shares of common stock has
been reserved for issuance under the 2000 employee stock purchase plan, none of
which have been issued as of the date of this offering. The number of shares
reserved for issuance under the 2000 employee stock purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 0.75%
of our outstanding common stock on the last day of the immediately preceding
fiscal year, 300,000 shares or a lesser number of shares as the board of
directors determines. The 2000 employee stock purchase plan becomes effective
upon the date of this offering. Unless terminated earlier by the board of
directors, the 2000 employee stock purchase plan will terminate in December
2019.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping offering periods of approximately 24 months' duration, with new
offering periods (other than the first offering period) commencing on May 1 and
November 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on April 30, 2002;
the initial purchase period is expected to begin on the date of this offering
and end on October 31, 2000, with subsequent purchase periods ending on April
30, 2001, October 31, 2001 and April 30, 2002. The 2000 employee stock purchase
plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or of
any majority-owned subsidiary designated by the board, are eligible to
participate in the 2000 employee stock purchase plan if they are employed by us
or a designated subsidiary for at least 20 hours per week and more than five
months per year. The 2000 employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions at a rate of not
more than 20% of an employee's compensation. The purchase price is equal to the
lower of 85% of the fair market value of the common stock at the beginning of
each offering period or at the end of each purchase period, subject to certain
adjustments as provided in the plan. Employees may end their participation in
the 2000 employee stock purchase plan at any time during an offering period,
and participation ends automatically on termination of employment.
An employee is not eligible to participate in the 2000 employee stock
purchase plan if immediately after the grant of an option to purchase stock
under the plan such employee would own stock and/or hold outstanding options to
purchase stock equaling 5% or more of the total voting power or value of all
classes of our stock or stock of our subsidiaries, or if such option would
permit an employee's rights to purchase stock under the 2000 employee stock
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 2000
employee stock purchase plan in any one purchase period. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in that offering
period shall automatically be withdrawn from the offering period as of the end
of the purchase date and re-enrolled in the new 24-month offering period
beginning on the first business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
employee stock purchase plan will be assumed or an equivalent right substituted
by our acquiror. If our acquiror did not agree to assume or substitute stock
purchase rights, any offering period and purchase period then in progress would
be shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding
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awards, the number of shares remaining available for issuance under the plan,
the number of shares added to the plan each year under the plan's evergreen
provision and the maximum number of shares that may be purchased by a
participant during a purchase period will adjust in the event of a stock split,
stock dividend or other similar change in our capital stock. Our board of
directors has the power to amend or terminate the 2000 employee stock purchase
plan and to change or terminate offering periods as long as such action does
not adversely affect any outstanding rights to employee stock purchase stock
thereunder. However, the board of directors may amend or terminate the 2000
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
Employee Benefit Plans
401(k) Plan. In 1999, we adopted our 401(k) plan covering our full-time
employees over age twenty-one . Employees are eligible after three months
employment. The 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended, so that contributions to the 401(k)
plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) plan, and so that our
contributions, if any, will be deductible by us when made. Under the 401(k)
plan, employees may elect to reduce their current compensation by up to 20% up
to the statutorily prescribed annual limit ($10,500 in 2000) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to our 401(k)
plan on behalf of all participants in the 401(k) plan. To date, we have not
made any matching contributions to the 401(k) plan.
Employment Offer Letters
In connection with the hiring of David Bullis as our president and chief
operating officer in July 1999, we entered into a letter agreement with Mr.
Bullis. Mr. Bullis's options vest over a four year period at a rate of 18.75%
of the number of shares subject to the option nine months after the date of
grant, with the remaining shares vesting in equal installments at the end of
each quarter thereafter. If we experience a change in control within Mr.
Bullis's first two years of employment, the vesting will accelerate with
respect to 50% of these options. Mr. Bullis's employment is for no specified
length of time, and either party has the right to terminate Mr. Bullis's
employment at any time with or without cause.
In connection with the hiring of Larry Culver as our chief financial officer
in August 1999, we entered into a letter agreement with Mr. Culver. In
addition, prior to Mr. Culver joining us as chief financial officer, Mr. Culver
had been hired by us as a consultant in August 1999, and in connection with
such consulting agreement, Mr. Culver was granted a nonqualified stock option.
Mr. Culver's incentive stock options vest over a four year period with 12.5% of
the total number of shares subject to the option vesting twenty-seven months
after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Culver's nonqualified
options vest over a two year period at a rate of 37.5% of the total number of
shares subject to the option nine months after the date of grant, with the
remaining shares vesting in equal installments at the end of each quarter
thereafter. If we experience a change in control within Mr. Culver's first two
years of employment, the vesting on his nonqualified option will accelerate
completely. Mr. Culver's employment is for no specified length of time, and
either party has the right to terminate Mr. Culver's employment at any time
with or without cause.
In connection with the hiring of Douglas Schulze as our vice president of
marketing in October 1999, we entered into a letter agreement with Mr. Schulze.
Mr. Schulze's options vest over a four
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year period at a rate of 18.75% of the total number of shares subject to the
option nine months after the date of grant, with the remaining shares vesting
in equal installments at the end of each quarter thereafter. Mr. Schulze's
employment is for no specified length of time, and either party has the right
to terminate Mr. Schulze's employment at any time with or without cause.
In connection with the hiring of James Van Kerkhove as our vice president of
production in November 1999, we entered into a letter agreement with Mr. Van
Kerkhove. Mr. Van Kerkhove's options generally vest over a four year period at
a rate of 18.75% of the total number of shares subject to the option nine
months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Van Kerkhove's
employment is for no specified length of time, and either party has the right
to terminate Mr. Van Kerkhove's employment at any time with or without cause.
In connection with the hiring of David Weld as our senior vice president of
product development in December 1999, we entered into a letter agreement with
Mr. Weld. Mr. Weld's options generally vest over a four year and three month
period at a rate of 12.5% of the total number of shares subject to the option
nine months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Weld is treated as an
executive officer in the event of a change in control of Loudeye. In addition,
in connection with our acquisition of Alive.com Mr. Weld's right to purchase
shares of Alive.com common stock converted into a right to purchase shares of
our common stock. Mr. Weld's employment is for no specified length of time, and
either party has the right to terminate Mr. Weld's employment at any time with
or without cause.
In connection with the hiring of Thomas Hodge as our Vice President, General
Counsel in January 2000, we entered into a letter agreement with Mr. Hodge. Mr.
Hodge's options generally vest over a four year period at a rate of 18.75% of
the total number of shares subject to the option nine months after the date of
grant, with the remaining shares vesting in equal installments at the end of
each quarter thereafter. Mr. Hodge's employment is for no specified length of
time, and either party has the right to terminate Mr. Hodge's employment at any
time with or without cause.
In addition, we have a severance arrangement with each of our officers which
provides that if an officer is terminated without cause, he or she will receive
the then-current base salary and benefits for three months, or for six months
in the case of our executive officers.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their 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 payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as our director or officer,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Private Placements of Securities
Since our inception in August 1997, we have issued shares of our capital
stock as follows:
. a total of 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock in connection with the conversion of the
predecessor limited liability company into a Delaware corporation in
March 1998;
. a total of 2,508,848 shares of common stock in connection with the
acquisition of Alive.com;
. a total of 271,787 shares of Series A preferred stock at a price of
$0.843 per share in June 1998;
. a total of 3,259,194 shares of Series B preferred stock at a price of
$0.843 per share in June and August 1998;
. a total of 5,309,266 shares of Series C preferred stock at a price of
$1.90 per share in April and August 1999; and
. a total of 7,510,989 shares of Series D preferred stock at a price of
$6.37 per share in December 1999.
All shares of our preferred stock will convert into common stock on a one-for-
one basis upon the closing of this offering. The following table summarizes the
shares of capital stock purchased by executive officers, directors and five-
percent stockholders and their affiliates in these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Investor (1) Stock Stock Stock Stock Stock
- ---------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Martin G. Tobias (2)(3)..... 5,288,000 4,983,787 -- 278,949 117,739
Olympic Venture Partners
(2)........................ 362,987 -- 1,779,360 1,539,474 706,437
RRE Ventures (2)............ -- -- -- 2,105,263 470,957
EnCompass Group (2)......... -- -- 1,186,240 157,895 305,023
David C. Bullis............. -- -- -- 105,263 --
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
(3) Includes shares held by Martin Tobias's wife, Alex Tobias. In
consideration of Martin Tobias, our founder and chief executive officer,
and his wife's conversion of their membership interests in Encoding.com
LLC, we issued 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock. In addition, we repaid $225,000 in outstanding
principal and issued 271,787 shares of Series A preferred stock at a price
of $0.843 per share in exchange for a cancellation of the remaining
indebtedness from a note issued by us to Mr. Tobias in the aggregate
principal amount of $454,117.06.
Transactions with Officers and Directors
On December 14, 1999, we acquired Alive.com and issued 2,508,848 shares of
common stock and 91,181 options to purchase our common stock in exchange for
all outstanding capital stock and the assumption of all outstanding options of
Alive.com. In exchange for their shares of Alive.com, entities affiliated with
Olympic Venture Partners were issued 362,987 shares of our common stock. In
addition, three officers of Alive.com became officers of Loudeye. David Weld
was issued 84,896 shares of our common stock, Jeffrey Brown was issued 41,600
shares of our common stock
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and Mark Richardson was issued 41,600 shares of our common stock, in each case
in exchange for their shares of Alive.com common stock. Weld Brown LLC, of
which Mr. Weld and Mr. Brown are managers, was issued 412,559 shares of our
common stock.
Martin Tobias, our chief executive officer, is the landlord on our 3406 East
Union Street, Seattle, Washington lease and the owner of that property. We
lease 6,000 square feet under that lease that expires on September 1, 2003 with
an annual rental expense of approximately $120,000.
We have a severance arrangement with each of our officers. See "Employment
Offer Letters" for a description of the offer letters and a description of the
severance arrangement.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of December 31, 1999, assuming conversion of all
outstanding shares of preferred stock into common stock and as adjusted to
reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. our chief executive officer and other executive officers; and
. all directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o Loudeye Technologies, Inc., Times Square Building, 414 Olive Way, Suite
300, Seattle, WA 98101.
As of December 31, 1999, there were 29,759,493 shares of common stock
outstanding. The percent of beneficial ownership for each stockholder is based
on 29,759,493 shares of common stock outstanding prior to this offering, on an
as converted basis, and 34,259,493 shares of common stock outstanding after
this offering. Beneficial ownership is determined in accordance with the rules
of the SEC. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days after December 31, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership for any other person. Unless otherwise indicated
in the footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. In addition, the
percentage calculation after the offering assumes no exercise of the
underwriters' over-allotment option.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Outstanding
Shares -----------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Martin G. Tobias (1)................... 10,631,634 35.7% 31.0%
Olympic Venture Partners (2)........... 4,388,258 14.8% 12.8%
2420 Carillon Point
Kirkland, WA 98033
RRE Ventures (3)....................... 2,576,220 8.7% 7.5%
126 East 56th Street
New York, NY 10022
EnCompass Group U.S. Information 1,649,158 5.5% 4.8%
Technology Partners (4)...............
777 108th Avenue NE, Suite 2300
Bellevue, WA 98004
David C. Bullis (5).................... 555,263 1.9% 1.6%
David L.Weld, Jr. (6).................. 547,455 1.8% 1.6%
Larry Culver (7)....................... 400,000 1.3% 1.2%
Michael D. McHenry (8)................. 350,000 1.2% 1.0%
Douglas F. Schulze (9)................. 350,000 1.2% 1.0%
James L. Van Kerkhove (10)............. 250,000 * *
Charles P. Waite, Jr. (11)............. 4,388,258 14.8% 12.8%
Stuart J. Ellman (12).................. 2,576,220 8.7% 7.5%
Johan Liedgren (13).................... 60,000 * *
All directors and executive officers as 20,108,830 64.8% 56.6%
a group (10 persons)..................
</TABLE>
- --------
* Represents ownership less than one percent.
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(1) Includes 10,197,338 shares held by Martin Tobias and 434,297 shares held
by Alex Tobias.
(2) Includes 3,644,753 shares held by Olympic Venture Partners IV, LP,
423,862 shares held by Olympic Venture Partners V, LP, 272,547 shares
held by OVP IV Entrepreneurs' Fund, LP and 47,096 shares of OVP V
Entrepreneurs' Fund, LP. Charles P. Waite, Jr., a general partner of
Olympic Venture Partners, is one of our directors. Mr. Waite disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein. The general partner of each of
the foregoing entities is OVMC IV, L.L.C. The managing members of OVMC
IV, L.L.C. are George H. Clute, Gerard H. Langeler, William D. Miller and
Charles P. Waite, Jr.
(3) Includes 510,156 shares held by RRE Ventures Fund II, LP and 2,066,064
shares held by RRE Ventures II, LP. Stuart J. Ellman, a general partner
of RRE Ventures II, LP and RRE Ventures Fund II, LP and a member of RRE
Ventures GP II, LLC, is one of our directors. Mr. Ellman disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein. The general partner of each of
the foregoing entities is RRE Ventures GP II, L.L.C. The managing members
of RRE Ventures GP II, L.L.C. are James D. Robinson III, James D.
Robinson IV, Stuart J. Ellman and Andrew L. Zalasin.
(4) Includes 1,422,628 shares held by EnCompass Group U.S. Information
Technology Partners I, LP, 156,986 shares held by EnCompass U.S.
Information Technology Partners II, LP and 69,544 shares held by
Northwest Financing, LLC. The general partner of EnCompass Group U.S.
Information Technology Partners I, LP, is EGI Fund Management Company,
L.L.C. The general partner of EnCompass U.S. Information Technology
Partners II, LP is EGI Fund Management Company II, L.L.C. The managing
members of EGI Fund Management Company, L.L.C. and EGI Fund Management
Company II, L.L.C. are Wayne Wager, Scot Land, Yasuki Matsumoto and
Kiyoyuki Kubota. The general partner of Northwest Financing, L.L.C. is
EGI Fund Management Company, L.L.C. The managing members of EGI Fund
Management Company, L.L.C. are Wayne Wager, Scot Land and Yasuki
Matsumoto.
(5) Includes 450,000 shares subject to our right of repurchase.
(6) Includes 62,400 shares subject to our right of repurchase, 412,559 shares
held by Weld Brown LLC and 50,000 shares issuable upon exercise of
outstanding options within 60 days of December 31, 1999 but subject to
our right of repurchase. Mr. Weld disclaims beneficial ownership of
shares held by Weld Brown LLC except to the extent of his pecuniary
interest in those shares.
(7) Includes 200,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999, and 200,000 shares, all which are
subject to our right of repurchase.
(8) Includes 73,750 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 and 306,250 shares issuable upon
exercise of outstanding options, within 60 days of December 31, 1999 but
subject to our right of repurchase.
(9) Includes 345,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999, and 5,000 shares, all of which are
subject to our right of repurchase.
(10) Includes 250,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 but subject to our right of
repurchase.
(11) Charles P. Waite, Jr. is one of our directors and is a general partner of
Olympic Venture Partners, Mr. Waite disclaims beneficial ownership of
shares held by Olympic Venture Partners except to the extent of his
pecuniary interest in those shares.
(12) Stuart J. Ellman is one of our directors and is a general partner of RRE
Ventures II, LP and RRE Ventures Fund II, LP, and a member of RRE
Ventures GP II, LLC. Mr. Ellman disclaims beneficial ownership of shares
held by RRE Ventures except to the extent of his pecuniary interest in
those shares.
(13) Includes 22,500 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 and 37,500 shares issuable upon
exercise of outstanding options within 60 days of December 31, 1999 but
subject to our right of repurchase.
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DESCRIPTION OF CAPITAL STOCK
As of December 31, 1999, there were 29,759,493 shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into shares of common stock held by approximately 138 stockholders of
record. Upon completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
The following description of our capital stock is not complete and is
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Loudeye, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of Loudeye
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock.
Warrants
In June, 1999 in connection with an equipment line of credit, we issued a
warrant to Dominion Capital Management, L.L.C. to purchase 41,053 shares of
Series C preferred stock at an exercise price of $1.90 per share which will
expire on the earlier of June 22, 2008, or four years after the effective date
of this offering. In December 1999 in connection with a commercial agreement,
we issued a warrant to Valley Media to purchase 650,000 shares of common stock
at an exercise price of $10.00 per share which will expire on December 17,
2000.
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Registration Rights
The holders of 28,529,987 shares of common stock or their permitted
transferees are entitled to certain rights with respect to registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between Loudeye and the holders of registrable securities. Under
these registration rights, beginning on the earlier of June 3, 2005, or twelve
months after the effective date of the offering contemplated by this
prospectus, holders of at least a majority of the then-outstanding registrable
securities may require on two occasions that we register their shares for
public resale. We are obligated to register these shares only if the shares to
be registered would have an anticipated public offering price of at least
$10,000,000. In addition, holders of at least 25% of the then-outstanding
registrable securities may require that we register their shares for public
resale on form S-3 or similar short-form registration up to two times per year,
provided we are eligible to use form S-3 or similar short-form registration
statement and provided further that the value of the securities to be
registered is at least $500,000. Furthermore, in the event we elect to register
any of our shares of common stock for purposes of effecting any public
offering, the holders of registrable securities are entitled to include their
shares of common stock in the registration, subject however to our right to
reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate four years after the date of this public offering or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
Delaware and Washington Anti-Takeover Law and Certain Charter and Bylaw
Provisions
Provisions of Delaware and Washington law and our certificate of
incorporation and bylaws could make more difficult the acquisition of Loudeye
by a third party and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting or stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is
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a person who, together with affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock.
The laws of the state of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, or the WBCA, prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an acquiring
person) for a period of five years after such acquisition unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition.
Such prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take place
as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;
. the corporation's principal executive office is located in Washington;
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of
record by Washington residents, or (c) 1,000 or more of its stockholders
of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in
Washington or the corporation has more than $50.0 million of tangible
assets located in Washington.
A corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Loudeye.
Our Certificate of Incorporation provides for the division of our board of
directors into three
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classes, as nearly as equal in size as possible, with staggered three year
terms. The classification of the board of directors has the effect of requiring
more than one annual stockholder meeting to replace a majority of the
directors. Our bylaws provide that special meetings of stockholders can be
called only by the board of directors, the chairman of the board, if any, the
president and holders of 25% of the votes entitled to be cast at a meeting.
Moreover, the business permitted to be conducted at any special meeting of
stockholders is limited to the business brought before the meeting by the board
of directors, the chairman of the board, if any, the president or any 25%
holder. Our bylaws set forth an advance notice procedure with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors and with regard to business to be brought
before a meeting of stockholders. These and other provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of Loudeye.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is ChaseMellon Shareholders
Service, telephone number (206) 674-3030.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, as described below,
sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding 34,259,493 shares
of common stock. Of these shares, the 4,500,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment
option, will be freely tradable without restriction under the Securities Act,
unless purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act.
The remaining 29,759,493 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of FleetBoston Robertson
Stephens Inc., the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
the designated underwriters' representative. Taking into account the lock-up
agreements, and assuming FleetBoston Robertson Stephens Inc. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date, approximately 878,159
shares will be eligible for sale pursuant to Rule 701 and approximately
18,840,247 additional shares will be eligible for sale pursuant to Rule
144, of which all but 2,796,992 shares are held by affiliates.
. An additional 7,774,939 shares will be eligible for sale pursuant to
Rule 144 after December 14, 2000 and 2,244,898 shares will be eligible
for sale pursuant to Rule 144 after December 17, 2000. Shares eligible
to be sold by affiliates pursuant to Rule 144 are subject to volume
restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, which is 180 days after the date of this
prospectus, a person or persons whose shares are aggregated who has
beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of: (i) one percent of the number of shares of common stock
then outstanding, (which will equal approximately
77
<PAGE>
342,595 shares immediately after the offering; or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding 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. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
In general Rule 701, as currently in effect, permits resales of shares issued
pursuant to certain compensatory benefit plans and contracts commencing 90 days
after we become subject to the reporting requirements of the Exchange Act in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, of Rule 144. Any of our employees,
officers, directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1998 stock option plan, the Alive.com 1998 stock option plan, the 2000 stock
option plan, the 2000 director option plan, the 2000 employee stock purchase
plan or any other benefit plan after the effectiveness of such registration
statement will also be freely tradable in the public market, except that shares
held by affiliates will still be subject to the volume limitation, manner of
sale, notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of December 31, 1999, there were outstanding
options for the purchase of 4,223,209 shares of our common stock under our
employee benefit plans.
78
<PAGE>
UNDERWRITERS
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities, Inc. and CIBC World
Markets Corp. have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ...............................
Chase Securities, Inc..............................................
CIBC World Markets Corp. ..........................................
E*OFFERING CORP....................................................
---------
Total..........................................................
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the initial public offering price located on the
cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallocated to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No reduction in this price will change the amount of proceeds
to be received by us as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional shares of common stock at the same price per
share as we will receive for the 4,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,500,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those
on which the 4,500,000 shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the 4,500,000 shares of common stock offered by this prospectus.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period until 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock, any options or warrants to
purchase any
79
<PAGE>
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements. There are no
agreements between the representatives and any of our stockholders providing
consent by the representatives to the sale of shares prior to the expiration of
the 180-day lock-up period.
Future Sales By Us. In addition, we have generally agreed that, during the
180-day lock-up period, we will not, without the prior written consent of
FleetBoston Robertson Stephens Inc., (a) consent to the disposition of any
shares held by stockholders prior to the expiration of the 180-day lock-up
period or (b) issue, sell, contract to sell or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or exchangeable for
shares of common stock, other than our sale of shares in the offering, our
issuance of common stock upon the exercise of currently outstanding options and
warrants, our issuance of incentive awards under our stock incentive plans and
certain other conditions. See "Shares Eligible for Future Sale."
Directed Shares. We have requested that the underwriters reserve up to ten
percent of the shares of common stock for sale in this offering, at the initial
public offering price, to directors, officers, employees and other individuals
designated by us. As a result, the number of shares of common stock available
for sale to the general public in the offering will be reduced to the extent
these individuals and entities purchase the directed shares. Any directed
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares.
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price
for the common stock offered by this prospectus has been determined through
negotiations between us and the representatives. Among the factors considered
in these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by the underwriter or syndicate member. The
representatives have advised us that these transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
80
<PAGE>
Share Purchases. On December 17, 1999, an entity affiliated with FleetBoston
Robertson Stephens Inc., one of the representatives, purchased 78,493 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $500,000. On December 14, 1999, entities affiliated with
Hambrecht & Quist LLC, one of the representatives, purchased 235,479 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $1,500,001.
Expenses of the Offering. The expenses of the offering are estimated at
$1,081,180 and are payable entirely by us.
E*OFFERING Corp. A copy of the prospectus in electronic format will be made
available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE
Securities, Inc. E*TRADE Securities, Inc. will accept conditional offers to
purchase shares from all of its customers that pass and complete an online
eligibility profile. In the event that the demand for shares from the customers
of E*TRADE Securities, Inc. exceeds the amount of shares allocated to it,
E*TRADE Securities, Inc. will use a random allocation methodology to distribute
shares in even lots of 100 shares per customer.
81
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Venture Law Group, Professional Corporation, Kirkland, Washington. Certain
legal matters will be passed upon for the underwriters by Brobeck, Phleger &
Harrison LLP. Investment partnerships associated with Venture Law Group and
individual attorneys of Venture Law Group beneficially own an aggregate of
48,399 shares of our common stock.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Effective November 3, 1999, Arthur Andersen LLP was engaged as our
independent auditors and replaced other auditors who were dismissed as our
independent accountants on the same date. The decision to change auditors was
approved by our board of directors on November 27, 1999.
Prior to November 3, 1999, our former auditors issued a report on the period
from inception (August 12, 1997) to December 31, 1998. The report of our former
auditors did not contain an adverse opinion or disclaimer of opinion qualified
or modified as to audit scope or accounting principle. In connection with the
audit for the period from inception (August 12, 1997) through December 31, 1998
and through November 3, 1999, there were no disagreements with our former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of our former auditors, would have caused them to
make reference thereto in their report. Our former auditors have not audited or
reported on any of the financial statements or information included in this
prospectus.
Prior to November 3, 1999, we had not consulted with Arthur Andersen LLP on
items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements. We have requested that our former
auditors furnish us with a letter addressed to the SEC stating whether or not
they agree with the above statements. A copy of this letter is filed as an
exhibit to the registration statement of which this prospectus forms a part.
82
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to Loudeye and our common stock, we refer you to the registration
statement and to the exhibits and schedules filed therewith. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement may be
inspected by anyone without charge at the public reference section of the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or any portion of the registration statement may be obtained from
the public reference section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed fees. Information on the operation of
the public reference room can be obtained by calling 1-800-SEC-0330. The SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
83
<PAGE>
Glossary of Technical Terms
"Apple Quicktime" is a proprietary audio and video technology developed by
Apple Computer.
"AT&T a2b" is a proprietary audio compression/decompression technology
developed by AT&T.
"AVI" or "Audio Video Interleaved" animation file is a Windows multimedia video
format developed by Microsoft.
"Betacam SP" is an input format.
"Bit rate" is the data transfer rate at which a digital file is encoded to
transfer, indicating the amount of network bandwidth required to play the file
and is usually measured in Kbps.
"Broadband" refers to high speed transfer rates across the Internet and
typically refers to network transfer speeds in excess of 100 Kbps.
"Digital media" is any audio or video content that is in an electronic format.
"Digital video players" are any software applications that "play" video files.
For example, Windows Media Player is a digital video player.
"Digital Watermarking" is the process of embedding an unremovable and
unalterable pattern of bits into a digital media electronic file in order to
identify the source of illegal copies. For example, if a digital watermark is
placed into a master copy of an audio CD or a DVD movie, then all copies of
that disc are uniquely identified. The digital watermark enables the owner of a
copyright to trace unauthorized copies of its work to the holder of the master
copy from which the unauthorized copies were made.
"DSL" or "Digital Subscriber Line" is a technology that significantly increases
the digital capacity of ordinary telephone lines into a home or office.
"Gigabyte" refers to 1,000,000 kilobytes.
"Hosting facility" refers to a physical location that houses the hardware and
software needed to store the software and data files necessary to enable
applications, content and services available over the Internet.
"Indexing" is a process by which timing signals are created and embedded in a
video clip to identify visual scene changes, spoken words, names and faces of
recognized speakers, or other specified information, enabling the viewer to
search, fast-forward or rewind the clip and view the segment(s) of their
choice.
"Input formats" refers to the various types of electronic or analog (videotape,
film) media source materials received and processed through digital media
services, such as AVI, DVCAM (an international standard for recording high-
quality digital video), NTSC (an international standard for recording analog
video), and PAL (an international standard for recording analog video).
"ISDN" or "Integrated Services Digital Network" is an international
telecommunications standard for transmitting voice, video and data over digital
lines running at 64 Kbps.
"JPEG" or "Joint Photographic Experts Group" is a standard for compressing
digital still image files.
"Kbps" or "Kilobits-per-second" is the number of bits (in thousands) of data
that can be transferred across a network or telephone line in one second.
84
<PAGE>
"Liquid Audio" is a proprietary audio compression/decompression technology
developed by Liquid Audio.
"Metadata collection" and "metadata files" is the process of gathering
information associated with a single audio or video electronic file and the
digital files that store the information. Sample data could include song title,
copyright and artist.
"Microsoft Windows Media" is a proprietary audio and video technology developed
by Microsoft.
"MP3" or "Motion Picture Entertainment Group, Layer 3" is an audio
compression/decompression technology developed by the Fraunhofer Institute.
"MPEG" or "Motion Picture Entertainment Group" is a standard for compressing
digital video files. There are various levels of MPEG technology, indicated by
MPEG-1 (used in CD-ROMs and Video CDs), MPEG-2 (used in DVDs), and MPEG-4.
"Output formats" refers to the various types of digital files and streaming
media formats produced through digital media services, such as Apple Quicktime,
RealNetworks Realmedia, and Microsoft Windows Media.
"Scalable" and "scalability" refers to the ability to increase the output of a
system or process.
"Streaming media formats" refers to the structure of digital media files that
enables audio and video content to be played in real time over the Internet.
Microsoft Windows Media, Apple Quicktime and RealNetworks G2 are examples of
streaming media formats.
"Streaming media technologies/software" are applications and technologies
created to produce, enhance or enable audio and video content to be played in
real-time (vs. downloaded for viewing later) over the Internet.
"SVHS" is an input format.
"T1" refers to a data/voice communication line that provides a connection speed
of approximately 1.4 Mbps.
"Terabyte" refers to 1,000,000,000 kilobytes.
85
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets--Loudeye Technologies, Inc. .............................. F-3
Statements of Operations--Loudeye Technologies, Inc. .................... F-4
Statements of Stockholders' Equity (Deficit)--Loudeye Technologies,
Inc. ................................................................... F-5
Statements of Cash Flows--Loudeye Technologies, Inc. .................... F-6
Notes to Financial Statements--Loudeye Technologies, Inc. ............... F-7
Unaudited Pro Forma Combined Financial Information....................... F-21
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1999....................................................... F-22
Notes to Unaudited Pro Forma Combined Statements of Operations........... F-23
Report of Independent Public Accountants................................. F-25
Balance Sheets--Alive.com, Inc. ......................................... F-26
Statements of Operations--Alive.com, Inc. ............................... F-27
Statements of Changes in Shareholders' Deficit--Alive.com, Inc. ......... F-28
Statements of Cash Flows--Alive.com, Inc. ............................... F-29
Notes to Financial Statements--Alive.com, Inc. .......................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Loudeye Technologies, Inc.:
We have audited the accompanying balance sheets of Loudeye Technologies, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(August 12, 1997) to December 31, 1997 and for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of Loudeye'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 Loudeye Technologies, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from inception to December 31, 1997 and for each of the
two years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
January 28, 2000
F-2
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
As of December 31, (Note 2) as of
------------------------- December 31,
1998 1999 1999
----------- ------------ --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,442,307 $ 49,272,656
Accounts receivable, net allowance
of $20,000 and $187,000,
respectively...................... 86,687 955,357
Short-term investments............. -- 530,000
Prepaid and other assets........... 27,190 596,940
----------- ------------
Total current assets............. 1,556,184 51,354,953
Property and equipment, net.......... 1,383,174 5,282,267
Other assets......................... -- 270,089
Goodwill, net........................ -- 11,114,438
Other intangibles, net............... -- 4,536,326
----------- ------------
Total assets..................... $ 2,939,358 $ 72,558,073
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................... 274,990 4,778,380
Accrued compensation and benefits.. 17,784 388,373
Accrued liabilities................ 112,720 587,136
Customer deposits.................. 292,298 437,743
Current portion of long-term
obligations....................... 99,670 1,131,587
----------- ------------
Total current liabilities........ 797,462 7,323,219
Long-term obligations, less current
portion............................. 900,330 1,962,602
----------- ------------
Total liabilities................ 1,697,792 9,285,821
----------- ------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value,
41,000,000 shares authorized,
8,242,981, 21,063,236 issued and
outstanding, preference in
liquidation of $60,903,932........ 2,981,329 58,535,704 $ --
Common stock, $0.001 par value,
100,000,000 shares authorized;
5,288,000 and 8,696,257 issued and
outstanding, and 29,759,493 pro
forma, respectively, and
additional paid in capital........ (133,169) 22,790,272 81,325,976
Stock warrants..................... -- 1,158,574 1,158,574
Deferred stock compensation........ -- (5,700,957) (5,700,957)
Beneficial conversion feature...... -- 14,120,659 14,120,659
Accumulated deficit................ (1,606,594) (27,632,000) (27,632,000)
----------- ------------ ------------
Total stockholders' equity
(deficit)....................... 1,241,566 63,272,252 $ 63,272,252
----------- ------------ ============
Total liabilities and
stockholders' equity
(deficit)..................... $ 2,939,358 $ 72,558,073
=========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(August 12, Year Ended
1997) to December 31,
December 31, -------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Revenues............................... $ 10,141 $ 285,635 $ 2,645,279
Cost of revenues....................... 16,645 504,187 2,870,850
-------- ----------- ------------
Gross margin......................... (6,504) (218,552) (225,571)
-------- ----------- ------------
Operating expenses:
Research and development............. 12,270 203,506 1,248,081
Sales and marketing.................. 38,841 587,998 5,106,475
General and administrative........... 37,164 673,965 3,612,054
Amortization of intangibles.......... -- -- 258,422
Stock-based compensation............. -- -- 1,475,710
-------- ----------- ------------
Total operating expenses............. 88,275 1,465,469 11,700,742
-------- ----------- ------------
Other income (expense):
Interest income...................... -- 54,365 204,741
Interest expense..................... -- (20,616) (183,175)
-------- ----------- ------------
Net loss............................... (94,779) (1,650,272) (11,904,747)
Beneficial conversion feature of
convertible preferred stock........... -- -- (14,120,659)
-------- ----------- ------------
Net loss to common shareholders........ $(94,779) $(1,650,272) $(26,025,406)
======== =========== ============
Basic and diluted net loss per share... -- $ (0.41) $ (4.81)
======== =========== ============
Weighted average shares outstanding
used to compute basic and diluted net
loss per share........................ -- 4,039,444 5,410,507
======== =========== ============
Basic and diluted pro forma net loss
per share............................. $ (0.17) $ (1.56)
=========== ============
Weighted average shares outstanding
used to compute basic and diluted pro
forma net loss per share.............. 9,585,049 16,659,800
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock and
Convertible Additional Paid-in
Preferred Stock Capital Stock Warrants Beneficial Deferred
---------------------- --------------------- Members' ------------------ Conversion Stock
Shares Amount Shares Amount Equity Shares Amount Feature Compensation
---------- ----------- --------- ----------- -------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, August
12, 1997........ -- $ -- -- $ -- $10,000 -- $ -- $ -- $ --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1997............ -- -- -- -- 10,000 -- -- -- --
Issuance of
common stock, in
conjunction with
conversion from
LLC to C
corporation..... -- -- 5,288,000 5,288 (5,288) -- -- -- --
Issuance of
Series A
convertible
preferred stock
in conjunction
with conversion
from LLC to C
corporation..... 4,712,000 4,712 -- -- (4,712) -- -- -- --
Conversion from
LLC to C
corporation..... -- -- -- (138,457) -- -- -- -- --
Conversion of
advances to
Series A
convertible
preferred
stock........... 271,787 229,116 -- -- -- -- -- -- --
Conversion of
notes payable
into Series B
convertible
preferred
stock........... 593,120 500,000 -- -- -- -- -- -- --
Issuance of
Series B
convertible
preferred
stock........... 2,666,074 2,247,501 -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1998............ 8,242,981 2,981,329 5,288,000 (133,169) -- -- -- -- --
Issuance of
Series C
convertible
preferred
stock........... 4,914,529 9,327,603 -- -- -- -- -- -- --
Conversion of
notes payable
into Series C
convertible
preferred
stock........... 394,737 750,000 -- -- -- -- -- -- --
Deferred stock
compensation.... -- -- -- 6,604,431 -- -- -- -- (6,604,431)
Stock-based
compensation-
consultants..... -- -- -- 572,236 -- -- -- -- --
Issuance of
common stock for
the purchase of
certain assets.. -- -- 20,000 30,000 -- -- -- -- --
Acquisition of
Alive.com....... -- -- 2,508,848 15,527,504 -- -- -- -- --
Issuance of
Series D
convertible
preferred
stock........... 7,510,989 45,476,772 -- -- -- -- -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- 903,474
Common stock
options
exercised....... -- -- 879,409 189,270 -- -- -- -- --
Warrants issued
in conjunction
with the
issuance of
certain credit
facilities...... -- -- -- -- -- 41,053 34,074 -- --
Warrants issued
in conjunction
with strategic
sales
agreements...... -- -- -- -- -- 650,000 1,124,500 -- --
Beneficial
Conversion
feature of
convertible
preferred
stock........... -- -- -- -- -- -- -- 14,120,659 --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1999............ 21,063,236 $58,535,704 8,696,257 $22,790,272 $ -- 691,053 $1,158,574 $14,120,659 $(5,700,957)
========== =========== ========= =========== ======= ======= ========== =========== ===========
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
------------- --------------
<S> <C> <C>
Balances, August
12, 1997........ $ -- $ 10,000
Net loss........ (94,779) (94,779)
------------- --------------
Balances,
December 31,
1997............ (94,779) (84,779)
Issuance of
common stock, in
conjunction with
conversion from
LLC to C
corporation..... -- --
Issuance of
Series A
convertible
preferred stock
in conjunction
with conversion
from LLC to C
corporation..... -- --
Conversion from
LLC to C
corporation..... 138,457 --
Conversion of
advances to
Series A
convertible
preferred
stock........... -- 229,116
Conversion of
notes payable
into Series B
convertible
preferred
stock........... -- 500,000
Issuance of
Series B
convertible
preferred
stock........... -- 2,247,501
Net loss........ (1,650,272) (1,650,272)
------------- --------------
Balances,
December 31,
1998............ (1,606,594) 1,241,566
Issuance of
Series C
convertible
preferred
stock........... -- 9,327,603
Conversion of
notes payable
into Series C
convertible
preferred
stock........... -- 750,000
Deferred stock
compensation.... -- --
Stock-based
compensation-
consultants..... -- 572,236
Issuance of
common stock for
the purchase of
certain assets.. -- 30,000
Acquisition of
Alive.com....... -- 15,527,504
Issuance of
Series D
convertible
preferred
stock........... -- 45,476,772
Amortization of
deferred stock
compensation.... -- 903,474
Common stock
options
exercised....... -- 189,270
Warrants issued
in conjunction
with the
issuance of
certain credit
facilities...... -- 34,074
Warrants issued
in conjunction
with strategic
sales
agreements...... -- 1,124,500
Beneficial
Conversion
feature of
convertible
preferred
stock........... (14,120,659) --
Net loss........ (11,904,747) (11,904,747)
------------- --------------
Balances,
December 31,
1999............ $(27,632,000) $ 63,272,252
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(August 12, Year Ended
1997) to December 31,
December 31, -------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (94,779) $(1,650,272) $(11,904,747)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization......... 12,965 215,726 1,182,230
Stock-based compensation.............. -- -- 1,475,710
Stock warrant expense................. -- -- 1,124,500
Changes in assets and liabilities:
Accounts receivable.................. -- (86,687) (856,070)
Prepaids and other assets............ (1,532) (25,658) (563,747)
Other assets......................... -- -- (189,283)
Bank overdraft....................... 7,590 (7,590) --
Accounts payable..................... 1,150 273,840 4,203,820
Accrued compensation and benefits.... -- 17,784 279,984
Accrued liabilities.................. -- 112,720 220,226
Customer deposits.................... -- 292,298 145,445
--------- ----------- ------------
Net cash used in operating
activities......................... (74,606) (857,839) (4,881,932)
--------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment... (133,773) (1,478,092) (4,423,053)
Purchases of short-term investments... -- -- (530,000)
--------- ----------- ------------
Net cash used in investing
activities......................... (133,773) (1,478,092) (4,953,053)
--------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common
stock................................ -- -- 189,270
Advances from stockholder............. 198,579 255,537 --
Repayment of stockholder advances..... -- (225,000) --
Borrowings on long-term obligations... -- 1,500,000 3,104,824
Principal payments on long-term
obligations.......................... -- -- (433,135)
Equity contributed at inception....... 10,000 -- --
Proceeds from issuance of convertible
preferred stock, net of offering
costs................................ -- 2,247,501 54,804,375
--------- ----------- ------------
Net cash provided by financing
activities......................... 208,579 3,778,038 57,665,334
--------- ----------- ------------
Increase in cash and cash equivalents.. 200 1,442,107 47,830,349
Cash and cash equivalents, beginning of
period................................ -- 200 1,442,307
--------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 200 $ 1,442,307 $ 49,272,656
========= =========== ============
Supplemental disclosure of cash flow
information:
Cash paid for interest................ $ -- $ 20,616 $ 182,134
========= =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
. $4,712 of members' equity was converted into 4,712,000 shares of Series A
convertible preferred stock on March 26, 1998
.$5,288 of members' equity was converted into 5,288,000 shares of common
stock on March 26, 1998
. $229,116 of advances from a stockholder was converted into 271,787 shares
of Series A convertible preferred stock on June 5, 1998
.$500,000 of debt was converted into 593,120 shares of Series B convertible
preferred stock on June 5, 1998
.$750,000 of debt was converted into 394,737 shares of Series C convertible
preferred stock on April 30, 1999
.20,000 shares of common stock were issued for the purchase of $30,000 of
certain assets in August 1999
.2,508,848 shares of common stock were issued for the purchase of Alive.com
on December 14, 1999
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:
The Company
Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications that transform audio and video content
from traditional sources into Internet compatible formats. The Company is
headquartered in Seattle, Washington and to date has conducted business in the
United States in one business segment. The Company was organized on August 12,
1997 (date of inception) as a Washington limited liability company (LLC). On
March 26, 1998, the Company was converted to a Delaware C Corporation.
The Company is subject to a number of risks similar to other companies in a
comparable stage of development including reliance on key personnel, successful
marketing of its services in an emerging market, competition from other
companies with greater technical, financial management and marketing resources,
successful development of new services and the enhancement of existing
services, and the ability to secure adequate financing to support future
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Initial Public Offering and Unaudited Pro Forma Amounts
In December 1999, the Board of Directors of the Company authorized the filing
of a registration statement with the Securities and Exchange Commission (the
SEC) that would permit the Company to sell shares of the Company's common stock
in connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the outstanding shares
of the Company's convertible preferred stock will automatically convert into
21,063,236 shares of common stock upon the closing of the proposed IPO. The
unaudited pro forma stockholders' equity at December 31, 1999 is adjusted for
the conversion of preferred stock.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Short-term Investments
In December, the Company established irrevocable standby letters of credit
totalling $530,000 in conjunction with the lease of the Company's primary
office facility and a remote production facility. The letters of credit are
secured by certificates of deposit in the same amount which are required to
remain until the expiration of the letters of credit. The letters of credit
expire October 31, 2000 and December 31, 2000, however, they will be
automatically renewed during the term of the leases. The letters of credit
contain an automatic reduction schedule reducing the amount of the letter of
credit each year by $70,000 until they each reach $100,000, and remains through
the end of the term.
F-7
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
trade accounts receivable, accounts payable and long-term obligations. Fair
values of cash and cash equivalents and short-term investments, which is a
certificate of deposit securing the letter of credit, approximate cost due to
the short period of time to maturity. The fair values of financial instruments
that are short-term and/or that have little or no market risk are considered to
have a fair value equal to book value. Assets and liabilities that are included
in this category are receivables, accounts payable and accrued liabilities.
The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.
During 1998, two customers made up 14% and 12%, respectively, of the
Company's revenue. During 1999, two customers made up 13% and 11% of the
Company's revenues, respectively.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Improvements....................................................... 5 years
Computer and production equipment.................................. 3 years
Office equipment................................................... 5 years
Software........................................................... 3 years
</TABLE>
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future undiscounted net cash flows is less than
the carrying amount of the asset. The Company has identified no such impairment
losses.
Revenue Recognition
Substantially all of our revenues to date have been generated by sales of
digital media services through time and material contracts. Digital media
services revenues consist of encoding service to convert audio and video
content into internet media formats. Under these time and material contracts,
the Company recognizes revenues as services are rendered and the Company has no
continuing involvement in the goods and services delivered.
The Company has not recognized significant revenues to date from consulting
and hosting services or licensing digital media applications. The Company
recognizes consulting services revenues from fixed-price contracts on the
percentage-of-completion method, measured by the cost incurred to date to the
estimated total cost for the contracts. Consulting services revenues from time
and material contracts are recognized as services are rendered. Hosting
revenues are generally
F-8
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
recognized as services are rendered on a monthly basis, however, to date, such
revenues have been insignificant. The Company has not recognized any revenues
from licensing digital media applications, however, the Company will apply the
provisions of SOP 97-2 with respect to such transactions.
Warranty Obligations
The Company generally provides warranties for 30 days after date of delivery.
Estimated warranty obligations are provided at the time of delivery of the
encoded product to the customer. Warranty liabilities are included in accrued
liabilities in the accompanying balance sheets.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $164,000 and
$636,000 in advertising costs for the years ended December 31, 1998 and 1999,
respectively. Advertising costs prior to December 31, 1997 were not
significant.
Income Taxes
Before March 26, 1998, the Company was taxed as an LLC, which provided that,
in lieu of corporate income taxes, the members of the LLC were taxed on their
proportionate shares of the Company's taxable income. After March 26, 1998,
when the Company converted to a C corporation, income taxes were accounted for
under the liability method.
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 8).
F-9
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan. The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS 123 and the Emerging Issues
Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services" (EITF 96-18).
Use of Estimates in the Preparation of Financial Statements
The preparation of the 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net Loss Per Share
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," basic earnings per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing net loss
by the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of shares of
common stock issuable upon the conversion of the convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method); common equivalent
shares are excluded from the calculation if their effects is antidilutive. The
Company has not had any issuances or grants for nominal consideration as
defined under Staff Accounting Bulletin 98. Diluted net loss per share for all
periods shown does not include the effects of the convertible preferred stock
and shares issuable upon the exercise of stock options and warrants as the
effect of their inclusion is antidilutive during each period.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock outstanding that will
automatically convert upon completion of the Company's initial public offering
(using the if-converted method from the original issue date). Pro forma diluted
net loss per share excludes the impact of stock options and warrants as the
effect of their inclusion would be antidilutive.
At December 31, 1999 there were 734,936 stock options which had been
exercised under the 1998 Stock Option Plan but which were subject to repurchase
at a weighted average exercise price of $0.24. Additionally, as part of the
terms of the acquisition of Alive.com on December 14, 1999, the following
shares were subject to repurchase:
. 229,754 outstanding shares issued under exercise of stock options were
subject to repurchase at a weighted average price of $0.48.
F-10
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
. 272,825 outstanding vested shares issued as consideration under the terms
of a stock purchase agreement with Allaire Corporation repurchaseable at
fair market value within 90 days of the termination date of the licensing
and stock purchase agreement assumed by Loudeye as part of the terms of
the acquisition of Alive.com.
. 173,619 outstanding unvested shares issued as consideration under the
terms of a stock purchase agreement with Allaire Corporation
repurchaseable at a weighted average exercise price of $0.20 within 90
days of the termination date of the licensing and stock purchase
agreement assumed by Loudeye as part of the terms of the acquisition of
Alive.com.
The impact of the above unvested shares subject to repurchase has been
removed from the calculation of weighted average shares outstanding for
purposes of calculating basic and diluted earnings per share. The following
table presents a reconciliation of shares used to calculate basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Actual Pro Forma
--------- ----------
<S> <C> <C>
Weighted average shares outstanding................. 5,703,655 16,952,948
Impact of 1998 Stock Option Plan shares subject to
repurchase......................................... (274,099) (274,099)
Impact of Allaire unvested shares subject to
repurchase......................................... (8,199) (8,199)
Impact of Alive Option Plan shares subject to
repurchase......................................... (10,850) (10,850)
--------- ----------
Weighted average shares used to calculate basic and
diluted earnings per share......................... 5,410,507 16,659,800
========= ==========
</TABLE>
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, digital media services.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
F-11
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP-97-2 to require that an
entity recognize revenues for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or
VSOE, of the fair values of all the undelivered elements that are not accounted
for by means of long-term contract accounting, and (2) VSOE of fair value does
not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We do
not expect SOP 98-9 to have any effect, on our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes its revenue recognition practices
are in conformity with SAB No. 101.
3. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Office equipment.................................... $ 85,369 $ 440,489
Software............................................ 53,215 472,515
Improvements........................................ 294,102 853,785
Computer and production equipment................... 1,179,179 4,588,015
Construction in progress............................ -- 79,962
Accumulated depreciation............................ (228,691) (1,152,499)
---------- -----------
Property and equipment, net......................... $1,383,174 $ 5,282,267
========== ===========
</TABLE>
Depreciation expense was $13,000, $216,000 and $924,000 in 1997, 1998 and
1999, respectively.
4. LONG-TERM OBLIGATIONS:
In August 1998, the Company established an equipment line of credit for up to
$1.0 million secured by the Company's property and equipment. Advances under
the equipment line are payable over 36 equal monthly installments commencing on
August 30, 1999. The equipment line bears interest at the bank's prime rate
(7.75% at December 31, 1998 and 8.50% at December 31, 1999) and had an
outstanding balance of $1,000,000 and $861,111 as of December 31, 1998 and
December 31, 1999, respectively.
In June 1999, the Company established a debt facility totaling up to $2.6
million that allows the Company to borrow funds through June 2000. Loans made
under this facility will be secured by assets financed under the agreement.
Advances under the debt agreement bear interest at 8%, adjusted for prevailing
interest rates. Rates in effect for advances outstanding range from 8.57% to
9.40% and are payable over 36 equal monthly installments plus a final payment
equal to 15% of the principal amount. As of December 31, 1999, $2,027,087 was
outstanding under this debt facility.
F-12
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As a part of this debt facility, the lender received a warrant to purchase
41,053 shares of Series C preferred stock at a purchase price of $1.90 per
share. This warrant expires upon the earlier of June 22, 2008 or four years
after an initial public offering. The outstanding warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon the exercise of the warrant in the case of stock dividends, stock
splits, reorganizations, reclassifications, consolidations and dilutive
issuances of securities at prices below the then existing warrant exercise
price. The determination of fair value of the warrant was made using the Black-
Scholes option pricing model and assuming a term of two years, a risk-free
interest rate of 5.5% and expected volatility of 75%.
Pursuant to the acquisition of Alive.com on December 14, 1999, the Company
assumed a $250,000 bank line of credit, under which $172,500 was outstanding at
December 31, 1999. Borrowings bear interest at the bank's prime rate plus 1.0%
(9.50% at December 31, 1999) and are collateralized by property and equipment.
Future payments of long-term debt are as follows: as of December 31, 1999
<TABLE>
<S> <C>
2000............................................................ 1,131,587
2001............................................................ 1,186,666
2002............................................................ 775,936
----------
$3,094,189
==========
</TABLE>
5. STOCKHOLDERS' EQUITY:
Convertible Preferred Stock
The Company is authorized to issue 41,000,000 shares of preferred stock. Shares
of preferred stock may be issued from time to time in one or more series, with
designations, rights, preferences and limitations established by the Company's
Board of Directors.
As of December 31, 1999, the Company had designated four series of convertible
preferred stock (Series A through D). Amounts are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Series A preferred stock: Issued 4,983,787 shares
in 1998, aggregate liquidation preference
$233,828, with participation to $500,000 in the
event of the liquidation or sale of the
Company......................................... $ 233,828 $ 233,828
Series B preferred stock: Issued 3,259,194 shares
in 1998, aggregate liquidation preference
$2,747,501 with participation to $5,495,001 in
the event of the liquidation or sale of the
Company......................................... 2,747,501 2,747,501
Series C preferred stock: Issued 5,309,266 shares
in 1999, aggregate liquidation preference
$10,077,603, with participation to $20,175,211
in the event of the liquidation or sale of the
Company......................................... -- 10,077,603
Series D preferred stock: Issued 7,510,989 shares
in 1999, aggregate liquidation preference
$47,845,000, with participation to $95,690,000
in the event of the liquidation or sale of the
Company......................................... -- 45,476,772
---------- -----------
$2,981,329 $58,535,704
========== ===========
</TABLE>
F-13
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The rights and privileges of the preferred stock are as follows:
Dividends--Holders of Series A, B, C and D are entitled to receive
dividends of $0.07, $0.07, $0.15 and $0.52, respectively, per share per
annum, when and if declared by the Board of Directors. Such dividends are
not cumulative. As of December 31, 1999, none have been declared.
Conversion--Each share of Series A, B, C and D is convertible, at the
option of the holders, into common stock. Each share of Series A, B, C and
D automatically converts into common stock upon the closing of a public
offering that meets certain conditions.
Liquidation Preferences--The Series A, B, C and D shares have liquidation
preferences of $0.843, $0.843, $1.90 and $6.37 per share, respectively,
(with participation up to $500,000, $5,495,001, $20,175,211 and
$95,690,000, respectively) in the event of the liquidation of the Company.
If the value of the Company on liquidation is insufficient to pay the
entire preferential amount, distribution shall be made pro rata to all
preferred shareholders in proportion to the preferential amount the
preferred shareholder is otherwise entitled to receive.
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
Voting Rights--The holders of each share of Series A, B, C and D shall be
entitled to the number of votes equal to the number of shares of common
stock into which such shares could be converted, and have voting rights
equal to holders of common stock.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A, B, C and D
shares, as well as separate class votes of the individual series in certain
circumstances. In conjunction with the sale of Series A and Series B redeemable
preferred stock, the Company, its founders, and the redeemable preferred stock
investors also entered into an investor rights agreement, voting agreement,
cosale agreement and a stock restriction agreement. In subsequent sales of
preferred stock the investor rights agreement, voting agreement and cosale have
been amended and restated.
Beneficial Conversion Feature
In December 1999, the Company issued 7,510,989 shares of Series D convertible
preferred stock at a purchase price of $6.37 per share. Such shares are
convertible into shares of common stock on a one-for-one basis. The deemed fair
value of the common stock was based on the lowpoint of the anticipated filing
range for the initial public offering. Consequently, the transaction resulted
in a beneficial conversion feature of $14,120,659. The beneficial conversion
feature has been reflected as a preferred dividend in the accompanying
financial statements as of December 31, 1999.
F-14
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Reserved for Future Issuance
The following shares of common and preferred stock have been reserved for
future issuance as of December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Employee stock option plans..................................... 6,371,772
2000 Director stock option plan................................. 250,000
2000 Employee stock purchase plan............................... 200,000
Convertible preferred stock..................................... 41,000,000
Common stock warrants........................................... 650,000
Preferred stock warrants........................................ 41,053
----------
48,512,825
==========
</TABLE>
6. STOCK OPTION PLANS:
1998 Stock Option Plan
Under the Company's 1998 Stock Option Plan, the Board of Directors and any of
its committees may grant to employees, consultants and directors options to
purchase the Company's common stock at terms and prices determined by the Board
of Directors. Incentive stock options may be granted to employees at a price
set by the plan administrator. Options may generally be exercised after six
months of employment, and within 10 years of the date of grant, whether or not
fully vested, or within three months of termination of employment, and
typically vest over 4.5 years. Unvested shares issued are subject to repurchase
upon termination of service. The Plan provides for the issuance of options to
purchase up to 4,660,000 shares of the Company's stock. The Company accounts
for the Plan under APB 25.
2000 Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Stock Option Plan. This plan provides for the grant of incentive stock options
to employees, including employee directors, and of nonstatutory stock options
to employees, directors and consultants. The 2000 plan provides for the
issuance of options to purchase up to 2,500,000 shares of the Company's common
stock, plus an automatic annual increase on the first day of each of the fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 5% of
our outstanding common stock on the last day of the immediately preceding
fiscal year or a lesser number of shares as our Board determines. Options
granted prior to the initial public offering may be exercised whether or not
fully vested. Unvested shares issued are subject to repurchase upon termination
of service.
2000 Directors Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Directors' Stock Option Plan. 250,000 shares of common stock has been reserved
for issuance under the 2000 directors' plan, all of which remain available for
future grants. This plan provides for the grant of nonstatutory stock options
to the Company's nonemployee directors.
F-15
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
In December 1999, the board of directors approved the creation of the 2000
Employee Stock Purchase Plan (ESPP). A total of 200,000 shares of common stock
has been reserved for issuance under the ESPP, none of which have been issued
as of December 17, 1999. The number of shares reserved for issuance under the
ESPP will be subject to an automatic annual increase on the first day of each
of the fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of 0.75% of the Company's outstanding common stock on the last day of
the immediately preceding fiscal year or a lesser number of shares as the board
of directors determines.
Alive Stock Option Plan
As part of the terms of the acquisition of Alive.com, Alive's stock option
plan (Alive Plan) was assumed by the Company. There were no alterations to any
of the provisions of the Alive Plan. This plan provides for the issuance of
737,038 incentive and nonqualified common stock options for employees,
directors, consultants, or advisors of the Company and options to purchase
89,981 shares are currently outstanding. Options issued under this plan
typically vest over a four-year period, expire five years from the date of
grant, and generally expire ninety days after termination of employment or
services. Stock options are immediately exercisable as of the vesting
commencement date, however, unvested shares issued are subject to repurchase
upon termination of service at the individual's exercise price. No further
options will be issued under the Alive Plan.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation expense been recognized on stock options issuance based on the
fair value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
-------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported.......................... $(94,779) $(1,650,272) $(26,025,406)
Pro forma............................ (94,779) (1,650,938) (26,377,726)
Basic and diluted net loss per share:
As reported.......................... -- $ (0.41) $ (4.81)
Pro forma............................ -- $ (0.41) $ (4.88)
</TABLE>
To determine compensation expense under SFAS 123, the Company used the
following assumptions:
. Risk-free interest rates of 5.0 to 5.5%
. Expected lives of 5 years
. Expected dividend yields of 0%
. Expected volatility of 0%
F-16
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Option activity under the plans was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Grant Date Exercise
Number Fair Value Price
--------- ---------- --------
<S> <C> <C> <C>
Outstanding, January 1, 1998
Granted................................... 1,420,500 $0.01 $0.07
Cancelled................................. (125,000) 0.01 0.06
---------
Outstanding, December 31, 1998.............. 1,295,500 0.02 0.07
Granted with exercise price equal to fair
market value............................. 679,600 3.76 0.83
Granted with exercise price less than fair
market value............................. 3,707,831 0.47 2.05
Exercised................................. (879,409) 0.62 0.22
Cancelled................................. (580,313) 0.15 0.16
---------
Outstanding, December 31, 1999.............. 4,223,209 1.79 0.97
</TABLE>
The following information is provided for options outstanding and exercisable
at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ ----------------------------
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Exercise Contractual Exercise Contractual
Range Number Prices life Number Prices life
----- --------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
.05-.25 1,724,307 0.12 8.94 293,612 0.11 8.85
.40-.81 1,253,486 0.41 9.68 396,134 0.42 9.69
1.00-2.54 824,316 1.02 9.86 7,033 1.55 9.35
6.00 421,100 6.00 9.96 -- -- --
---------
4,223,209
</TABLE>
The options outstanding at December 31, 1999 have a weighted average
remaining contractual life of approximately 9.4 years.
Included in the exercised options outstanding are 734,936 shares subject to
repurchase at a weighted average exercise price of $0.24 under provisions of
the 1998 stock option plan. Also included in the exercised options outstanding
are 229,756 options exercised under the Alive stock option plan but subject to
repurchase at a weighted average price of $0.48.
7. STOCK-BASED COMPENSATION
The Company records deferred stock compensation for the difference between
the exercise price of stock options granted and the deemed fair value for
financial statement presentation purposes of the Company's common stock at the
date of grant. The deferred compensation is amortized over the vesting period
of the related options, which is generally 4.5 years. No deferred compensation
or related stock-based compensation expense was recorded at December 31, 1998.
Through December 31, 1999, the Company recorded gross deferred compensation
totaling $6.6 million and related stock-based compensation expense totaled
approximately $903,000.
The Company has granted approximately 220,000 options to consultants which
vest on the same terms as options granted to employees. These terms require
that the individuals continue their current consulting relationship with the
Company in order to continue vesting. These options are accounted
F-17
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
for in accordance with the provisions of SFAS 123 and EITF 96-18. Accordingly,
using the Black-Scholes option pricing model and assuming a term of five years,
a risk-free interest rate of 5.50% and expected volatility of 75%, the options
are marked to fair value at each reporting period through charges to stock-
based compensation in the statements of operations. Approximately $572,000 was
recognized in stock-based compensation expense related to these options in the
year ended December 31, 1999.
For the year ended December 31, 1999, the Company recorded in total
approximately $1.5 million in stock-based compensation charges as a component
of operating expenses. This amount represents both the consulting expenses as
well as amortization of stock options granted below fair market value. These
amounts can be allocated to the other expense categories in the accompanying
statements of operations as follows:
<TABLE>
<S> <C>
Production (cost of revenues).................................... $ 186,116
Research and development......................................... 115,645
Sales and marketing.............................................. 306,248
General and administrative....................................... 867,701
----------
$1,475,710
==========
</TABLE>
8. FEDERAL INCOME TAXES:
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $9.4 million related to U.S. federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
These carryforwards will begin to expire in 2018.
The Company did not provide any current or deferred United States federal or
state income tax provision or benefit for any of the periods presented because
it has experienced operating losses since inception, and has provided full
valuation allowances on deferred tax assets because of uncertainty regarding
their realizability. This valuation allowance increased in 1998 and 1999 by
$477,712 and $2,475,661, respectively. Deferred taxes consist primarily of net
operating loss carryforwards and timing differences for customer deposits,
stock compensation expense and excess book depreciation.
The difference between the statutory federal tax rate of 35% (34% federal and
1% state, net of federal benefits) and the tax benefit of zero recorded by the
Company is primarily due to the Company's full valuation allowance against its
net deferred tax assets.
The components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
-------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward............ $ 31,226 $ 411,724 $ 3,204,162
Other...................................... -- 97,214 438,717
Stock based compensation................... -- -- 884,071
Deferred tax liabilities related to
intangible assets......................... -- -- (1,542,351)
-------- --------- -----------
Total net deferred tax assets............ 31,226 508,938 2,984,599
Valuation allowance.......................... (31,226) (508,938) (2,984,599)
-------- --------- -----------
Total.................................... $ -- $ -- $ --
======== ========= ===========
</TABLE>
F-18
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS:
Operating Leases
During 1999, the Company entered into an agreement for its office facility
under an operating lease which expires in 2004. Additionally, the Company
entered into a five-year office lease with annual payments of approximately
$243,000, a five year office lease with annual payments of approximately
$500,000, and a five-year office lease with annual payments of approximately
$180,000. Prior to 1999, the Company had leased office space from a related
party. Minimum lease commitments as of December 31, 1999 under noncancellable
leases are as follows:
<TABLE>
<S> <C>
2000............................................................ $1,369,311
2001............................................................ 1,488,873
2002............................................................ 1,584,629
2003............................................................ 1,634,599
2004............................................................ 1,451,153
----------
$7,528,565
==========
</TABLE>
Rent expense under operating leases totaled $61,328 and $267,149 for the
years ended December 31, 1998 and 1999, respectively.
Services Agreement
On December 17, 1999 the Company entered into a services agreement with a
distributor of music and video entertainment products. In conjunction with the
services agreement, the Company granted 650,000 warrants to acquire common
stock at $10 per share. The warrants are exercisable immediately and expire in
December 2000. According to EITF 96-18, the fair market value of these warrants
was calculated using the Black-Scholes pricing model, using a risk-free
interest rate of 5.0%, volatility of 70% and an expected life of one year. The
value was calculated to be $1,124,500 and was included in sales and marketing
expense in the accompanying statements of operations.
10. RELATED PARTY TRANSACTIONS:
On September 1, 1998, the Company entered into a five-year lease agreement
with the Company's primary officer. The total monthly rental payments are
approximately $10,000 per month. Total payments during the years ended December
31, 1998 and 1999 were approximately $40,000 and $120,000. The lease agreement
provides for an early termination payment of $52,000.
11. ACQUISITION OF ALIVE.COM, INC.:
Effective December 14, 1999, the Company acquired Alive.com, Inc., a
developer of multimedia applications. In connection with the acquisition, the
Company issued 2,508,848 shares of common stock and 91,181 options to purchase
shares of common stock valued at fair market value using the Black-Scholes
option pricing model in exchange for all of the outstanding capital stock and
the assumption of all outstanding options of Alive.com, Inc. The deemed fair
value of the common stock and options issued in the acquisition, for accounting
purposes, was approximately $15.5 million. The Company also incurred $74,000 in
acquisition costs and assumed net liabilities of $300,000, for a
F-19
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
total purchase price of $15.9 million. The acquisition was accounted for as a
purchase and, accordingly, the results of operations of Alive.com, Inc. have
been included in the consolidated financial statements commencing on the date
of acquisition. The excess purchase price of approximately $15.9 million was
allocated to goodwill, work force in place and acquired technology, which is
being amortized on a straight-line basis over an estimated useful life of three
years.
In connection with the acquisition, net assets purchased and liabilities
assumed were as follows:
<TABLE>
<S> <C>
Cash, receivables and other current assets..................... $ 92,828
Property and equipment, and other noncurrent assets............ 424,714
Total liabilities.............................................. (817,542)
---------
$(300,000)
=========
</TABLE>
The following table presents the purchase price and excess purchase price
associated with the acquisition of Alive.com.
<TABLE>
<S> <C>
Value of common stock and common stock options issued......... $15,527,000
Net liabilities assumed....................................... 300,000
Transaction costs............................................. 74,000
-----------
Excess purchase price....................................... $15,901,000
===========
</TABLE>
The following table presents the unaudited pro forma results assuming that
the Company had acquired Alive.com, Inc. at the beginning of fiscal year 1998.
This information may not necessarily be indicative of the future combined
results of the operations of the Company.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Total revenues................................ $ 286,259 $ 2,718,211
Net loss...................................... $(8,962,387) $(35,837,226)
Basic and diluted net loss per share.......... $ (1.37) $ (4.58)
</TABLE>
Included in the outstanding shares purchased as part of the Alive.com
acquisition were 229,756 shares subject to repurchase which were assumed as
part of the terms of the purchase agreement. 446,444 shares had been issued by
Alive.com in exchange for a license of certain of Allaire Corporation's
technology, on a royalty free basis, coupled with an agreement by Allaire to
provide certain technological, sales, distribution and marketing support.
272,825 of these shares were vested as of December 31, 1999, however, in the
event of the termination of the agreement, the shares may be repurchased by the
Company within 90 days of termination at the then fair market value of the
Company's common stock. 173,619 of these shares remained unvested as of
December 31, 1999 and may be repurchased by the Company within 90 days of
termination at the weighted average exercise price of $0.20. The unvested
shares vest at the rate of 24,802 shares at the end of each three-month period.
The effect of the 173,619 shares subject to repurchase has been eliminated from
the computation of earnings per share as described in Note 2.
F-20
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statement of operations of Loudeye
Technologies, Inc. for the year ended December 31, 1999 gives effect to the
acquisition of Alive.com, Inc. as if it had been acquired on January 1, 1999.
The unaudited pro forma combined statements of operations are presented for
informational purposes only and do not purport to represent what the Company's
financial position and results of operations for the year ended December 31,
1999 would actually have been had the acquisition, in fact, occurred on January
1, 1999, or the Company's results of operations for any future period. The
unaudited pro forma combined statement of operations should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus and the information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of Loudeye Technologies and
Alive.com to account for the merger as a purchase. Accordingly, assets acquired
and liabilities assumed are reflected at their estimated fair values which are
subject to further refinement, including appraisals and other analysis. The
unaudited pro forma consolidated financial information has been prepared based
on the assumptions described in the notes thereto and includes assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of Alive.com based on preliminary estimates of their fair value.
The actual allocation of such consideration may differ from that reflected in
the unaudited pro forma combined financial information after valuations and
other procedures to be performed after the closing of the merger. In the
opinion of Loudeye Technologies, all adjustments necessary to present fairly
such unaudited pro forma combined financial information have been made based on
the proposed terms and structure of the merger. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of future operating results or financial position. These unaudited
pro forma combined financial statements and accompanying notes should be read
in conjunction with historical financial statements and the related notes
thereto of Loudeye Technologies and Alive.com.
F-21
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
(January 1, 1999
to December 14, 1999) Pro Forma Pro Forma
Loudeye Alive Adjustments Total
------------ --------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 2,645,279 $ 72,932 $ 2,718,211
Cost of revenues........ 2,870,850 5,017 2,875,867
------------ ----------- ------------
Gross margin.......... 225,571 67,915 (157,656)
Operating expenses:
Research and
development.......... 1,248,081 1,503,736 2,751,817
Sales and marketing... 5,106,475 1,769,224 6,875,699
General and
administrative....... 3,612,054 1,481,864 5,093,918
Amortization of
intangibles.......... 258,422 -- 5,080,000(b) 5,338,422
Stock-based
compensation......... 1,475,710 28,456 1,504,166
------------ ----------- ------------
Total operating
expenses........... 11,700,742 4,783,280 21,564,022
Other income (expense),
net.................... 21,566 (16,455) 5,111
------------ ----------- ------------
Net loss................ $(11,904,747) (4,731,820) $(21,716,567)
------------ ----------- ------------
Beneficial conversion
feature of convertible
preferred stock........ (14,120,659) -- $(14,120,659)
------------ ----------- ------------
Net loss to common
shareholders........... $(26,025,406) $(4,731,820) $(35,837,226)
============ =========== ============
Basic and diluted net
loss per share......... $ (4.81) $ (4.58)
============ ============
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share.................. 5,410,507 7,816,252
============ ============
Basic and diluted pro
forma net loss per
share.................. $ (1.56) $ (1.88)
============ ============
Weighted average shares
outstanding used to
compute basic and
diluted pro forma net
loss per share......... 16,659,800 19,065,545
============ ============
</TABLE>
F-22
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
December 31, 1999
1. BASIS OF PRESENTATION:
The pro forma combined statement of operations for the year ended December
31, 1999 gives effect to the acquisition of Alive.com, Inc. as if it had been
acquired January 1, 1999. The pro forma adjustments are based on consideration
exchanged, including the estimated fair value of assets acquired, liabilities
assumed and common stock issued. The actual adjustments, which will be based on
valuations of fair value as of the date of acquisition, may differ from that
made herein.
The pro forma combined financial statement is presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the common stock consideration exchanged by Loudeye
Technologies, Inc. for the fair value of the assets acquired and liabilities
assumed.
2. PRO FORMA ADJUSTMENTS:
(a) To record the acquisition of Alive.com, Inc. as follows:
<TABLE>
<S> <C>
Common stock consideration.................................... $15,527,000
Estimated transaction costs................................... 74,000
Net liabilities acquired...................................... 300,000
-----------
Excess purchase price......................................... $15,901,000
===========
</TABLE>
The purchase price of Alive.com, Inc. consists of 2,508,848 shares of common
stock based on the price of Loudeye Technologies, Inc. common stock with an
assumed fair value of $6.00 as determined by the Company's Board of Directors
and 91,181 options to purchase shares of common stock valued at fair market
value using the Black-Scholes option pricing model.
Transaction costs associated with this merger have been estimated to be
$74,000. Should the actual amount differ, the intangible asset recorded would
increase and related amortization would increase.
(b) To record amortization of intangibles as follows:
<TABLE>
<S> <C>
Eleven and one-half months of 1999 amortization................ $5,080,000
</TABLE>
All intangibles are amortized over a period of three years.
(c) Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of shares outstanding during the period assuming
that shares issued for acquisitions were outstanding for the entire period. Pro
forma basic and diluted net loss per share is computed based on the weighted
average number of shares outstanding giving effect to shares issued in
acquisitions as if they were outstanding for the entire period and to the
conversion of convertible preferred stock on an as-if converted basis from the
original issuance date.
F-23
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(Continued)
3. RECONCILIATION OF HISTORICAL WEIGHTED AVERAGE SHARES TO PRO FORMA WEIGHTED
AVERAGE SHARES:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Historical............................................... 5,410,507
Alive.com, January 1, 1999-December 14, 1999............. 2,405,745
---------
Pro forma................................................ 7,816,252
=========
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Alive.com, Inc.:
We have audited the accompanying balance sheet of Alive.com, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, changes in shareholders' deficit, and cash flows for the period
from inception (February 27, 1998) to December 31, 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 audit.
We conducted our audit 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 audit provides 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 Alive.com, Inc. as of December
31, 1998, and the results of its operations and cash flows for the period from
inception to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
December 21, 1999
F-25
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 243,665 $ 74,225
Accounts receivable, net allowance of $11,384 as
of December 14, 1999............................ -- 12,600
Prepaids and other assets........................ 114,967 6,003
----------- -----------
Total current assets........................... 358,632 92,828
Property and equipment, net........................ 241,257 392,849
Other assets....................................... 90,887 31,865
----------- -----------
$ 690,776 $ 517,542
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 429,550 $ 299,570
Accrued liabilities.............................. 42,910 344,795
Note payable, current portion.................... 75,000 90,000
Convertible notes payable........................ 1,000,000 --
----------- -----------
Total current liabilities...................... 1,547,460 734,365
Note payable, net of current portion............... 150,000 82,500
Deferred rent...................................... 36,512 83,393
----------- -----------
Total liabilities.............................. 1,733,972 900,258
----------- -----------
Mandatorily redeemable convertible preferred stock,
902,886 and 2,770,119 shares authorized, issued
and outstanding, liquidation preference of
$6,189,976 at December 14, 1999................... 673,698 6,017,172
Shareholders' deficit:
Preferred stock, undesignated series, $.01 par
value, authorized 7,229,881 shares, none issued
and outstanding................................. -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 2,301,581 and 2,322,752 issued and
outstanding at December 31, 1998 and December
14, 1999, respectively, and additional paid-in
capital......................................... 295,221 369,149
Deferred stock compensation...................... -- (25,102)
Deficit accumulated during the development
stage........................................... (2,012,115) (6,743,935)
----------- -----------
Total shareholders' deficit.................... (1,716,894) (6,399,888)
----------- -----------
Total liabilities and shareholders' deficit.. $ 690,776 $ 517,542
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27,
1998) to 1998) to Period Ended-
December 31, December 14, December 14,
1998 1999 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Revenues.............................. $ 624 $ 73,556 $ 72,932
Cost of revenues...................... 21 5,038 5,017
----------- ----------- -----------
Gross margin........................ 603 68,518 67,915
----------- ----------- -----------
Operating expenses:
Research and development............ 631,793 2,135,529 1,503,736
Sales and marketing................. 941,577 2,710,801 1,769,224
General and administrative.......... 424,941 1,935,261 1,510,320
----------- ----------- -----------
Total operating expenses.......... 1,998,311 6,781,591 4,783,280
Other income (expense), net........... (14,407) (30,862) (16,455)
----------- ----------- -----------
Net loss.............................. $(2,012,115) $(6,743,935) $(4,731,820)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-in
Capital Deferred Total
------------------- Stock Deficit Shareholders'
Shares Amount Compensation Accumulated Deficit
--------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances,
February 27, 1998...... -- $ -- $ -- $ -- $ --
Issuance of common
stock................. 1,753,298 188,600 -- -- 188,600
Common stock options
exercised............. 548,283 106,621 -- -- 106,621
Net loss............... -- -- -- (2,012,115) (2,012,115)
--------- -------- -------- ----------- -----------
Balances,
December 31, 1998...... 2,301,581 295,221 -- (2,012,115) (1,716,894)
Common stock options
exercised............. 106,671 27,195 -- -- 27,195
Repurchase of common
stock................. (85,500) (9,300) -- -- (9,300)
Issuance of stock
warrants.............. -- 2,475 -- -- 2,475
Deferred stock
compensation.......... -- 36,280 (36,280) -- --
Amortization of
deferred stock
compensation.......... -- -- 11,178 -- 11,178
Compensation
attributable to stock
options............... -- 17,278 -- -- 17,278
Net loss............... -- -- -- (4,731,820) (4,731,820)
--------- -------- -------- ----------- -----------
Balances,
December 14, 1999
(unaudited)........... 2,322,752 $369,149 $(25,102) $(6,743,935) $(6,399,888)
========= ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27,
1998) to 1998) to Period Ended
December 31, December 14, December 14,
1998 1999 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(2,012,115) $(6,743,935) $(4,731,820)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 28,714 182,242 153,528
Common stock and warrant expense..... 132,213 148,978 16,765
Amortization of deferred stock
compensation........................ -- 11,178 11,178
Non-employee common stock
compensation expense................ -- 17,278 17,278
Changes in assets and liabilities:
Accounts receivable.................. -- (12,600) (12,600)
Prepaids and other assets............ (149,467) (28,592) 120,875
Accounts payable..................... 429,550 299,570 (129,980)
Accrued liabilities.................. 46,216 348,101 301,885
Deferred rent........................ 36,512 83,393 46,881
----------- ----------- -----------
Net cash used in operating
activities........................ (1,488,377) (5,694,387) (4,206,010)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.. (269,971) (524,025) (254,054)
----------- ----------- -----------
Net cash used in investing
activities........................ (269,971) (524,025) (254,054)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net.......................... $ 106,621 $ 124,476 $ 17,855
Proceeds from issuance of preferred
stock, net.......................... 370,392 4,195,661 3,825,269
Proceeds from issuance of convertible
notes payable....................... 1,300,000 1,800,000 500,000
Proceeds from issuance of note
payable............................. 225,000 225,000 --
Repayment of note payable............ -- (52,500) (52,500)
----------- ----------- -----------
Net cash provided by financing
activities........................ 2,002,013 6,292,637 4,290,624
----------- ----------- -----------
Change in cash and cash equivalents... 243,665 74,225 (169,440)
Cash and cash equivalents, beginning
of period............................ -- -- 243,665
----------- ----------- -----------
Cash and cash equivalents, end of
period............................... $ 243,665 $ 74,225 $ 74,225
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid--interest.................. $ 15,630 $ 37,315 $ 21,685
=========== =========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Conversion of convertible notes
payable and accrued interest to
redeemable convertible preferred
stock............................... $ 303,306 $ 1,821,511 $ 1,518,205
=========== =========== ===========
Deferred compensation on grants of
stock options....................... $ -- $ 36,280 $ 36,280
=========== =========== ===========
Issuance of common stock and warrants
in exchange for software licenses
and services........................ $ 188,600 $ 191,075 $ 2,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
ALIVE.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Amounts and disclosures as of and for the period
ended December 14, 1999 are unaudited)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Alive.com, Inc. (the "Company") is engaged in the development of software
products which enable users to develop multimedia presentations over the
Internet and intranets. The Company was incorporated in the State of Washington
on February 27, 1998 (date of inception). The Company has devoted substantially
all of its efforts to date in product development, establishment of sales and
marketing distribution channels, and raising capital.
Inherent in the Company's business are various risks and uncertainties,
including the Company's limited operating history and development of the
Internet as a communications medium. The Company's success depends upon the
acceptance of the Company's technology and the Company's ability to generate
license revenues from the use of its technology.
On December 14, 1999, the Company was acquired by Loudeye Technologies, Inc.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, and trade accounts
receivable, accounts payable and long-term debt. Fair values of cash and cash
equivalents approximate cost due to the short period of time to maturity. The
fair values of financial instruments that are short-term and/or that have
little or no market risk are considered to have a fair value equal to book
value. Assets and liabilities that are included in this category are
receivables, accounts payable and accrued liabilities.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation and depreciation is computed using the straight-line basis over
the estimated useful lives of the assets, which are generally three to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the respective lease term or estimated useful life of the asset.
F-30
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenues from software license fees upon delivery of
the software product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. Revenue from packaged product
sales to and through distributors and resellers is recorded when related
products are shipped, net of an allowance for estimated returns.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Expenses
Advertising costs are expensed as incurred. The Company incurred $280,500 and
$635,594 in advertising for the period from February 27, 1998 (date of
inception) to December 31, 1998, and for the period ended December 14, 1999,
respectively.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 8).
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan.
F-31
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Use of Estimates in the Preparation of Financial Statements
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements for the period ended December 14,
1999 have been prepared on the same basis as the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles. Results of operations for interim period presented herein are not
necessarily indicative of results of operations for the entire year.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, software product
development.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
F-32
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Office equipment................................. $108,161 $ 122,092
Software......................................... 2,356 56,582
Improvements..................................... 47,461 84,848
Computer equipment............................... 111,993 260,503
Accumulated depreciation......................... (28,714) (131,176)
-------- ---------
Property and equipment, net.................... $241,257 $ 392,849
======== =========
</TABLE>
3. OTHER ASSETS:
Other assets were as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Deferred charges, net........................... $56,387 $ --
Deposits........................................ 25,000 25,400
Trade name, net................................. 9,500 6,465
------- -------
$90,887 $31,865
======= =======
</TABLE>
4. NOTE PAYABLE:
In August 1998, the Company entered into a financing arrangement with a bank
which provided for a $250,000 line of credit for operating needs and equipment
financing. Under the terms of the agreement, the maximum borrowing on the
revolving line of credit is reduced by the amount of equipment financed.
Borrowings under the line of credit bear interest at the bank's prime rate plus
1.0% (9.00% at December 31, 1998 and 9.25% at December 14, 1999) and are
collateralized by substantially all of the Company's property and equipment.
The line of credit matures in February 2000, and equipment financing is payable
in 30 equal installments of principal, plus interest, commencing on March 27,
1999.
During 1998, the Company financed $225,000 of equipment purchases under the
terms of the arrangement.
Future principal payments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 90,000
2001.............................................................. 82,500
--------
$172,500
========
</TABLE>
F-33
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. CONVERTIBLE NOTES PAYABLE:
The Company issued convertible notes payable in connection with the Series A
redeemable preferred stock and Series B redeemable preferred stock financings.
The notes were unsecured and due on demand with interest at the federal short-
term interest rate. Note principal and accrued interest were converted to
Series A redeemable preferred stock and Series B redeemable preferred stock at
a conversion price of $0.858358 and $2.90 per share, respectively.
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During July 1998, the Company issued 902,886 shares of Series A mandatorily
redeemable preferred stock at $.858358 per share. In March and April 1999, the
Company issued 1,867,233 shares of Series B mandatorily redeemable preferred
stock at $2.90 per share.
A summary of convertible preferred stock is as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Series A redeemable preferred stock, $.01 par
value; 902,886 shares authorized, issued and
outstanding; $775,000 aggregate liquidation
preference, net of issuance costs of
$101,302...................................... $673,698 $ 673,698
Series B redeemable preferred stock, $.01 par
value; 1,867,233 shares authorized, issued and
outstanding; $5,414,976 aggregate liquidation
preference, net of issuance costs of
$71,502....................................... -- 5,343,474
-------- ----------
$673,698 $6,017,172
======== ==========
</TABLE>
Each share of redeemable preferred stock has voting rights equal to its
common stock equivalent, and is convertible at the holder's option into one
share of the Company's common stock, subject to certain adjustments. The
preferred stock automatically converts to common stock in the event of an
initial public offering of not less than $5.00 per share and for a total
offering of not less than $20,000,000, or the date specified by election of
two-thirds of the preferred shareholders voting as a class.
The holders of preferred stock will be entitled to receive non-cumulative
dividends, if and when declared by the Board of Directors, and shall be
entitled to participate pro rata in any dividends paid on the common stock on
an as-if-converted basis.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B shall be entitled to receive, in
preference to holders of common stock, an amount equal to $0.858358 and $2.90
per share subject to certain adjustments, respectively plus declared but unpaid
dividends or such amount per share as-if each share had been converted to
common stock prior to such event.
Each of the Series A and Series B redeemable preferred stock is redeemable by
the holder in three equal annual installments upon the election of a majority
of the respective shareholders on or
F-34
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
after July 2, 2003 and March 15, 2004, respectively. The redemption price of
Series A and Series B is equal to $0.858358 and $2.90 per share subject to
certain adjustments, respectively plus declared but unpaid dividends.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A and Series B
shares. In conjunction with the sale of Series A and Series B redeemable
preferred stock, the Company, its founders, and the redeemable preferred stock
investors also entered into an investor rights agreement, voting agreement, and
a stock restriction agreement.
7. SHAREHOLDERS' DEFICIT:
Authorized Shares
The Company has authorized for issuance a total of 30,000,000 shares,
consisting of 20,000,000 shares of common stock, and 10,000,000 shares of
preferred stock, of which 902,886 shares are designated as Series A redeemable
preferred stock and 1,867,233 shares designated as Series B redeemable
preferred stock.
Voting Agreements
Weld, Brown LLC, a Washington limited liability company ("Weld Brown"), and
certain common stock shareholders entered into a voting agreement, whereby each
shareholder has agreed to vote all shares of the Company's common stock or any
other class of voting security of the Company now or hereafter owned or
controlled by them only in the manner specified by a manager of Weld Brown.
In conjunction with the sale of the Series A and Series B redeemable
preferred stock, Allaire Corporation ("Allaire"), Weld Brown, and the Series A
and Series B investors have entered into a voting agreement whereby each has
agreed to fix the number of directors at no more than five, and each are
allowed to designate a director. The fifth board member is designated by the
other four directors.
Restricted Stock and Repurchase Agreements
On July 14, 1998, the Company entered into a contribution and restricted
purchase agreement with Allaire and issued 907,591 shares of common stock
("Allaire shares") in exchange for a license of certain of Allaire's
technology, on a royalty free basis, coupled with an agreement by Allaire to
provide certain technological, sales, and marketing support. Under the terms of
the agreement, 302,531 shares vested immediately and the remaining shares vest,
so long as the agreement is not terminated, at the rate of 50,421 shares at the
end of each three-month period. Shares issued are subject to a repurchase
option upon the occurrence of certain events, at the current fair market value
for vested shares and $0.10 per share for unvested shares.
On July 14, 1998, the Company entered into a restricted stock purchase
agreement with Weld Brown and issued 845,707 shares of common stock ("Weld
Brown shares") in exchange for certain
F-35
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
intellectual property rights. Under the terms of the agreement, 123,762 shares
were founders shares, 165,017 shares were advisory shares, and 556,928 shares
were executive shares. The founders shares were immediately vested, and
advisory and executive shares vest upon the occurrence of certain performance
and service conditions. Unvested shares were subject to a repurchase option at
$0.10 per share. During October 1998, the Company's board of directors
determined that the performance and service conditions had been satisfied and
all shares were released from the repurchase option.
The fair value of the Allaire shares and Weld Brown shares exchanged, $96,810
and $91,790, respectively was recorded as a deferred charge at the date the
performance commitment was established and is being amortized over the
respective vesting periods. The value of the shares was determined using a
Black-Scholes valuation model with the following assumptions; expected life of
three years, expected dividend yield and volatility of 50%, and a risk-free
interest rate of approximately 5%.
The Company's 1998 Stock Incentive Compensation Plan ("Option Plan") provides
for options to purchase the Company's common stock which are immediately
exercisable, however, the shares are subject to repurchase by the Company at
the exercise price paid. The Company's right of repurchase lapses over four
years, subject to certain acceleration provisions.
Warrants
In June 1999, in connection with an office lease agreement, the Company
issued warrants to purchase 7,500 of the Company's common stock at a price of
$1.25 per share. The warrants are immediately exercisable and expire after the
earlier of August 31, 2004, the sale of substantially all of the Company's
assets, the acquisition of the Company, or an initial public offering. The
value of the warrants of $2,475 was fully amortized at December 14, 1999.
Common Stock Reserved
The Company has reserved sufficient common stock to effect the conversions of
all outstanding shares of the preferred stock. The Company has also reserved
common stock for grants pursuant to the Company's Option Plan and exercise of
common stock warrants.
Stock Option Plan
The Company's Option Plan provides for the issuance of up to 1,498,350
incentive and nonqualified common stock options for employees, directors,
consultants, or advisors of the Company. The Board of Directors is authorized
to administer the Plan and establish the stock option terms, including the
exercise price and vesting periods.
Stock options typically vest over a four-year period, expire five years from
the date of grant, and generally expire ninety days after termination of
employment or services. Stock options are immediately exercisable as of the
options vesting commencement date, however, shares issued are subject to the
Company's right of repurchase which lapses over the vesting period.
The Company's repurchase price is equal to the amount the holder paid for
such shares. Any shares issued which are no longer subject to the Company's
right to repurchase are subject to the
F-36
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's right of first refusal to purchase any Company shares such holders
propose to sell, pledge, or otherwise transfer.
The Company generally grants stock options with exercise prices equal to the
fair market value of common stock on the date of grant as determined by the
Board of Directors. During 1999 and 1998, the weighted average fair value of
options granted was $0.45 and $0.02, respectively.
On March 18, 1999, the Company amended the Option Plan to provide the
acceleration of vesting of outstanding awards upon a change in control unless
such acceleration would preclude the use of the pooling of interests method in
a business combination. The amendment specifies that for any awards granted
prior to March 18, 1999, upon a change in control, such awards immediately vest
in full and for awards granted on or after March 18, 1999, vesting is
accelerated up to 50% under various circumstances.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
-------- ------
<S> <C> <C>
Options granted.......................................... 796,054 $ 0.20
Exercised................................................ (548,283) 0.19
--------
Outstanding, December 31, 1998........................... 247,771 0.22
Options granted.......................................... 167,250 0.80
Exercised................................................ (106,671) (0.25)
Expired.................................................. (123,050) (0.63)
--------
Outstanding, December 14, 1999........................... 185,300 0.45
========
</TABLE>
At December 14, 1999, outstanding stock options have exercise prices ranging
from $0.10-$1.25 per share and weighted average remaining contractual life of
4.31 years.
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of a stock option is
lower than the deemed fair value for financial reporting purposes of the
underlying common stock. The Company recorded aggregate deferred stock-based
compensation of $36,280 in the period ended December 14, 1999. The deferred
stock-based compensation is being amortized over the vesting period of the
underlying options.
Had the stock-based compensation for the Company's stock options been
determined based on the fair value method prescribed in SFAS 123, the Company's
net loss would have been increased by approximately $60,000 and $1,000 for the
period ended December 14, 1999 and the period from February 27, 1998 (date of
inception) to December 31, 1998, respectively. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rate of
approximately 5%, no dividend yield, zero volatility, and a weighted-average
expected life of the option of three years. The
F-37
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
pro forma disclosure is not necessarily indicative of future pro-forma
disclosures because of the manner in which Statement 123 calculations are
phased in over time.
8. INCOME TAXES:
At December 14, 1999, the Company has a net operating loss carryforward of
approximately $6.7 million, which is available to offset future taxable income
through 2018. The significant components of the Company's deferred tax assets
consist of the net operating loss carryforward, accrued vacation, and stock-
based compensation expense. Deferred tax assets reflect the 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.
Since the Company's utilization of these deferred tax assets is dependent on
future profits which are not assured, a valuation allowance equal to the
deferred tax assets has been provided.
9. RELATED PARTY TRANSACTIONS:
The Company had a cost-sharing arrangement with Weld Brown whereby the
Company reimbursed Weld Brown for office expenses (including rent, amortization
of applicable computers and furniture, and office supplies) and 50% of the
office administrator's salary. The cost sharing arrangement ceased upon the
Company acquiring its own facility. Total payments to Weld Brown for the period
from February 27, 1998 (date of inception) and for the period ended December
14, 1999 were approximately $158,500 and $32,900, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Operating Lease
The Company leases office facilities in Seattle, Washington and certain
equipment. Rent expense is amortized on a straight-line basis over the periods
in which the benefit from the property is derived. Minimum future rental
payments under these noncancelable operating leases are approximately as
follows:
<TABLE>
<S> <C>
2000............................................................ $ 369,000
2001............................................................ 473,000
2002............................................................ 553,000
2003............................................................ 627,000
2004............................................................ 621,000
Thereafter...................................................... --
----------
$2,643,000
==========
</TABLE>
Rent expense was approximately $50,900 and $276,000 for the period from
February 27, 1998 (date of inception) to December 31, 1998, and for the period
ended December 14, 1999, respectively.
In June 1999, the Company entered into a lease agreement which provides for
the landlord to reimburse the Company for tenant improvements at the rate of
$5.00 per square rentable area. Reimbursements are payable in phases, upon
completion, and are not to exceed an aggregate of $120,215.
F-38
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. SUBSEQUENT EVENT:
Effective December 14, 1999, the Company entered into an agreement whereby
all of the outstanding stock and options of the Company would be acquired by
Loudeye Technologies, Inc. in exchange for 2,508,848 shares of Loudeye common
stock and 91,181 options to acquire Loudeye Common Stock. Immediately prior to
closing of this acquisition, all shares of mandatorily redeemable, convertible
preferred stock were converted into common stock of the Company which were then
acquired by Loudeye in the purchase transaction.
F-39
<PAGE>
[Inside back cover artwork]
[Logo of Loudeye Technologies, Inc.]
www.loudeye.com
<PAGE>
[LOGO OF LOUDEYE TECHNOLOGIES, INC.]
originally encoding.com
Until , 2000 (25 days after commencement of this
offering), 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
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<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, other than
underwriting discounts and commissions, payable by Loudeye in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee................................................ $ 15,180
NASD filing fee..................................................... 95,000
Nasdaq National Market listing fee.................................. 1,000
Printing and engraving expenses..................................... 300,000
Legal fees and expenses............................................. 350,000
Accounting fees and expenses........................................ 200,000
Blue Sky qualification fees and expenses............................ 5,000
Transfer agent and registrar fees................................... 15,000
Miscellaneous fees and expenses..................................... 100,000
----------
Total............................................................. $1,081,180
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article VII of
Loudeye's certificate of incorporation and sections 6.1 and 6.2 of Article VI
of Loudeye's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Loudeye has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Loudeye, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto)
also provides for cross indemnification among Loudeye and the underwriters with
respect to certain matters, including matters arising under the Securities Act
of 1933.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in August 1997, Loudeye has issued and sold (without
payment of any selling commission to any person except as indicated in (a)(6))
the following unregistered securities:
1. In March 1998, Loudeye issued 4,712,000 shares of Series A preferred
stock and 5,288,000 shares of Common Stock to the two founders of
Encoding.com LLC, in connection with the conversion of Encoding.com, LLC
into a Delaware corporation. The Series A preferred stock is convertible
into an aggregate of 4,712,000 shares of common stock.
II-1
<PAGE>
2. In June 1998, Loudeye paid $225,000 and issued 271,787 shares of Series
A preferred stock to one individual in exchange for partial cancellation
of indebtedness, convertible into an aggregate of 271,787 shares of
common stock for an aggregate purchase price of $229,116.44.
3. In June and August 1998, Loudeye issued and sold shares of Series B
preferred stock convertible into an aggregate of 3,259,194 shares of
common stock to a total of six investors for an aggregate purchase price
of $2,747,500.54.
4. In April and August 1999, Loudeye issued and sold shares of Series C
preferred stock convertible into an aggregate of 5,309,266 shares of
common stock to a total of 25 investors for an aggregate purchase price
of $10,087,605.40.
5. In June 1999, Loudeye issued a warrant to purchase 41,053 shares of
Series C preferred stock to one entity, in connection with an equipment
lease line, convertible into 41,053 shares of common stock.
6. In December 1999, Loudeye issued and sold shares of Series D preferred
stock convertible into an aggregate of 7,510,989 shares of common stock
to 44 investors for an aggregate purchase price of $47,844,999.00. In
connection with the Series D round of financing, we paid our placement
agent a commission of $2,267,249.90.
7. In December 1999, Loudeye issued a warrant to purchase a total of
650,000 shares of common stock to one entity, in connection with a
commercial agreement, convertible into a total of 650,000 shares of
common stock.
8. In December 1999, Loudeye issued 2,508,848 shares of common stock to 50
holders of Alive stock in exchange for all outstanding capital stock and
the assumption of all outstanding options of Alive.com.
9. As of December 31, 1999, 878,159 shares of common stock had been issued
to employees, directors and consultants of Loudeye upon exercise of
options or pursuant to restricted stock purchase agreements and
4,223,209 shares of common stock were issuable upon exercise of
outstanding options under Loudeye's 1998 stock option plan.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(8) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Items 15(a)(9) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Loudeye.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
2.1* Agreement and Plan of Reorganization dated November 19, 1999 between
Registrant and Alive.com, Inc.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3* Certificate of Amendment to Fifth Amended Certificate of Incorporation
of the Registrant dated December 17, 1999.
3.4 Bylaws of the Registrant, as amended.
4.1 Form of the Registrant's common stock certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2* 1998 Stock Option Plan, as amended.
10.3* Alive.com, Inc. 1998 Stock Option Plan.
10.4 2000 Stock Option Plan.
10.5 2000 Director Stock Option Plan.
10.6 2000 Employee Stock Purchase Plan.
10.7* Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Martin Tobias.
10.8* Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Alex Tobias.
10.9* Series A Preferred Stock Note Conversion Agreement dated June 5, 1998
among the Registrant and Martin Tobias.
10.10* Series B Preferred Stock Purchase Agreement dated June 5, 1998 among
the Registrant and Purchasers of Series B preferred stock.
10.11* Series C Preferred Stock Purchase Agreement dated April 30, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.12* Series C Preferred Stock Purchase Agreement dated August 6, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.13* Warrant to Purchase Series C Preferred Stock dated June 22, 1999
between the Registrant and Dominion Capital Management, L.L.C.
10.14* Series D Preferred Stock Purchase Agreement dated December 14, 1999
among the Registrant and Purchasers of Series D preferred stock.
10.15* Amended and Restated Investors' Rights Agreement dated December 14,
1999 among the Registrant and certain holders of our preferred stock.
10.16* Warrant to Purchase Common Stock dated December 17, 1999 between
Registrant and Valley Media, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17* Lease Agreement dated August 10, 1999 between the Registrant and Times
Square Building LLC
for offices at Times Square Building, 414 Olive Way, Suite 300,
Seattle, Washington.
10.18* Lease Agreement dated September 1, 1998 between the Registrant and
Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
10.19* Lease Agreement dated October 28, 1999 between the Registrant and
Westlake Park Associates for offices at Centennial Building, 1904
Fourth Avenue, Seattle, Washington.
10.20* Lease Agreement dated June 7, 1999 between Registrant and MSI 83 King
LLC for offices at 83 King Street, Seattle, Washington.
10.21* Lease Agreement dated November 9, 1999 between Registrant and Downtown
Entertainment Associates, LP for offices at 1424 Second Street, Santa
Monica, California.
10.22+* Encoding Services Agreement dated June 30, 1999 between the Registrant
and EMusic.com, Inc.
10.23+* Services Agreement dated December 17, 1999 between Registrant and
Valley Media, Inc.
10.24* Imperial Bank Starter Kit Loan and Security Agreement dated August 4,
1998 between the Registrant and Imperial Bank.
10.25* Loan and Security Agreement with Dominion Venture Finance L.L.C. dated
June 15, 1999 between the Registrant and Dominion Venture Finance
L.C.C.
10.26 Offer letter to David Bulis dated June 23, 1999.
10.27 Offer letter to Larry Culver dated August 3, 1999.
10.28 Offer letter to Douglas Schulze dated August 30, 1999.
10.29 Offer letter to James Van Kerkhove dated November 5, 1999.
10.30 Offer letter to David Weld dated December 2, 1999.
10.31 Offer Letter to Tom Hodge dated January 17, 2000.
10.32** Agreement between the Registrant and Microsoft Corporation dated June
22, 1998.
16.1* Letter from Ernst & Young LLP Regarding Change in Accountants.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (see page II-6).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
(b) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts. Schedules not listed above
have been omitted because they are inapplicable or the requested information is
shown in the financial statements of the Registrant or the related notes to the
financial statements.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") 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.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, 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 this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on February 4, 2000.
Loudeye Technologies, Inc.
/s/ Martin G. Tobias
By: _________________________________
Martin G. Tobias
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Martin G. Tobias Chief Executive Officer and February 4, 2000
_________________________________ Director (Principal Executive
Martin G. Tobias Officer)
/s/ Larry Culver Chief Financial Officer February 4, 2000
_________________________________ (Principal Financial and
Larry Culver Accounting Officer)
/s/ Charles P. Waite, Jr. Director February 4, 2000
_________________________________
Charles P. Waite, Jr.
/s/ Stuart J. Ellman Director February 4, 2000
_________________________________
Stuart J. Ellman
/s/ Johan Liedgren Director February 4, 2000
_________________________________
Johan Liedgren
/s/ Larry Culver
*By:_____________________________
Larry Culver
</TABLE>
II-6
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Charged Balance
Balance at to Costs at End
Beginning and of
of Period Expenses Deductions(1) Period
---------- -------- ------------- --------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Period Ended December 31, 1997..... $ -- $ -- $ -- $ --
Year Ended December 31, 1998....... -- 20,000 -- 20,000
Year Ended December 31, 1999....... 20,000 182,427 (15,555) 186,872
</TABLE>
- --------
(1) Deductions represent writeoffs of specifically identified uncollectible
accounts.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated November 19, 1999 between
Registrant and Alive.com, Inc.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
3.3* Certificate of Amendment to Fifth Amended Certificate of Incorporation
of the Registrant dated December 17, 1999.
3.4 Bylaws of the Registrant, as amended.
4.1 Form of the Registrant's common stock certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2* 1998 Stock Option Plan, as amended.
10.3* Alive.com, Inc. 1998 Stock Option Plan.
10.4 2000 Stock Option Plan.
10.5 2000 Director Stock Option Plan.
10.6 2000 Employee Stock Purchase Plan.
10.7* Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Martin Tobias.
10.8* Series A Preferred Stock Subscription Agreement dated March 26, 1998
among the Registrant and Alex Tobias.
10.9* Series A Preferred Stock Note Conversion Agreement dated June 5, 1998
among the Registrant and Martin Tobias.
10.10** Series B Preferred Stock Purchase Agreement dated June 5, 1998 among
the Registrant and Purchasers of Series B preferred stock.
10.11* Series C Preferred Stock Purchase Agreement dated April 30, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.12* Series C Preferred Stock Purchase Agreement dated August 6, 1999 among
the Registrant and Purchasers of Series C preferred stock.
10.13* Warrant to Purchase Series C Preferred Stock dated June 22, 1999
between the Registrant and Dominion Capital Management, L.L.C.
10.14* Series D Preferred Stock Purchase Agreement dated December 14, 1999
among the Registrant and Purchasers of Series D preferred stock.
10.15* Amended and Restated Investors' Rights Agreement dated December 14,
1999 among the Registrant and certain holders of our preferred stock.
10.16* Warrant to Purchase Common Stock dated December 17, 1999 between
Registrant and Valley Media, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17* Lease Agreement dated August 10, 1999 between the Registrant and Times
Square Building LLC for offices at Times Square Building, 414 Olive
Way, Suite 300, Seattle, Washington.
10.18* Lease Agreement dated September 1, 1998 between the Registrant and
Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
10.19* Lease Agreement dated October 28, 1999 between the Registrant and
Westlake Park Associates for offices at Centennial Building, 1904
Fourth Avenue, Seattle, Washington.
10.20* Lease Agreement dated June 7, 1999 between Registrant and MSI 83 King
LLC for offices at 83 King Street, Seattle, Washington.
10.21* Lease Agreement dated November 9, 1999 between Registrant and Downtown
Entertainment Associates, LP for offices at 1424 Second Street, Santa
Monica, California.
10.22+* Encoding Services Agreement dated June 30, 1999 between the Registrant
and EMusic.com, Inc.
10.23+* Services Agreement dated December 17, 1999 between Registrant and
Valley Media, Inc.
10.24* Imperial Bank Starter Kit Loan and Security Agreement dated August 4,
1998 between the Registrant and Imperial Bank.
10.25* Loan and Security Agreement with Dominion Venture Finance L.L.C. dated
June 15, 1999 between the Registrant and Dominion Venture Finance
L.C.C.
10.26 Offer Letter to David Bullis dated June 23, 1999.
10.27 Offer Letter to Larry Culver dated August 3, 1999.
10.28 Offer Letter to Douglas Schulze dated August 30, 1999.
10.29 Offer Letter to James Van Kerkhove dated November 5, 1999.
10.30 Offer Letter to David Weld dated December 2, 1999.
10.31 Offer Letter to Tom Hodge dated January 17, 2000.
10.32** Agreement between the Registrant and Microsoft Corporation dated June
22, 1998.
16.1* Letter from Ernst & Young LLP Regarding Change in Accountants.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (see page II-6).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
Draft of January 26, 2000
Underwriting Agreement
__________, 2000
FleetBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
CIBC World Markets Corp.
As Representatives of the several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. encoding.com, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
- ----------
of its Common Stock, par value $.001 per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". FleetBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and CIBC World Markets Corp. have each
agreed to act as Representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Shares.
The Shares to be sold by FleetBoston Robertson Stephens Inc. pursuant to the
Directed Share Program as described in the Registration Statement are referred
to hereinafter as the "Directed Shares." Any Directed Shares not orally
confirmed for purchase by any participants by the end of the business day on
which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-____), which contains a form of prospectus to be used in connection with the
public offering and sale of the Shares. Such registration statement, as amended,
including the financial statements, exhibits and schedules thereto, in the form
in which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"), including any information deemed to be a part thereof at the
time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities
Act, is called the "Registration Statement". Any registration statement filed by
the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Shares, is called
<PAGE>
the "Prospectus"; provided, however, if the Company has, with the consent of
FleetBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated ________, 2000
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not 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 therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as
2.
<PAGE>
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information given in the Prospectus: (i) there has been no material
adverse change, or any development known to the Company that could reasonably be
expected to result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether or not
arising from transactions in the ordinary course of business, of the Company
(any such change or effect, where the context so requires, is called a "Material
Adverse Change" or a "Material Adverse Effect"); (ii) the Company has not
incurred any material liability or obligation, indirect, direct or contingent,
not in the ordinary course of business nor entered into any material transaction
or agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company,
except for dividends paid to the Company, on any class of capital stock or
repurchase or redemption by the Company of any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company as of and at the dates indicated and the results of their operations and
cash flows for the periods specified. Such financial statements have been
prepared in conformity with generally accepted accounting principles as applied
in the United States, applied on a consistent basis throughout the periods
involved, except as may
3.
<PAGE>
be expressly stated in the related notes thereto. No other financial statements
or supporting schedules are required to be included in the Registration
Statement. The financial data set forth in the Prospectus under the captions
"Summary--Summary Selected Financial Data", "Selected Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement.
(j) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The pro forma consolidated financial statements of
the Company and the related notes thereto included under the caption "Prospectus
Summary -- Pro Forma Consolidated Selected Financial Data," "Pro Forma
Consolidated Selected Financial Data" and elsewhere in the Prospectus and in the
Registration Statement present fairly the information contained therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented on
the bases described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. No other pro forma
financial information is required to be included in the Registration Statement
pursuant to Regulation S-X.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity.
(l) Incorporation and Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation or limited liability
company, as the case may be, in good standing under the laws of the jurisdiction
in which it is organized with full corporate power and authority to own its
properties and conduct its business as described in the prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing under
the laws of each jurisdiction which requires such qualification.
(m) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company other
than those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth
4.
<PAGE>
in the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(n) Stock Exchange Listing. The Shares have been approved for listing on
the Nasdaq National Market, subject only to official notice of issuance.
(o) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(p) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company pursuant to, (i) the
charter or by-laws of the Company, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the Company is
a party or bound or to which its property is subject or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the Company of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any of its properties.
(q) No Defaults or Violations. The Company is not in violation or default
of (i) any provision of its charter or by-laws, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument to which it is a
party or bound or to which its property is subject or (iii) any statute, law,
rule, regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties, as applicable, except
any such violation or default which would not, singly or in the aggregate,
result in a Material Adverse Change except as otherwise disclosed in the
Prospectus.
(r) No Actions, Suits or Proceedings. Except as otherwise disclosed in the
Prospectus, no action, suit or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or its
property is pending or, to the best knowledge of the Company, threatened that
(i) could reasonably be expected to have a Material Adverse Effect on the
performance of this Agreement or the consummation of any of the transactions
contemplated hereby or (ii) could reasonably be expected to result in a Material
Adverse Effect.
(s) All Necessary Permits, Etc. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies necessary to conduct their
respective businesses, and neither the Company nor any subsidiary has received
any notice of proceedings relating to the revocation or modification of, or non-
compliance with, any such certificate, authorization or permit which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
could result in a Material Adverse Change.
5.
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(t) Title to Properties. The Company has good and marketable title to all
the properties and assets reflected as owned in the financial statements
referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or such
subsidiary.
(u) Tax Law Compliance. The Company has filed all necessary federal, state
and foreign income and franchise tax returns and have paid all taxes required to
be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them. The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to in Section 1(i) above in respect of all federal, state and foreign
income and franchise taxes for all periods as to which the tax liability of the
Company has not been finally determined. The Company is not aware of any tax
deficiency that has been or might be asserted or threatened against the Company
that could result in a Material Adverse Change.
(v) Intellectual Property Rights. The Company owns or possesses adequate
rights to use all patents, patent rights or licenses, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company does not in
the conduct of their business as now or proposed to be conducted as described in
the Prospectus infringe or conflict with any right or patent of any third party,
or any discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company, which such
infringement or conflict is reasonably likely to result in a Material Adverse
Change.
(w) Year 2000 Preparedness. There are no issues related to the Company's
being Year 2000 compliant that (i) are of a character required to be described
or referred to in the Registration Statement or Prospectus by the Securities Act
which have not been accurately described in the Registration Statement or
Prospectus or (ii) might reasonably be expected to result in any Material
Adverse Change or that might materially affect their properties, assets or
rights. All internal computer systems and each Constituent Component (as defined
below) of those systems and all computer-related products and each Constituent
Component (as defined below) of those products of the Company fully comply with
Year 2000 Qualification
6.
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Requirements except for such failures to comply which would not result in a
Material Adverse Effect. "Year 2000 Qualifications Requirements" means that the
internal computer systems and each Constituent Component (as defined below) of
those systems and all computer-related products and each Constituent Component
(as defined below) of those products of the Company (i) have been reviewed to
confirm that they store, process (including sorting and performing mathematical
operations, calculations and computations), input and output data containing
date and information correctly regardless of whether the date contains dates and
times after January 1, 2000, (ii) have been designated to ensure date and time
entry recognition and calculations, and date data interface values that reflect
the century, (iii) accurately manage and manipulate data involving dates and
times, including single century formulas and multi-century formulas, and will
not cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates, (iv) accurately
process any date rollover, and (v) accept and respond to two-digit year date
input in a manner that resolves any ambiguities as to the century. "Constituent
Component" means all software (including operating systems, programs, packages
and utilities), firmware, hardware, networking components, and peripherals
provided as part of the configuration. The Company has inquired of material
vendors as to their Year 2000 compliance and has disclosed in the Registration
Statement or Prospectus any issues that might reasonably be expected to result
in any Material Adverse Change.
(x) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(y) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(z) Insurance. The Company is insured by recognized, financially sound and
reputable institutions with policies in such amounts and with such deductibles
and covering such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and earthquakes, general liability and Directors and Officers
liability. The Company has no reason to believe that it or any subsidiary will
not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. Neither of the
Company nor any subsidiary has been denied any insurance coverage which it has
sought or for which it has applied.
(aa) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, value added resellers,
subcontractors, original equipment manufacturers, authorized dealers or
international distributors that might be expected to result in a Material
Adverse Change.
7.
<PAGE>
(bb) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(cc) Lock-Up Agreements. Each officer and director of the Company, and
each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as Exhibit A or as otherwise approved by the Representatives or
---------
counsel to the Representatives (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of FleetBoston Robertson Stephens Inc.
(dd) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(ee) No Unlawful Contributions or Other Payments. Neither the Company nor,
to the best of the Company's knowledge, any employee or agent of the Company,
has made any contribution or other payment to any official of, or candidate for,
any federal, state or foreign office in violation of any law or of the character
required to be disclosed in the Prospectus.
(ff) Environmental Laws. (i) The Company is in compliance with all rules,
laws and regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
--
seq.), or otherwise designated as a contaminated site under applicable state or
- ---
local law.
(gg) ERISA Compliance. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and published interpretations thereunder (collectively,
"ERISA")) established or maintained by the Company or their "ERISA Affiliates"
(as defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company is a member. No
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfounded benefit
8.
<PAGE>
liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA
Affiliates has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company or any of
its ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(hh) No consent, approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained, is required in
connection with the offering of the Directed Shares in any jurisdiction where
the Directed Shares are being offered.
(ii) The Company has not offered, or caused FleetBoston Robertson Stephens
Inc. to offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence a customer or supplier of the
Company.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price
----------
per Firm Share to be paid by the several Underwriters to the Company shall be
$[___] per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. Seattle time, at the offices of Venture Law Group,
4750 Carillon Point, Seattle, WA 98033 (or at such other place as may be agreed
upon among the Representatives and the Company), (i) on the third (3/rd/) full
business day following the first day that Shares are traded, (ii) if this
Agreement is executed and delivered after 1:30 P.M., Seattle time, the fourth
(4/th/) full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
2(g) and 3(e) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later that two (2) full business days
following delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of [___] Option Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Shares. The option
granted hereunder is for use by the Underwriters solely in covering any over-
allotments in connection with the sale and distribution of the Firm Shares. The
option granted hereunder may be exercised at any time upon written notice by the
Representatives to the Company (with a copy to the Company), which notice may be
given at any time within
9.
<PAGE>
30 days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number of
----------
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
FleetBoston Robertson Stephens Inc., individually and not as the Representatives
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company
shall also deliver, or cause to be delivered, a credit representing the Option
Shares the Underwriters have agreed to purchase at the First Closing Date (or
the Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
Seattle time on the second business day following the date the Shares are
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Representatives shall request.
10.
<PAGE>
Section 3. Covenants of the Company. The Company further covenants and
agrees with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law,
11.
<PAGE>
the Company promptly will prepare and file with the Commission, and furnish at
its own expense to the Underwriters and to dealers, an appropriate amendment to
the Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause FleetBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending March 31, 2001 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not, without the prior written consent of FleetBoston Robertson Stephens Inc.,
for a period of 180 days following the date of the Prospectus, offer, sell or
contract to sell, or otherwise dispose of or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity
12.
<PAGE>
with the Company or any affiliate of the Company) directly or indirectly, or
announce the offering of, any other Common Shares or any securities convertible
into, or exchangeable for, Common Shares; provided, however, that the Company
may (i) issue and sell Common Shares pursuant to any director or employee stock
option plan, stock ownership plan or dividend reinvestment plan of the Company
in effect at the date of the Prospectus and described in the Prospectus so long
as none of those shares may be transferred on during the period of 180 days from
the date that the Registration Statement is declared effective (the "Lock-Up
Period") and the Company shall enter stop transfer instructions with its
transfer agent and registrar against the transfer of any such Common Shares and
(ii) the Company may issue Common Shares issuable upon the conversion of
securities or the exercise of warrants outstanding at the date of the Prospectus
and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five years
hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
(n) The Company will direct the transfer agent to place stop transfer
orders on any Directed Shares that have been sold to participants subject to the
three month restriction on sale, transfer, assignment, pledge or hypothecation
imposed by NASD Regulation, Inc. under its Interpretative Material 2110-1 on
free-riding and withholding to the extent necessary to ensure compliance with
the three month restrictions.
(o) The Company will comply with all applicable securities and other
applicable laws, rules and regulations in each jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
(p) The Company will pay all reasonable fees and disbursements of counsel
incurred by the Underwriters in connection with the directed Shares Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, LLC. The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later date as shall be
13.
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consented to in writing by you; and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall have
been initiated or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel; and the National Association of Securities Dealers, LLC shall have
raised no objection to the fairness and reasonableness of the underwriting terms
and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, there shall not have been any Material Adverse Change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Venture Law Group, A Professional Corporation, counsel for the Company,
substantially in the form of Exhibit B attached hereto, dated the First Closing
---------
Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
---------
questions of law not involving the laws of the United States or the State of
Washington and general corporate law of the State of Delaware upon opinions of
local counsel, and as to questions of fact upon representations or certificates
of officers of the Company, and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) Opinion of Patent Counsel for the Company. You shall have received on
the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of McDermott, Will & Emery, patent counsel for the Company substantially
in the form of Exhibit C attached hereto.
---------
(f) Opinion of Trademark Counsel for the Company. You shall have received
on the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of Visomark Law Group, PLLC for the Company substantially in the form of
Exhibit D attached hereto.
- ---------
(g) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of Exhibit
-------
E hereto. The Company shall have
- -
14.
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furnished to such counsel such documents as they may have requested for the
purpose of enabling them to pass upon such matters.
(h) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company and
Alive.com within the meaning of the Act and the applicable published Rules and
Regulations and based upon the procedures described in such letter delivered to
you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4) business
days prior to the First Closing Date or the Second Closing Date, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the First Closing Date or the
Second Closing Date, as the case may be, and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and Alive.com
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from Arthur Andersen LLP shall be addressed to or for the use of
the Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company and Alive.com within the meaning
of the Act and the applicable published Rules and Regulations, (ii) set forth
their opinion with respect to their examination of the consolidated balance
sheet of the Company and Alive.com as of December 31, 1999 and related
consolidated statements of operations, shareholders' equity, and cash flows for
the twelve (12) months ended December 31, 1999, (iii) state that in the course
of such review, nothing came to their attention that leads them to believe that
any material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and
address other matters agreed upon by Arthur Andersen LLP and you. In addition,
you shall have received from Arthur Andersen LLP a letter addressed to the
Company and Alive.com and made available to you for the use of the Underwriters
stating that their review of the Company's and Alive.com's systems of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's and Alive.com's consolidated
financial statements as of December 31, 1999, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(i) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
15.
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(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto
contained all material information required to be included therein by the
Securities Act and in all material respects conformed to the requirements
of the Securities Act, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (c) any obligation, direct
or contingent, that is material to the Company, incurred by the Company,
except obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company that
is material to the Company, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or (f) any loss
or damage (whether or not insured) to the property of the Company which has
been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(j) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached hereto or as otherwise approved by the
---------
Representatives or counsel to the Representatives from each officer and director
of the Company, and each beneficial owner of one or more percent of the
outstanding issued share capital of the Company.
(k) Stock Exchange Listing. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(l) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(m) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
16.
<PAGE>
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
listing the Common Shares on the Nasdaq National Market, (ix) all costs and
expenses incident to the preparation and undertaking of "road show" preparations
to be made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8,
Section 9, or if the sale to the Underwriters of the Shares on the First Closing
Date is not consummated because of any refusal, inability or failure on the part
of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
17.
<PAGE>
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii) or (iv) above, provided that the Company
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by FleetBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
18.
<PAGE>
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph, the second paragraph,
the third paragraph and the forth paragraph under the caption "Underwriting" in
the Prospectus; and the Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal
19.
<PAGE>
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 7 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (FleetBoston Robertson Stephens Inc. in the case of Section 7(b) and
Section 8), representing the indemnified parties who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as
20.
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the total net proceeds from the offering (before deducting expenses) received by
the Company bears to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The 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 Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person with respect to such
fraudulent misrepresentation who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 7(f) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
21.
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(j) Indemnification for Directed Share Program. The Company agrees to
indemnify and hold harmless FleetBoston Robertson Stephens Inc. and its
affiliates and each person, if any, who controls FleetBoston Robertson Stephens
Inc. or its affiliates within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act ("FleetBoston Robertson Stephens
Entities"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material fact
contained in any material prepared by or with the consent of the Company for
distribution to participants in connection with the Directed Share Program, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) caused by the failure of any participant to pay for and accept
delivery of Directed Shares that the participant has agreed to purchase; or
(iii) related to, arising out of, or in connection with the Directed Share
Program other than losses, claims, damages or liabilities (or expenses relating
thereto) that are finally judicially determined to have resulted form the bad
faith or gross negligence of FleetBoston Robertson Stephens Entities.
In case any proceeding (including any governmental investigation)
shall be instituted involving any FleetBoston Robertson Stephens Entity in
respect of which indemnity may be sought pursuant to Section 7(k), the
FleetBoston Robertson Stephens Entity seeking indemnity shall promptly notify
the Company in writing and the Company, upon request of the Robertson Stephens
Entity, shall retain counsel reasonably satisfactory to the FleetBoston
Robertson Stephens Entity to represent the FleetBoston Robertson Stephens Entity
and any other the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any FleetBoston Robertson Stephens Entity shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such FleetBoston Robertson Stephens Entity unless (i) the Company
shall have agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the FleetBoston Robertson Stephens Entity and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not, in respect of the legal expenses
of the FleetBoston Robertson Stephens Entities in connection with any proceeding
or related proceedings the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all FleetBoston Robertson Stephens Entities. Any such firm for the FleetBoston
Robertson Stephens Entities shall be designated in writing by FleetBoston
Robertson Stephens. The Company shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees to
indemnify the FleetBoston Robertson Stephens Entities from and against any loss
or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time a FleetBoston Robertson Stephens Entity shall
have requested the Company to reimburse it for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the Company
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 30
days after receipt by the Company of the aforesaid request and (ii) the Company
shall not have reimbursed the FleetBoston Robertson Stephens Entity in
accordance with such request prior to the date of such settlement. The Company
shall not, without the prior written consent of FleetBoston Robertson Stephens,
effect any settlement of any pending or threatened proceeding in respect of
which any FleetBoston Robertson Stephens Entity is or could have been a party
and indemnity could have been sought hereunder by such FleetBoston Robertson
Stephens Entity, unless such
22.
<PAGE>
settlement includes an unconditional release of the FleetBoston Robertson
Stephens Entities from all liability on claims that are the subject matter of
such proceeding.
To the extent the indemnification provided for in Section 7(k) is
unavailable to a FleetBoston Robertson Stephens Entity or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
the Company, in lieu of indemnifying the FleetBoston Robertson Stephens Entity
thereunder, shall contribute to the amount paid or payable by the FleetBoston
Robertson Stephens Entity as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the FleetBoston Robertson
Stephens Entities on the other hand from the offering of the Directed Shares or
(ii) if the allocation provided by clause (i) of this paragraph above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) of this paragraph above but
also the relative fault of the Company on the one hand and of the FleetBoston
Robertson Stephens Entities on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and of the FleetBoston Robertson
Stephens Entities on the other hand in connection with the offering of the
Directed Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Directed Shares (before deducting
expenses) and the total underwriting discounts and commissions received by the
FleetBoston Robertson Stephens Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Shares. If the loss, claim, damage or
liability is caused by an untrue or alleged untrue statement of a material fact,
the relative fault of the Company on the one hand and the FleetBoston Robertson
Stephens Entities on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement or the omission or
alleged omission relates to information supplied by the Company or by the
FleetBoston Robertson Stephens Entities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the FleetBoston Robertson Stephens Entities agree that
it would not be just or equitable if contribution pursuant to this Section 7(k)
were determined by pro rata allocation (even if the FleetBoston Robertson
Stephens Entities were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in paragraph three of this Section 7(k). The amount paid or payable
by the FleetBoston Robertson Stephens Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the BanclBoston
Robertson Stephens Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 7(k), no
FleetBoston Robertson Stephens Entity shall be required to contribute any amount
in excess of the amount by which the total price at which the Directed Shares
distributed to the public were offered to the public exceeds the amount of any
damages that such FleetBoston Robertson Stephens Entity has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. The remedies provided for in this Section 7(k) are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any FleetBoston Robertson Stephens Entity at law or in equity.
The indemnity and contribution provisions contained in this Section
7(k) shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any FleetBoston Robertson Stephens Entity or the
23.
<PAGE>
Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Directed Shares.
Section 8. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on Schedule A bears to the aggregate number of
----------
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representatives or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing Date,
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the reasonable judgment of
the Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the reasonable judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the reasonable judgment of the Representatives may interfere materially with
the conduct of the business and operations of the
24.
<PAGE>
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 9 shall be without liability on the part of
(a) the Company to any Underwriter, except that the Company shall be obligated
to reimburse the expenses of the Representatives and the Underwriters pursuant
to Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any
party hereto to any other party except that the provisions of Section 7 shall at
all times be effective and shall survive such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
FLEETBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
Loudeye Technologies, Inc.
Times Square
414 Olive Way, Suite 300
Seattle, WA 97035
Facsimile: (206) 832-4001
Attention: Dave Bullis, President & COO
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 9 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors, and no other person will have any right or obligation hereunder. The
term "successors" shall not include any purchaser of the Shares as such from any
of the Underwriters merely by reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
25.
<PAGE>
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each party
irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
Section 15. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
26.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
Loudeye Technologies, Inc.
By:_______________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
FLEETBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
CIBC WORLD MARKETS CORP.
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
By FLEETBOSTON ROBERTSON STEPHENS INC.
By: _____________________________________________
Authorized Signatory
27.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Common
Underwriters Shares To be Purchased
- ------------------------------------------------------------------ ----------------------
<S> <C>
FLEETBOSTON ROBERTSON STEPHENS INC. AND
FLEETBOSTON ROBERTSON STEPHENS INTERNATIONAL
INC....................................................... [___]
HAMBRECHT & QUIST LLC........................................... [___]
CIBC WORLD MARKETS CORP......................................... [___]
[___]........................................................... [___]
[___]........................................................... [___]
Total.................................................. [___]
</TABLE>
S-A
<PAGE>
Exhibit A
Lock-Up Agreement
FleetBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
CIBC World Markets Corp.
As Representatives of the Several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: encoding.com, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain
shares of Common Stock of the Company ("Common Stock") or securities convertible
into or exchangeable or exercisable for Common Stock. The Company proposes to
carry out a public offering of Common Stock (the "Offering") pursuant to a
registration statement to be filed with the Securities and Exchange Commission
(the "Registration Statement") for which you will act as the Representatives
(the "Representatives") of the underwriters. The undersigned recognizes that
the Offering will be of benefit to the undersigned and will benefit the Company
by, among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market, (iv) with respect to sales or purchases of
Common Stock acquired on the open market or (v) with the prior written consent
of FleetBoston Robertson Stephens Inc., for a period commencing on the date
hereof and continuing to a date 180 days after the Registration Statement is
declared effective by the Securities and Exchange Commission (the "Lock-up
Period"). The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
included, relates to or derives any
A-1
<PAGE>
significant part of its value from Securities. The undersigned also agrees and
consents to the entry of stop transfer instructions with the Company's transfer
agent and registrar against the transfer of shares of Common Stock or Securities
held by the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal Representatives, and assigns of
the undersigned. If the Registration Statement shall not have been declared
effective on or before June 30, 2000, this Lock-Up Agreement shall be of no
further force or effect.
Dated _____________________________________________
___________________________________________________
Printed Name of Holder
By:________________________________________________
Signature
___________________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if signing
as custodian, trustee, or on behalf of an entity)
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a Material Adverse Effect. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of
the dates stated therein, the issued and outstanding shares of capital
stock of the Company have been duly and validly issued and are fully paid
and nonassessable, and, to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
(v) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right.
(vi) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights generally or by general
equitable principles;
(viii) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Securities Act;
(ix) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been
B-1
<PAGE>
validly registered under the Securities Act and the Rules and Regulations
of the Exchange Act and the applicable rules and regulations of the
Commission thereunder;
(x) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply
with Delaware law;
(xii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiii) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company, or over
any of its properties or operations;
(xv) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company, or over any of its properties or operations
is necessary in connection with the consummation by the Company of the
transactions herein contemplated, except (i) such as have been obtained or
are required under the Securities Act or Exchange Act, (ii) such as may be
required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the Underwriters
(as to which we express no opinion), (iii) such as may be required by the
National Association of Securities Dealers, LLC and (iv) such as may be
required under the federal or provincial laws of Canada or other applicable
foreign securities laws;
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character
required to be disclosed in
B-2
<PAGE>
the Registration Statement or the Prospectus by the Securities Act, other
than those described therein;
(xvii) To such counsel's knowledge, the Company is not presently (a) in
material violation of its respective charter or bylaws, or (b) in material
breach of any applicable statute, rule or regulation known to such counsel
or, to such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or over
any of their properties or operations;
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Company Shares or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Company
Shares or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse
of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such
rights; and
(xix) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other Representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the First Closing
Date or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
B-3
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of
Patent Counsel for the Company
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
service marks or other proprietary information or materials and:
(i) The Company is listed in the records of the United States Patent and
Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications"). To the knowledge
of such counsel, there are no claims of third parties to any ownership
interest or lien with respect to any of the Patents or Applications. Such
counsel is not aware of any material defect in form in the preparation or
filing of the Applications on behalf of the Company. To the knowledge of
such counsel, the Applications are being pursued by the Company. To the
knowledge of such counsel, the Company owns as its sole property the
Patents and pending Applications;
(ii) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a
schedule to such opinion (the "Foreign Patents") and each of the
applications listed on a schedule to such opinion (the "Foreign
Applications"). Such counsel knows of no claims of third parties to any
ownership interest or lien with respect to the Foreign Patents or Foreign
Applications. Such counsel is not aware of any material defect of form in
the preparation or filing of the Foreign Applications on behalf of the
Company. To the knowledge of such counsel, the Foreign Applications are
being pursued by the Company. To the knowledge of such counsel, the Company
owns as its sole property the Foreign Patents and pending Foreign
Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign Patents
are not valid as issued. Such counsel has no knowledge of any reason why
any patent to be issued as a result of any Application or Foreign
Application would not be valid or would not afford the Company useful
patent protection with respect thereto;
(iv) As to the statements under the captions "Risk Factors -- Dependence
on Patents and Proprietary Rights" and "Business -- Patents and Proprietary
Rights," nothing has come to the attention of such counsel which caused
them to believe that the above-mentioned sections of the Registration
Statement and any amendment or supplement thereto made available and
reviewed by such counsel, at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date
and on any later date on which Option Stock are to be purchased, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
and
(v) Such counsel knows of no material action, suit, claim or proceeding
relating to patents, patent rights or licenses, copyrights, collaborative
research, licenses or royalty arrangements or agreements or trade secrets,
know-how or proprietary techniques,
C-1
<PAGE>
including processes and substances, owned by or affecting the business or
operations of the Company which are pending or threatened against the
Company or any of its officers or directors.
C-2
<PAGE>
Exhibit D
Trademark Counsel for the Company
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to trademarks, and:
(i) As to the statements under the captions which relate to the trademarks
of the Company "Risk Factors -- Dependence on Patents and Proprietary
Rights" and "Business -- Patents and Proprietary Rights," nothing has come
to the attention of such counsel which caused them to believe that the
above-mentioned sections of the Registration Statement and any amendment or
supplement thereto made available and reviewed by such counsel, at the time
the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which Option
Stock are to be purchased, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
(ii) Such counsel knows of no material action, suit, claim or proceeding
relating to trademarks or trademark rights, owned by or affecting the
business or operations of the Company which are pending or threatened
against the Company or any of its officers or directors.
D-1
<PAGE>
Exhibit E
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The Firm Shares have been duly authorized and, upon issuance and
delivery and payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and non-
assessable.
(ii) The Registration Statement has become effective under the Act and, to
our knowledge, no stop order proceedings with respect thereto have been
instituted or threatened or are pending under the Act.
(iii) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Venture Law Group and McDermott, Will &
Emery, each dated the date hereof, and furnished to you in accordance with the
provisions of the Underwriting Agreement. Such opinions appear on their face to
be appropriately responsive to the requirements of the Underwriting Agreement.
We may state, however, that based upon our participation as described
in the preceding paragraph, (i) we confirm that we have no reason to believe
that the Registration Statement (other than the financial statements, including
the notes and schedules thereto, and the other financial and statistical data
included in the Registration Statement, as to which we express no belief), at
the time the Registration Statement became effective, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
(ii) we confirm that we have no reason to believe that the Prospectus (other
than the financial statements, including the notes and schedules thereto, and
the other financial and statistical data included in the Prospectus, as to which
we express no belief), on the date hereof, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
E-1
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ENCODING.COM, INC.
The undersigned, Martin Tobias and John W. Robertson, hereby certify that:
1. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of Encoding.com, Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of the State of Delaware on March 26, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
The name of this corporation is Encoding.com, Inc. (the "Corporation").
-----------
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent. The name of
its registered agent at such address is National Corporate Research, Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is One
Hundred Forty One Million (141,000,000) shares, each with a par value of $0.001
per share. One Hundred Million (100,000,000) shares shall be Common Stock and
Forty One Million (41,000,000) shares shall be Preferred Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by this Fifth Amended and Restated Certificate of Incorporation
may be issued from time to time in one or more series. Five Million (5,000,000)
shares shall be designated "Series A Preferred Stock"; Four Million (4,000,000)
------------------------
shares shall be designated "Series B Preferred Stock"
------------------------
<PAGE>
and Four Million (4,000,000) shares shall be designated "Series B-1 Preferred
--------------------
Stock"; Six Million (6,000,000) shares shall be designated "Series C Preferred
- ----- ------------------
Stock" and Six Million (6,000,000) shares shall be designated "Series C-1
- ----- ----------
Preferred Stock"; and Eight Million (8,000,000) shares shall be designated
- ---------------
"Series D Preferred Stock" and Eight Million (8,000,000) shares shall be
designated "Series D-1 Preferred Stock" The rights, preferences, privileges
--------------------------
and restrictions granted to and imposed on the Series A, Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock are as set forth
below in this Article IV(B). The Corporation's board of directors (the
"Board of Directors") is hereby authorized to fix or alter the rights,
------------------
preferences, privileges and restrictions granted to or imposed upon additional
series of Preferred Stock, and the number of shares constituting any such
series and the designation thereof, or of any of them. Subject to compliance
with applicable protective voting rights which have been or may be granted
to the Preferred Stock or series thereof in Certificates of Designations
or the Corporation's Certificate of Incorporation or otherwise ("Protective
----------
Provisions"), but notwithstanding any other rights of the Preferred Stock or any
- ----------
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinate to, pari passu with (including, without
---- -----
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to, any of those of any present or future class or series of Preferred
or Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number of
shares of any series, prior or subsequent to the issue of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1. Dividend Provisions. Subject to the rights of series of Preferred
-------------------
Stock which may from time to time come into existence in compliance with the
terms hereof, the holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series C-
1, Series D or Series D-1 Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the Corporation) on the Common Stock of the Corporation, at the rate of (i)
$0.07 per share per annum on each outstanding share of Series A Preferred Stock,
Series B and Series B-1 Preferred Stock, (ii) $0.15 per share per annum on each
outstanding share of Series C and Series C-1 Preferred Stock, payable quarterly
when, as and if declared by the Board of Directors and (iii) $0.52 per share per
annum on each outstanding share of Series D and Series D-1 Preferred Stock,
payable quarterly when, as and if declared by the Board of Directors. Such
dividends shall not be cumulative.
2. Liquidation.
-----------
(a) Preference. In the event of any liquidation, dissolution or
----------
winding up of the Corporation, either voluntary or involuntary (a
"Liquidation"), subject to the rights of series of Preferred Stock that may from
-----------
time to time come into existence in compliance with the
-2-
<PAGE>
terms hereof, the holders of the Series A, Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Common Stock by reason of their ownership thereof,
an amount per share equal to (i) $0.843 per share for each share of Series A
Preferred Stock then held by them, up to a total of $250,000 in the aggregate
for all holders of Series A Preferred Stock, (ii) $0.843 per share for each
share of Series B or Series B-1 Preferred Stock then held by them, (iii) $1.90
per share for each share of Series C or Series C-1 then held by them, (iv) $6.37
per share for each share of Series D or Series D-1, plus in each case declared
but unpaid dividends. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A, Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
that may from time to time come into existence in compliance with the terms
hereof, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive hereunder.
(b) Remaining Assets. Upon the completion of the distribution
----------------
required by Section 2(a) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence in compliance with the terms hereof, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of the Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock and the Common Stock pro rata based on
the number of shares of Common Stock held by each (assuming conversion of all
such Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series
D-1 Preferred Stock) until (i) with respect to the holders of Series A Preferred
Stock, such holders shall have received an aggregate of $500,000 (including
amounts paid pursuant to Section 2(a) above), (ii) with respect to the holders
of Series B and Series B-1 Preferred Stock, such holders shall have received an
aggregate of $1.686 per share (including amounts paid pursuant to Section 2(a)
above), (iii) with respect to the holders of Series C and Series C-1 Preferred
Stock, such holders shall have received an aggregate of $3.80 per share
(including amounts paid pursuant to Section 2(a) above), and (iv) with respect
to the holders of Series D and Series D-1 Preferred Stock, such holders shall
have received an aggregate of $12.74 per share (including amounts paid pursuant
to Section 2(a) above); thereafter, subject to the rights of series of Preferred
Stock that may from time to time come into existence in compliance with the
terms hereof, if assets remain in the Corporation, the holders of the Common
Stock of the Corporation shall receive all of the remaining assets of the
Corporation pro rata based on the number of shares of Common Stock held by each.
Notwithstanding the foregoing Sections (B)(2)(a) and (b) of this Article IV, if
a holder of Series A, Series B, Series B-1, Series C, Series C-1, Series D or
Series D-1 Preferred Stock would have received a greater amount in a Liquidation
had such holder converted such Series A, Series B, Series B-1, Series C, Series
C-1, Series D or Series D-1 Preferred Stock into Common Stock immediately prior
to such Liquidation pursuant to Section (B)(4)(a) of this Article IV, then such
holder shall be entitled to receive such greater amount.
-3-
<PAGE>
(c) Certain Acquisitions.
--------------------
(i) Deemed Liquidation. For purposes of this Section 2, a
------------------
Liquidation of the Corporation shall be deemed to occur if the Corporation shall
(i) sell, convey, or otherwise dispose of or encumber all or substantially all
of its property or business or (ii) merge into or consolidate with any other
corporation or business entity (other than a wholly-owned subsidiary
corporation) or (iii) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Corporation is disposed of, provided that this Section 2(c)(i) shall not apply
to a merger effected exclusively for the purpose of changing the domicile of the
Corporation.
(ii) Valuation of Consideration. In the event of a
--------------------------
Liquidation, if the consideration received by the Corporation is other than
cash, its value will be deemed its fair market value as determined in accordance
with this clause (c)(ii). Any securities shall be valued as follows:
(A) Securities not subject to investment letter
restricting transfer or other similar restrictions on free marketability:
(1) If traded on a securities exchange or The
Nasdaq Stock Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange over the thirty-day period ending
three (3) days prior to the closing of the Liquidation;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing of the Liquidation; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the
Corporation and, provided at least 500,000 shares of Series B, Series C and
Series D Preferred Stock is outstanding, the holders of at least a majority of
the voting power of all then outstanding shares of Series B, Series C and Series
D Preferred Stock, voting together as a single class.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in Section 2(c)(ii)(A) to reflect the approximate fair
market value thereof, as determined in good faith by the Corporation and,
provided at least 500,000 shares of Series B, Series C and Series D Preferred
Stock is outstanding, the holders of at least a majority of the voting power of
all then outstanding shares of Series B, Series C and Series D Preferred Stock,
voting together as a single class.
(iii) Notice of Transaction. The Corporation shall give each
---------------------
holder of record of Series A Preferred Stock, Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock written notice of such
impending transaction not later than ten
-4-
<PAGE>
(10) days prior to the stockholders' meeting called to approve such transaction,
or ten (10) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than ten
(10) days after the Corporation has given the first notice provided for herein
or sooner than ten (10) days after the Corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of Preferred Stock that are
entitled to such notice rights or similar notice rights and that represent at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
(iv) Effect of Noncompliance. In the event the requirements
-----------------------
of this Section 2(c) are not complied with, the Corporation shall forthwith
either cause the closing of the transaction to be postponed until such
requirements have been complied with, or cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Series A Preferred
Stock, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1
Preferred Stock shall revert to and be the same as such rights, preferences and
privileges existing immediately prior to the date of the first notice referred
to in Section 2(c)(iii) hereof.
3. Redemption. The Preferred Stock is not redeemable.
----------
4. Conversion. The holders of the Series A, Series B, Series B-1,
----------
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
-----------------
(a) Right to Convert. Subject to Section 4(c), each share of
----------------
Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (i) $0.843
in the case of the Series A Preferred Stock, (ii) $0.843 in the case of the
Series B and Series B-1 Preferred Stock, (iii) $1.90 in the case of the Series C
and Series C-1 Preferred Stock and (iv) $6.37 in the case of the Series D and
Series D-1 Preferred Stock by the Conversion Price applicable to such share,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Conversion Price per share shall be
$0.843 for shares of Series A Preferred Stock, $0.843 for shares of Series B
Preferred Stock, $1.90 for shares of Series C Preferred Stock and $6.37 for
shares of Series D Preferred Stock. The initial Conversion Price per share of
Series B-1, Series C-1 and Series D-1 Preferred Stock shall be determined in
accordance with Section 4(d)(i)(C) below. Such initial Conversion Price shall be
subject to adjustment as set forth in Section 4(d) below.
(b) Automatic Conversion. Each share of Series A, Series B,
--------------------
Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such
-5-
<PAGE>
share immediately upon the earlier of (i) except as provided below in Section
4(c), the Corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), the public offering
--------------
price of which is not less than $10.00 per share (appropriately adjusted for any
stock split, dividend, combination or other recapitalization) and which results
in aggregate cash proceeds to the Corporation of $30,000,000 (net of
underwriting discounts and commissions) or (ii) the date specified by written
consent or agreement of the holders of at least two-thirds of the then
outstanding shares of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock, voting together as a single class;
provided, however, the Series D and Series D-1 Preferred Stock shall only so
convert upon the written consent or agreement of the holders of at least two-
thirds of the then outstanding shares Series D and Series D-1 Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A, Series B,
-----------------------
Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred Stock shall
be entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for such series of Preferred Stock,
and shall give written notice to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of such series of Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act the conversion may, at the option of
any holder tendering such Preferred Stock for conversion, be conditioned upon
the closing with the underwriters of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive Common Stock upon
conversion of such Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the closing of such sale of
securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
A, Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below Purchase Price. If the
-------------------------------------------------
Corporation shall issue, after the date upon which any shares of Series B,
Series C or Series D Preferred Stock were first issued (the "Purchase Date" with
-------------
respect to each series), any Additional Stock (as defined below) without
consideration or for a consideration per share less
-6-
<PAGE>
than the Conversion Price for such series in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such series in
effect immediately prior to each such issuance shall automatically be adjusted
as set forth in this Section 4(d)(i), unless otherwise provided in this Section
4(d)(i).
(A) Adjustment Formula. Whenever the Conversion Price is
------------------
adjusted pursuant to this Section (4)(d)(i), the new Conversion Price shall be
determined by multiplying the Conversion Price then in effect by a fraction, (x)
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (the "Outstanding Common") plus the number of
------------------
shares of Common Stock that the aggregate consideration received by the
Corporation for such issuance would purchase at such Conversion Price; and (y)
the denominator of which shall be the number of shares of Outstanding Common
plus the number of shares of such Additional Stock. For purposes of the
foregoing calculation, the term "Outstanding Common" shall include shares of
Common Stock deemed issued pursuant to Section 4(d)(i)(F) below.
(B) Definition of "Additional Stock". For purposes of this
-------------------------------
Section 4(d)(i), "Additional Stock" shall mean any shares of Common Stock issued
----------------
(or deemed to have been issued pursuant to Section 4(d)(i)(F)) by the
Corporation after the Purchase Date) other than:
(1) Common Stock issued pursuant to a transaction
described in Section 4(d)(ii) hereof;
(2) Shares (including shares and options issued before
the date of this Agreement) of Common Stock issuable or issued to employees,
consultants or directors of the Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of the
Corporation;
(3) Capital stock, or options or warrants to purchase
capital stock, issued (i) in connection with an investment by a strategic
partner and (ii) to financial institutions, lenders or lessors in connection
with commercial credit arrangements, loans, equipment financings or similar
transactions;
(4) Shares of Common Stock or Preferred Stock issuable
upon exercise of options, notes, warrants or other rights outstanding as of the
date of this Restated Certificate;
(5) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers or
similar transactions, the terms of which are approved by the Board of Directors
of the Corporation;
(6) Shares of Common Stock issued or issuable upon
conversion of the Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock outstanding as of the date of this Restated
Certificate; and
-7-
<PAGE>
(7) Shares of Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Series A, Series B, Series B-1, Series C, Series C-1, Series D or Series D-1
Preferred Stock will be converted to Common Stock.
(C) Conversion Price of Series B-1, Series C-1 and Series
-----------------------------------------------------
D-1 Preferred Stock. From and after such time as any share of Series B-1,
- -------------------
Series C-1 or Series D-1 Preferred Stock is issued and outstanding, except as
explicitly set forth in this Certificate of Incorporation, the Conversion Price
for the Series B-1 Preferred Stock shall be the Series B Conversion Price in
effect immediately prior to such issuance, the Conversion Price for the Series
C-1 Preferred Stock shall be the Series C Conversion Price in effect immediately
prior to such issuance and the Conversion Price for the Series D-1 Preferred
Stock shall be the Series D Conversion Price in effect immediately prior to such
issuance, and shall not thereafter be subject to adjustment pursuant to Section
4(d)(i)(A).
(D) No Fractional Adjustments. No adjustment of the
-------------------------
Conversion Price for the Series A, Series B, Series B-1, Series C, Series C-1,
Series D or Series D-1 Preferred Stock shall be made in an amount less than one
cent per share, provided that any adjustments which are not required to be made
by reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to three years from the
date of the event giving rise to the adjustment being carried forward, or shall
be made at the end of three years from the date of the event giving rise to the
adjustment being carried forward.
(E) Determination of Consideration. In the case of the
------------------------------
issuance of Common Stock for cash, the consideration shall be deemed to be the
amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
In the case of the issuance of the Common Stock for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to be
the fair value thereof as determined by the Board of Directors irrespective of
any accounting treatment.
(F) Deemed Issuances of Common Stock. In the case of the
--------------------------------
issuance (whether before, on or after the applicable Purchase Date) of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 4(d)(i):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for
-8-
<PAGE>
a consideration equal to the consideration (determined in the manner provided in
Section 4(d)(i)(E)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution adjustments) for
the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without limitation,
the passage of time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in Section 4(d)(i)(E).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the Corporation upon
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion Price of each
of the Series A, Series B, Series B-1, Series C, Series C-1, Series D and Series
D-1 Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Sections 4(d)(i)(F)(1) and
4(d)(i)(F)(2) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 4(d)(i)(F)(3) or
4(d)(i)(F)(4).
-9-
<PAGE>
(G) No Increased Conversion Price. Notwithstanding any
-----------------------------
other provisions of this Section (4)(d)(i), except to the limited extent
provided for in Sections 4(d)(i)(F)(3) and 4(d)(i)(F)(4), no adjustment of the
Conversion Price pursuant to this Section 4(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the
--------------------------
Corporation should at any time or from time to time after the Purchase Date fix
a record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
------------------------
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price of each of the Series A, Series B, Series B-1,
Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Section 4(d)(i)(F).
(iii) Reverse Stock Splits. If the number of shares of
--------------------
Common Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for each of the Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event the Corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(d)(ii), then, in
each such case for the purpose of this Section 4(e), the holders of Series A,
Series B, Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be
-10-
<PAGE>
made so that the holders of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D and Series D-1 Preferred Stock shall thereafter be entitled to
receive upon conversion of such Preferred Stock the number of shares of stock or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of such Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of such
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D or Series D-1 Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. The number of
shares issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock the holder is at the time converting
into Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A, Series B, Series B-1, Series C, Series C-1,
Series D and Series D-1 Preferred Stock pursuant to this Section 4, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of such Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A, Series B, Series B-1, Series C, Series C-1,
Series D or Series D-1 Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and readjustment,
(B) the Conversion Price for such series of Preferred Stock at the time in
effect and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of such series of Preferred Stock.
-11-
<PAGE>
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation 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 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, the Corporation
shall mail to each holder of Series A, Series B, Series B-1, Series C, Series C-
1, Series D and Series D-1 Preferred Stock, at least ten (10) 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 or right, and the
amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A, Series B, Series B-1, Series C, Series
C-1, Series D and Series D-1 Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of such series of Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of such
series of Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, engaging
in best efforts to obtain the requisite stockholder approval of any necessary
amendment to this Certificate of Incorporation.
(k) Notices. Any notice required by the provisions of this
-------
Section 4 to be given to the holders of shares of Series A, Series B, Series B-
1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his, her or its address appearing on the books of the
Corporation.
5. Voting Rights. The holder of each share of Series A, Series B,
-------------
Series B-1, Series C, Series C-1, Series D and Series D-1 Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted, and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights and
powers of the holders of Common Stock, and shall be entitled, notwithstanding
any provision hereof or in the Bylaws, to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series A,
Series B, Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward).
-12-
<PAGE>
6. Protective Provisions.
---------------------
(a) Majority of Preferred Stock. Subject to the rights of
---------------------------
series of Preferred Stock which may from time to time come into existence in
compliance with the terms hereof, so long as any shares Preferred Stock are
outstanding (as adjusted for stock splits, stock dividends or
recapitalizations), the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of Preferred Stock, voting
together as a class:
(i) effect, or permit to occur, a transaction described
in Section 2(c)(i) above;
(ii) alter or change the rights, preferences or privileges
of the shares of Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock so as to affect adversely the shares of such
series;
(iii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series A, Series B, Series B-1, Series C, Series C-1, Series D or Series D-1
Preferred Stock;
(iv) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security, having a preference over, or being on a
parity with, the Series A, Series B, Series B-1, Series C, Series C-1, Series D
or Series D-1 Preferred Stock with respect to voting, dividends, conversion or
upon Liquidation;
(v) amend this Restated Certificate or the Bylaws of the
Corporation;
(vi) redeem, purchase or otherwise acquire (or pay into or
set funds aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which the Corporation has the
option to repurchase such shares at cost upon the occurrence of certain events,
such as the termination of employment, or through the exercise of any right of
first refusal;
(vii) change the authorized number of directors of the
Corporation; or
(viii) declare or pay any dividend or distribution with
respect to shares of Common Stock or other equity securities junior to the
Series A, Series B or B-1, Series C or C-1, or Series D or D-1 Preferred Stock.
-13-
<PAGE>
(b) Supermajority of Preferred Stock. Subject to the rights of
--------------------------------
series of Preferred Stock which may from time to time come into existence in
compliance with the terms hereof, so long as any shares Preferred Stock are
outstanding (as adjusted for stock splits, stock dividends or
recapitalizations), the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least two thirds of the then outstanding shares of Preferred Stock, voting
together as a class, increase or decrease the total number of authorized shares
of Common Stock.
(c) Series B, Series C and Series D Preferred Stock. Subject
-----------------------------------------------
to the rights of series of Preferred Stock which may from time to time come into
existence in compliance with the terms hereof, so long as any shares of Series
B, Series B-1, Series C, Series C-1, Series D or Series D-1 Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B, Series B-1, Series C,
Series C-1, Series D and Series D-1 Preferred Stock, voting together as a class:
(i) effect a transaction described in Section 2(c)(i)
above, unless each holder of Series B or Series B-1 Preferred Stock shall
receive at least $1.686 per share, each holder of Series C or Series C-1
Preferred Stock shall receive at least $3.80 per share, and each Series D or
Series D-1 Preferred Stock shall receive at least $12.74 per share (each as
adjusted for stock splits, stock dividends or recapitalizations) in connection
with such transaction;
(ii) alter or change the rights, preferences or privileges
of the shares of Series B, Series C or Series D Preferred Stock so as to affect
adversely and materially the shares of such series;
(iii) issue, or obligate itself to issue, any other series
of Preferred Stock at a price less than $0.843 per share with respect to the
Series B, $1.90 with respect to the Series C and $6.37 with respect to the
Series D (each as adjusted for stock splits, stock dividends or
recapitalizations); provided, however, that the Corporation shall not issue or
obligate itself to issue any other series of Preferred Stock at a price less
than $1.90 but greater than $0.843 per share (as adjusted for stock splits,
stock dividends or recapitalizations) without the approval of the holders of at
least a majority of the then outstanding shares of Series C, Series C-1, Series
D and Series D-1, voting together as a class; and provided, further, that
Corporation shall not issue or obligate itself to issue any other series of
Preferred Stock at a price less than $6.37 but greater than $1.90 per share (as
adjusted for stock splits, stock dividends or recapitalizations) without the
approval of the holders of at least a majority of the then outstanding shares of
Series D and Series D-1, voting as a separate class; or
(iv) redeem, purchase or otherwise acquire (or pay into or
set funds aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which
-14-
<PAGE>
the Corporation has the option to repurchase such shares at cost upon the
occurrence of certain events, such as the termination of employment, or through
the exercise of any right of first refusal.
(d) Series B Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence, so long as any
shares of Series B or B-1 Preferred Stock are outstanding, the Corporation shall
not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least two-thirds of the then outstanding
shares of Series B and B-1 Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (d) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series B Preferred Stock in a manner different from the Series A,
Series C, Series C-1, Series D or Series D-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series B or Series B-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series B Preferred Stock with respect to voting, dividends or
upon liquidation.
(e) Series C Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence in compliance
with the terms hereof, so long as any shares of Series C or Series C-1 Preferred
Stock are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least two-thirds of the then outstanding shares of Series C and Series C-1
Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (e) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series C or C-1 Preferred Stock in a manner different from the Series
A, Series B, Series B-1, Series D or Series D-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series C or Series C-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series C Preferred Stock with respect to voting, dividends,
conversion or upon Liquidation.
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<PAGE>
(f) Series D Preferred Stock. Subject to the rights of series of
------------------------
Preferred Stock which may from time to time come into existence in compliance
with the terms hereof, so long as any shares of Series D or Series D -1
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least two-thirds of the then outstanding shares of Series D and
Series D -1 Preferred Stock, voting together as a class:
(i) amend this Restated Certificate or the Bylaws of the
Corporation to change or modify this clause (f) or if such amendment would
alter, change or affect, directly or indirectly, adversely and materially the
shares of Series D or Series D -1 Preferred Stock in a manner different from the
Series A, Series B, Series B-1, Series C or Series C-1 Preferred Stock;
(ii) increase or decrease (other than by conversion and
except as set forth in Section 8) the total number of authorized shares of
Series D or Series D-1 Preferred Stock; or
(iii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series D Preferred Stock with respect to voting, dividends,
conversion or upon Liquidation or otherwise.
7. Status of Converted Stock. In the event any shares of Preferred
-------------------------
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be canceled and shall not be issuable by the Corporation. The Certificate
of Incorporation of the Corporation shall be appropriately amended to effect the
corresponding reduction in the Corporation's authorized capital stock.
8. Special Mandatory Conversion.
----------------------------
(a) At any time following the Purchase Date, if (i) any holder of
shares of Series B, Series C or Series D Preferred Stock is offered the right to
purchase equity securities of the Corporation in accordance with Section 2.3 of
the Investors' Rights Agreement (the "Purchase Right") with respect to an equity
--------------
financing in excess of $250,000 of the Corporation at a price per share which is
less than the original issue price for the Series B, Series C or Series D
Preferred Stock (as adjusted for stock dividends, stock splits, subdivisions or
stock combinations) (an "Equity Financing") and (ii) such holder does not by
----------------
exercise of such holder's Purchase Right acquire at least its pro rata amount of
the total number of securities offered in such Equity Financing, then, effective
immediately prior to the consummation of such Equity Financing, all of such
holder's shares of Series B Preferred Stock, Series C or Series D Preferred
Stock, as applicable, shall automatically and without further action on the part
of such holder be converted into an equivalent number of shares of Series B-1
Preferred Stock, Series C-1 or Series D-1 Preferred Stock, as applicable;
provided, however, that no such conversion shall occur in connection with a
particular Equity Financing if, pursuant to the written request of the
Corporation, the Purchase Right with respect to such Equity Financing is waived
in accordance with the terms of such request; and provided, further, that no
such conversion shall occur in
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<PAGE>
connection with a particular Equity Financing with respect to a particular
holder of Series B, Series C or Series D Preferred Stock if, pursuant to the
written request of the Corporation, (i) such holder agrees in writing to waive
such holder's Purchase Right with respect to such Equity Financing and (ii)
ninety percent (90%) of the holders of shares of Series B, Series C or Series D
Preferred Stock, as applicable, agrees in writing that such particular holder of
shares of Series B, Series C or Series D Preferred Stock, as applicable, may
waive such particular holder's Purchase Right with respect to such Equity
Financing. Upon conversion pursuant to this Section 8, the shares of Series B,
Series C or Series D Preferred Stock so converted shall be canceled and not
subject to reissuance.
(b) The holder of any shares of Series B, Series C or Series D
Preferred Stock converted pursuant to this Section 8 shall deliver to the
Corporation during regular business hours at the office of any transfer agent of
the Corporation for such series of Preferred Stock, or at such other place as
may be designated by the Corporation, the certificate or certificates
representing the shares so converted, duly endorsed or assigned in blank or to
the Corporation. As promptly thereafter as is practicable, the Corporation
shall issue and deliver to such holder, at the place designated by such holder,
a certificate or certificates for the number of full shares of the Series B-1
Preferred Stock, Series C-1 or Series D-1 Preferred Stock, as applicable, to
which such holder is entitled. The person in whose name the certificate for
such shares of Series B-1 Preferred Stock, Series C-1 or Series D-1 Preferred
Stock, as applicable, is to be issued shall be deemed to have become a
stockholder on the effective date of the conversion of the Series B Preferred
Stock, Series C or Series D Preferred Stock, as applicable, unless the transfer
books of the Corporation are closed on that date, in which case such person
shall be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open.
(c) In the event that any shares of Series B-1, Series C-1 or
Series D-1 Preferred Stock are issued, concurrently with such issuance, the
Corporation shall use its best efforts to take all such action as may be
required, including amending its Certificate of Incorporation, (i) to cancel all
authorized shares of such series that remain unissued after such issuance, (ii)
to create and reserve with respect to each new series of Preferred Stock equal
in number to the number of shares of such series so canceled and designated
Series B-2, Series C-2 or Series D-2 Preferred Stock (to the extent the canceled
shares are shares of Series B-1 Preferred Stock, Series C-1 or Series D-1
Preferred Stock, as applicable), with the same designations, powers, preferences
and rights and be subject to the same qualifications, limitations and
restrictions identical as are then applicable to the Series B Preferred Stock
(with respect to the Series B-2 Preferred Stock), Series C Preferred Stock (with
respect to the Series C-2 Preferred Stock) or Series D Preferred Stock (with
respect to the Series D-2 Preferred Stock), except that the conversion price for
shares of Series B-2, Series C-2 or Series D-2 once initially issued shall be
the Conversion Price for Series B, Series C or Series D Preferred Stock, as
applicable, in effect immediately prior to such issuance and shall not after
such issuance be subject to adjustment under Section 4(d)(i)(A) hereof and (iii)
to amend the provisions of this Section 8 to provide that any subsequent special
mandatory conversion pursuant hereto will be into shares of Series B-2, Series
C-2 or Series D-2 Preferred Stock rather than Series B-1 Preferred Stock, Series
C-1 or Series D-1 Preferred Stock, as applicable. The Corporation shall take the
same
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<PAGE>
actions with respect to the Series B-2, Series C-2 and Series D-2 Preferred
Stock and each series of Preferred Stock subsequently authorized pursuant to
this Section 8 upon initial issuance of shares of the last such series to be so
authorized.
(C) Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article IV(B).
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
Subject to Sections 5, 6(a)(v), 6(c)(i), 6(c)(ii), 6(d)(i), 6(d)(ii),
6(e)(i) and 6(f)(i) of Article IV hereof, the Board of Directors of the
Corporation is expressly authorized to make, alter or repeal Bylaws of the
Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
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<PAGE>
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
* * *
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<PAGE>
The foregoing Fourth Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Seattle, Washington, on December 12th, 1999.
/s/ Martin Tobias
_________________________________________
Martin Tobias, Chief Executive Officer
/s/ John W. Robertson
_________________________________________
John W. Robertson, Secretary
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<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LOUDEYE TECHNOLOGIES, INC.
The undersigned, Dave Bullis and Larry Culver, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Loudeye Technologies, Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on March 26, 1998 under the name
of Encoding.com, Inc.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
The name of this corporation is Loudeye Technologies, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent. The name of
its registered agent at such address is National Corporate Research, Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is One Hundred Five
Million (105,000,000) shares, each with a par value of $0.001 per share. One
Hundred Million (100,000,000) shares shall be Common Stock and Five Million
(5,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the applicable law of the state of Delaware and within the
limitations and restrictions stated in this Certificate of Incorporation, to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares
<PAGE>
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
(A) The Board of Directors of the Corporation shall divide the directors
into three classes, as nearly equal in number as reasonably possible, with the
term of office of the first class to expire at the first annual meeting of
shareholders following the date this Article VI becomes effective (the
"Effective Date") or any special meeting in lieu thereof, the term of office of
--------------
the second class to expire at the second annual meeting of shareholders after
the Effective Date or any special meeting in lieu thereof and the term of office
of the third class to expire at the third annual meeting of shareholders or any
special meeting in lieu thereof. At each annual meeting of shareholders or
special meeting in lieu thereof following such initial classification, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of shareholders
or special meeting in lieu thereof after their election and until their
successors are duly elected and qualified.
(B) Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he or she is a member until the expiration of his or her
current term or his or her prior death, retirement, removal or resignation, and
(ii) the newly created or eliminated directorships resulting from such increase
or decrease shall, if reasonably possible, be apportioned by the Board of
Directors between the three classes of directors so as to ensure that no one
class has more than one director more than any other class. To the extent
reasonably possible, consistent with the foregoing rule, any newly created
directorships shall be added to those classes whose terms of office are to
expire at the latest dates following such allocation and newly eliminated
directorships shall be subtracted from those classes whose terms of office are
to expire at the earliest dates following such allocation, unless otherwise
provided for from time to time by resolution adopted by a majority of the
directors then in office, although less than a quorum. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law, may exercise the powers of the full Board of Directors until
the vacancy is filled.
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<PAGE>
(C) Holders of stock of any class or series of the Corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders.
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE IX
(A) Except as otherwise provided in the Bylaws, the Bylaws may be altered
or amended or new Bylaws adopted by the affirmative vote of at least sixty-six
and two-thirds percent (66 2/3%) of the voting power of all of the then-
outstanding shares of the voting stock of the Corporation entitled to vote. The
Board of Directors of the Corporation is expressly authorized to adopt, amend or
repeal Bylaws.
(B) The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
(C) Advance notice of stockholder nominations for the election of directors
or of business to be brought by the stockholders before any meeting of the
stockholders of the corporation shall be given in the manner provided in the
Bylaws.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE XI
The Corporation shall have perpetual existence.
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. If
the General Corporation Law of Delaware is hereafter amended to authorize, with
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<PAGE>
the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through Bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the General Corporation Law of Delaware, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to a corporation, its stockholders, and
others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
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<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Seattle, Washington, on the ____ day of ___________, 2000.
__________________________
Dave Bullis, President
_________________________
Thomas Hodge, Secretary
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<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS
OF
LOUDEYE TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I - CORPORATE OFFICES............................................ 1
1.1 Registered Office............................................. 1
1.2 Other Offices................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS.................................... 1
2.1 Place Of Meetings............................................. 1
2.2 Annual Meeting................................................ 1
2.3 Special Meeting............................................... 2
2.4 Notice Of Stockholders' Meetings.............................. 2
2.5 Advance Notice of Stockholder Nominees and Other Stockholder.. 2
2.6 Quorum........................................................ 4
2.7 Adjourned Meeting; Notice..................................... 4
2.8 Conduct Of Business........................................... 4
2.9 Voting........................................................ 4
2.10 Waiver Of Notice.............................................. 5
2.11 Record Date For Stockholder Notice; Voting.................... 5
2.12 Proxies....................................................... 5
ARTICLE III - DIRECTORS.................................................. 6
3.1 Powers........................................................ 6
3.2 Number Of Directors........................................... 6
3.3 Election, Qualification And Term Of Office Of Directors....... 6
3.4 Resignation And Vacancies..................................... 6
3.5 Place Of Meetings; Meetings By Telephone...................... 7
3.6 Regular Meetings.............................................. 8
3.7 Special Meetings; Notice...................................... 8
3.8 Quorum........................................................ 8
3.9 Waiver Of Notice.............................................. 8
3.10 Board Action By Written Consent Without A Meeting............. 9
3.11 Fees And Compensation Of Directors............................ 9
3.12 Approval Of Loans To Officers................................. 9
3.13 Removal Of Directors.......................................... 9
3.14 Chairman Of The Board Of Directors............................ 10
ARTICLE IV - COMMITTEES.................................................. 10
4.1 Committees Of Directors....................................... 10
4.2 Committee Minutes............................................. 10
4.3 Meetings And Action Of Committees............................. 11
ARTICLE V - OFFICERS..................................................... 11
5.1 Officers...................................................... 11
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
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<S> <C>
5.2 Appointment Of Officers....................................................... 11
5.3 Subordinate Officers.......................................................... 11
5.4 Removal And Resignation Of Officers........................................... 11
5.5 Vacancies In Offices.......................................................... 12
5.6 Chief Executive Officer....................................................... 12
5.7 President..................................................................... 12
5.8 Vice Presidents............................................................... 12
5.9 Secretary..................................................................... 13
5.10 Chief Financial Officer....................................................... 13
5.11 Representation Of Shares Of Other Corporations................................ 13
5.12 Authority And Duties Of Officers.............................................. 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS......... 14
6.1 Indemnification Of Directors And Officers..................................... 14
6.2 Indemnification Of Others..................................................... 14
6.3 Payment Of Expenses In Advance................................................ 14
6.4 Indemnity Not Exclusive....................................................... 15
6.5 Insurance..................................................................... 15
6.6 Conflicts..................................................................... 15
ARTICLE VII - RECORDS AND REPORTS........................................................ 15
7.1 Maintenance And Inspection Of Records......................................... 15
7.2 Inspection By Directors....................................................... 16
7.3 Annual Statement To Stockholders.............................................. 16
ARTICLE VIII - GENERAL MATTERS........................................................... 16
8.1 Checks........................................................................ 16
8.2 Execution Of Corporate Contracts And Instruments.............................. 16
8.3 Stock Certificates; Partly Paid Shares........................................ 17
8.4 Special Designation On Certificates........................................... 17
8.5 Lost Certificates............................................................. 18
8.6 Construction; Definitions..................................................... 18
8.7 Dividends..................................................................... 18
8.8 Fiscal Year................................................................... 18
8.9 Seal.......................................................................... 18
8.10 Transfer Of Stock............................................................. 19
8.11 Stock Transfer Agreements..................................................... 19
8.12 Registered Stockholders....................................................... 19
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
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<S> <C>
ARTICLE IX - AMENDMENTS................................................... 19
</TABLE>
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
LOUDEYE TECHNOLOGIES, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Dover, County of Kent, State of Delaware. The name of the registered agent of
the corporation at such location is National Corporate Research, Ltd.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
--------------
(a) The annual meeting of stockholders shall be held on such date,
time and place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors each year. At the meeting,
directors shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
<PAGE>
(c) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of
this Section 2.2, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation, as provided in Section 2.5, and
such business must be a proper matter for stockholder action under the General
Corporation Law of Delaware.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in these Bylaws. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) Nothing in this Section 2.2 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 Special Meeting.
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the chairman of the board, the president or by one or more
stockholders holding shares in the aggregate entitled to cast not less than
twenty-five (25) percent of the votes at that meeting.
2.4 Notice Of Stockholders' Meetings; Affidavit of Notice.
-----------------------------------------------------
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with this Section 2.4 of these Bylaws
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting (or such longer or shorter time as
is required by Section 2.5 of these Bylaws, if applicable). The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 Advance Notice of Stockholder Nominees and Other Stockholder
------------------------------------------------------------
Proposals.
---------
(a) Only persons who are nominated in accordance with the procedures
set forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
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<PAGE>
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. Stockholders may bring other
business before the annual meeting, provided that timely notice is provided to
the secretary of the Corporation in accordance with this section, and provided
further that such business is a proper matter for stockholder action under the
General Corporation Law of Delaware. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 days nor more than 120 days prior to the
anniversary date of the prior year's meeting; provided, however, that in the
event that (i) the date of the annual meeting is more than 30 days prior to or
more than 60 days after such anniversary date, and (ii) less than 60 days notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a directors, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934 (including, without limitation, such person's written consent to being name
in the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the proposal is made (i) the name and address of the
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
of record by such stockholder and beneficially by such beneficial owner. At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a director shall furnish to the secretary of the Corporation
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. The chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and if he
or she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the president or the chairman of the board, the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president, or
the secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
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<PAGE>
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the Board of Directors may be held.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 Conduct Of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
2.9 Voting.
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
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<PAGE>
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 Record Date For Stockholder Notice; Voting.
------------------------------------------
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.12 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A
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<PAGE>
proxy shall be deemed signed if the stockholder's name is placed on the proxy
(whether by manual signature, typewriting, electronic transmission or otherwise)
by the stockholder or the stockholder's attorney-in-fact. The revocability of a
proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number Of Directors.
-------------------
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be five. Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
3.3 Election, Qualification And Term Of Office Of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws and unless otherwise
provided in the certificate of incorporation, directors shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation And Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies,
unless otherwise provided in
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<PAGE>
the certificate of incorporation and subject to the rights of any holders of
preferred stock then outstanding.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
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<PAGE>
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at,
-8-
<PAGE>
nor the purpose of, any regular or special meeting of the directors, or members
of a committee of directors, need be specified in any written waiver of notice
unless so required by the certificate of incorporation or these Bylaws.
3.10 Board Action By Written Consent Without A Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees And Compensation Of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal Of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
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<PAGE>
3.14 Chairman Of The Board Of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees Of Directors.
-----------------------
The Board of Directors may designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board may
designate 1 or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided in
the resolution of the Board of Directors, or in these Bylaws, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority to (a) amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (b) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (c) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the Corporation's property and assets, (d) recommend to
the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or (e) amend the Bylaws of the Corporation; and, unless the board
resolution establishing the committee, the Bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
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<PAGE>
4.3 Meetings And Action Of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment Of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of
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<PAGE>
the Board of Directors at any regular or special meeting of the board or, except
in the case of an officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
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<PAGE>
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either
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<PAGE>
by such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by the person having such authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
-------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (a) who is or was an employee or
agent of the corporation, (b) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (c) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted
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<PAGE>
pursuant to Section 6.2 following authorization thereof by the Board of
Directors shall be paid by the corporation in advance of the final disposition
of such action or proceeding upon receipt of an undertaking by or on behalf of
the indemnified party to repay such amount if it shall ultimately be determined
that the indemnified party is not entitled to be indemnified as authorized in
this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their
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<PAGE>
names and addresses and the number and class of shares held by each stockholder,
a copy of these Bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any
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<PAGE>
instrument in the name of and on behalf of the corporation; such authority may
be general or confined to specific instances. Unless so authorized or ratified
by the Board of Directors or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the
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<PAGE>
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
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<PAGE>
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
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<PAGE>
CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
OF
LOUDEYE TECHNOLOGIES, INC.
The undersigned hereby certifies that she is the duly elected, qualified,
and acting Secretary of Loudeye Technologies, Inc. (the "Corporation") and that
-----------
the foregoing Bylaws, comprising ___ pages, were adopted as the Bylaws of the
Corporation on _______, 2000, by the Board of Directors of the Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Adoption on __________ 2000.
__________________________________
Thomas Hodge
Secretary
-1-
<PAGE>
EXHIBIT 4.1
<TABLE>
<CAPTION>
loudeye(TM)
NUMBER SHARES
Loudeye Technologies, Inc.
<S> <C> <C>
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY AND RIDGEFIELD PARK NJ CERTAIN DEFINITIONS
COMMON STOCK
CUSIP 545754 10 3
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 EACH OF
__________________________________________________ ____________________________________________________
__________________________________________________ Loudeye Technologies, Inc. ____________________________________________________
__________________________________________________ ____________________________________________________
(hereinafter called the "Corporation") transferable on the books of the Corporation by the holder hereof in person or by duly
authorized attorney, upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are
issued and shall be held subject to all of the provisions of the Certificate of Incorporation and the By-Laws, as from time to time
amended, of the Corporation (copies of which are on file at the office of the Transfer Agent), and the holder hereof, by acceptance
of this certificate, consents to and agrees to be bound by all of said provisions. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of the duly authorized officers.
Dated:
/s/ Martin Tobias
CHIEF EXECUTIVE OFFICER
/s/ Larry Culver
CHIEF FINANCIAL OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C. [SEAL]
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
Loudeye Technologies, Inc.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof of
the Corporation and the qualifications, limitations and restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription of the face of
this certificate, shall be constituted as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT ___________ Custodian ___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to the Minors
survivorship and not as tenants Act ______________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ______________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
_________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
_________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
_______________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO B.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
February 3, 2000
Loudeye Technologies, Inc.
Times Square Building
414 Olive Way, Suite 300
Seattle, WA 98101
Registration Statement on Form S-1 (File No. 333-93361)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
93361) (the "Registration Statement") filed by you with the Securities and
----------------------
Exchange Commission on December 22, 1999, as amended February 3, 2000, in
connection with the registration under the Securities Act of 1933 of shares of
your Common Stock (the "Shares"). As your legal counsel in connection with this
------
transaction, we have examined the proceedings taken and we are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ William W. Ericson
WWE
<PAGE>
EXHIBIT 10.4
LOUDEYE TECHNOLOGIES, INC.
2000 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants and
to promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant of an option and subject to the
applicable provisions of Section 422 of the Code and the regulations promulgated
thereunder. Stock purchase rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or its Committee appointed
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary (as defined
below) which, together with the Company, is under common control of a third
person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
(e) "Change of Control" means a sale of all or substantially all of
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means one or more committees or subcommittees of the
Board appointed by the Board to administer the Plan in accordance with Section 4
below.
(h) "Common Stock" means the Common Stock of the Company.
(i) "Company" means Loudeye Technologies, Inc., a Delaware
corporation, and formerly encoding.com, Inc.
<PAGE>
(j) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent, Subsidiary or Affiliate to render services
and is compensated for such services, and any director of the Company whether
compensated for such services or not.
(k) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Parents, Subsidiaries, Affiliates or their
respective successors. A change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(l) "Corporate Transaction" means a sale of all or substantially all
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(m) "Director" means a member of the Board.
(n) "Employee" means any person (including, if appropriate, any Named
Executive Officer, officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate, with the status of employment determined based upon
such factors as are deemed appropriate by the Administrator in its discretion,
subject to any requirements of the Code or the Applicable Laws. The payment by
the Company of a director's fee to a Director shall not be sufficient to
constitute "employment" of such Director by the Company.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(p) "Fair Market Value" means, as of any date, the fair market value
of the Common Stock, as determined by the Administrator in good faith on such
basis as it deems appropriate and applied consistently with respect to
Participants. Whenever possible, the determination of Fair Market Value shall be
based upon the closing price for the Shares as reported in the Wall Street
Journal for the applicable date.
(q) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable Option Agreement.
(r) "Listed Security" means any security of the Company that is
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
-2-
<PAGE>
(s) "Named Executive" means any individual who, on the last day of
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(t) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(u) "Option" means a stock option granted pursuant to the Plan.
(v) "Option Agreement" means a written document, the form(s) of which
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a notice
of stock option grant and a form of exercise notice.
(w) "Option Exchange Program" means a program approved by the
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price.
(x) "Optioned Stock" means the Common Stock subject to an Option.
(y) "Optionee" means an Employee or Consultant who receives an
Option.
(z) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(aa) "Participant" means any holder of one or more Options or Stock
Purchase Rights, or the Shares issuable or issued upon exercise of such awards,
under the Plan.
(bb) "Plan" means this 2000 Stock Plan.
(cc) "Reporting Person" means an officer, Director, or greater than
ten percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(dd) "Restricted Stock" means Shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(ee) "Restricted Stock Purchase Agreement" means a written document,
the form(s) of which shall be approved from time to time by the Administrator,
reflecting the terms of a Stock Purchase Right granted under the Plan and
includes any documents attached to such agreement.
(ff) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
as amended from time to time, or any successor provision.
-3-
<PAGE>
(gg) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(hh) "Stock Exchange" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(ii) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 below.
(jj) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(kk) "Ten Percent Holder" means a person who owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of Shares that may be sold under the Plan
is 2,500,000 Shares of Common Stock, plus an annual increase on the first day of
each of the Company's fiscal years beginning in 2001, 2002, 2003, 2004 and 2005
equal to the lesser of (i) 2,500,000 Shares, (ii) five percent (5%) of the
Shares outstanding on the last day of the immediately preceding fiscal year, or
(iii) such lesser number of Shares as the Board shall determine. The Shares may
be authorized, but unissued, or reacquired Common Stock. If an award should
expire or become unexercisable for any reason without having been exercised in
full, or is surrendered pursuant to an Option Exchange Program, the unpurchased
Shares that were subject thereto shall, unless the Plan shall have been
terminated, become available for future grant under the Plan. In addition, any
Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise or purchase shall be treated as not issued and shall
continue to be available under the Plan. Shares issued under the Plan and later
repurchased by the Company pursuant to any repurchase right which the Company
may have shall not be available for future grant under the Plan.
4. Administration of the Plan.
(a) General. The Plan shall be administered by the Board or a
Committee, or a combination thereof, as determined by the Board. The Plan may be
administered by different administrative bodies with respect to different
classes of Participants and, if permitted by the Applicable Laws, the Board may
authorize one or more officers to make awards under the Plan.
(b) Committee Composition. If a Committee has been appointed pursuant
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan in
accordance with the
-4-
<PAGE>
requirements of Rule 16b-3 or Section 162(m) of the Code, to the extent
permitted or required by such provisions.
(c) Powers of the Administrator. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(p) of the Plan;
(ii) to select the Employees and Consultants to whom Options and
Stock Purchase Rights may from time to time be granted;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights are granted;
(iv) to determine the number of Shares of Common Stock to be
covered by each award granted;
(v) to approve the form(s) of agreement(s) used under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option,
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to implement an Option Exchange Program on such terms and
conditions as the Administrator in its discretion deems appropriate; provided
however that no amendment or adjustment to an Option that would materially and
adversely affect the rights of any Optionee shall be made without the prior
written consent of the Optionee;
(ix) to adjust the vesting of an award held by an Employee or
Consultant as a result of a change in the terms and conditions under which such
person is providing services to the Company;
(x) to construe and interpret the terms of the Plan and awards
granted under the Plan, which constructions, interpretations and decisions shall
be final and binding on all Participants; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
Participants who are foreign
-5-
<PAGE>
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
5. Eligibility.
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided that Employees of Affiliates
shall not be eligible to receive Incentive Stock Options.
(b) Type of Option. Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
(c) ISO $100,000 Limitation. Notwithstanding any designation under
Section 5(b), to the extent that the aggregate Fair Market Value of Shares with
respect to which Options designated as Incentive Stock Options are exercisable
for the first time by any Optionee during any calendar year (under all plans of
the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options
shall be treated as Nonstatutory Stock Options. For purposes of this Section
5(c), Incentive Stock Options shall be taken into account in the order in which
they were granted, and the Fair Market Value of the Shares subject to an
Incentive Stock Option shall be determined as of the date of the grant of such
Option.
(d) No Employment Rights. The Plan shall not confer upon any
Participant any right with respect to continuation of an employment or
consulting relationship with the Company, nor shall it interfere in any way with
such Participant's right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided that the term shall be no more than ten (10)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to a person who at the time of such grant is a Ten Percent
Holder, the term of the Option shall be five (5) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
in Section 14 below, the maximum number of Shares which may be subject to
Options and Stock Purchase Rights granted to any one Employee under this Plan
for any fiscal year of the Company shall be 2,500,000.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator and set forth in the Option Agreement, but shall be subject to
the following:
-6-
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who at the time of grant is a
Ten Percent Holder, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who is at the time of grant is a Ten
Percent Holder, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant if required by the Applicable
Laws and, if not so required, shall be such price as is determined by the
Administrator;
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant if such
Option is intended to qualify as performance-based compensation under Section
162(m) of the Code and if not so intended shall be such price as is determined
by the Administrator; or
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by Applicable
Law and, if not so required, shall be such price as is determined by the
Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) Permissible Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash; (2) check; (3) delivery of Optionee's promissory note with such
recourse, interest, security and redemption provisions as the Administrator
determines to be appropriate (subject to the provisions of Section 153 of the
Delaware General Corporation Law); (4) cancellation of indebtedness; (5) other
Shares that (x) in the case of Shares acquired upon exercise of an Option either
have been owned by the Optionee for more than six months on the date of
surrender (or such other period as may be required to avoid a charge to the
Company's earnings) or were not acquired, directly or indirectly, from the
Company, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which the Option is exercised; (6)
delivery of a properly executed exercise notice together with such other
documentation as the Administrator and the broker, if applicable, shall require
to effect exercise of the Option and prompt delivery to the
-7-
<PAGE>
Company of the sale or loan proceeds required to pay the exercise price and any
applicable withholding taxes; (7) any combination of the foregoing methods of
payment; or (8) such other consideration and method of payment for the issuance
of Shares to the extent permitted under the Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company and the Administrator may refuse to accept a particular form
of consideration at the time of any Option exercise if, in its sole discretion,
acceptance of such form of consideration is not in the best interests of the
Company at such time.
10. Exercise of Option.
(a) General.
(i) Exercisability. Any Option granted hereunder shall be
exercisable at such times and under such conditions as determined by the
Administrator, consistent with the term of the Plan and reflected in the Option
Agreement, including vesting requirements and/or performance criteria with
respect to the Company and/or the Optionee; provided however that, if required
by the Applicable Laws, any Option granted prior to the date, if any, upon which
the Common Stock becomes a Listed Security shall become exercisable at the rate
of at least 20% per year over five years from the date the Option is granted. In
the event that any of the Shares issued upon exercise of an Option (which
exercise occurs prior to the date, if any, upon which the Common Stock becomes a
Listed Security) should be subject to a right of repurchase in the Company's
favor, such repurchase right shall, if required by the Applicable Laws, lapse at
the rate of at least 20% per year over five years from the date the Option is
granted. Notwithstanding the above, in the case of an Option granted to an
officer, Director or Consultant of the Company or any Parent, Subsidiary or
Affiliate of the Company, the Option may become fully exercisable, or a
repurchase right, if any, in favor of the Company shall lapse, at any time or
during any period established by the Administrator. In addition, following the
date, if any, upon which the Common Stock becomes a Listed Security, the
Administrator shall not, unless otherwise instructed by the Board, issue any
Options that may be exercised prior to vesting.
(ii) Minimum Exercise Requirements. An Option may not be
exercised for a fraction of a Share. The Administrator may require that an
Option be exercised as to a minimum number of Shares, provided that such
requirement shall not prevent an Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
(iii) Procedures for and Results of Exercise. An Option shall be
deemed exercised when written notice of such exercise has been given to the
Company in accordance with the terms of the Option by the person entitled to
exercise the Option and the Company has received full payment for the Shares
with respect to which the Option is exercised. Full payment may, as authorized
by the Administrator, consist of any consideration and method of payment
allowable under Section 9(b) of the Plan; provided that the Administrator may
refuse to accept any form of consideration if, at the time of exercise, the
Administrator determines in its sole discretion that acceptance of such form of
consideration is not in the best interests of the Company at that time.
-8-
<PAGE>
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(iv) Rights as Stockholder. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 12 of the Plan.
(b) Termination of Employment or Consulting Relationship. Subject to
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise his or her
Option to the extent that the Optionee was entitled to exercise it at the date
of such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified above,
the Option shall terminate. No termination shall be deemed to occur and this
Section 10(b) shall not apply if (i) the Optionee is a Consultant who becomes an
Employee; or (ii) the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee.
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
(or such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified above, the
Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
(or such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the
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<PAGE>
extent otherwise entitled to exercise it at the date of such termination.
However, to the extent that such Optionee fails to exercise an Option which is
an Incentive Stock Option ("ISO") (within the meaning of Section 422 of the
Code) within three (3) months of the date of such termination, the Option will
not qualify for ISO treatment under the Code. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such Option to the extent so entitled within the time
specified above, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within twelve (12) months (or such other period of time
as is determined by the Administrator, with such determination in the case of an
Incentive Stock Option made at the time of grant of the Option) following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
death or, if earlier, the date of termination of Optionee's Continuous Status as
an Employee or Consultant. To the extent that Optionee was not entitled to
exercise the Option at the date of death or termination, as the case may be, or
if person entitled to exercise the Option does not exercise such Option to the
extent so entitled within the time specified above, the Option shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Service
Status from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in
the Option Agreement to such greater time as the Administrator shall deem
appropriate, provided that in no event shall an Option be exercisable later than
the date of expiration of the term of the Option as set forth in the Option
Agreement.
(f) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares an Option previously granted under the Plan
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. When the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid, and the time within which such person must accept such
offer. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer. If the Applicable Laws do not impose the requirements set
forth in the
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<PAGE>
preceding sentence and with respect to any Stock Purchase Rights granted after
the date, if any, on which the Common Stock becomes a Listed Security, the
purchase price of Shares subject to Stock Purchase Rights shall be as determined
by the Administrator. The offer to purchase Shares subject to Stock Purchase
Rights shall be accepted by execution of a Restricted Stock Purchase Agreement
in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided however that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer, Director or
Consultant of the Company or of any Parent or Subsidiary of the Company, it
shall lapse at a minimum rate of 20% per year if required by the Applicable
Laws.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. Taxes.
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option or Stock Purchase Right)
shall make such arrangements as the Administrator may require for the
satisfaction of any applicable federal, state, local or foreign withholding tax
obligations that may arise in connection with the exercise of the Option or
Stock Purchase Right and the issuance of Shares. The Company shall not be
required to issue any Shares under the Plan until such obligations are
satisfied. If the Administrator allows the withholding or surrender of Shares to
satisfy the Participant's tax withholding obligations under this Section 12
(whether pursuant to Section 12(c) or 12(d) or otherwise), the Administrator
shall not allow Shares to be withheld or surrendered in an amount that exceeds
the minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or
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<PAGE>
her compensation an amount sufficient to satisfy such tax obligations from the
next payroll payment otherwise payable after the date of an exercise of the
Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 12,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld. In the case of shares previously acquired from
the Company that are surrendered under this Section 12(d), such Shares must have
been owned by the Participant for more than six (6) months on the date of
surrender.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution; provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The Administrator may grant transferable Nonstatutory Stock Options as
provided for in the previous sentence prior to the date, if any, upon which the
Company's Common Stock becomes a Listed Security if permitted under the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option or Stock Purchase Right may be exercised,
during the lifetime of
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<PAGE>
the holder of Option or Stock Purchase Right, only by such holder or a
transferee permitted by this Section 13.
14. Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of Shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, the numbers of Shares set forth
in Sections 3(a)(i) and 8 above, and the number of Shares of Common Stock that
have been authorized for issuance under the Plan but as to which no Options or
Stock Purchase Rights have yet been granted or that have been returned to the
Plan upon cancellation or expiration of an Option or Stock Purchase Right, as
well as the price per Share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares of Common Stock subject to an
Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the dissolution or
liquidation of the Company, each Option and Stock Purchase Right will terminate
immediately prior to the consummation of such action, unless otherwise
determined by the Administrator.
(c) Corporate Transaction. In the event of a Corporate Transaction,
each outstanding Option or Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation (the "Successor
Corporation"), unless the Successor Corporation does not agree to assume the
award or to substitute an equivalent option or right, in which case such Option
or Stock Purchase Right shall terminate upon the consummation of the
transaction.
Notwithstanding the above sentence, in the event of a Change of Control,
the vesting and exercisability of each award outstanding under the Plan shall
automatically be accelerated to the extent of 25% of the Shares then unvested
and any repurchase right of the Company with respect to Shares previously issued
upon exercise of an award shall lapse as to 25% of the Shares then subject to
such repurchase right (with such vesting, exercisability and/or repurchase right
thereafter continuing on the schedule set forth in the applicable Stock Option
or Restricted Stock Purchase Agreement) and each such outstanding award shall
either be (i) assumed or replaced with equivalent option or right by the
Successor Corporation or (ii) replaced by a cash incentive program of the
Successor Corporation based on the value of the award at the time of the
consummation of the transaction; provided that if the Successor Corporation does
not agree to assume the award or replace it with an equivalent option, stock
purchase right or cash incentive
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<PAGE>
program, then the vesting and exercisability of each outstanding award shall
instead accelerate in full, with such Options becoming vested and exercisable as
to one hundred percent (100%) of underlying Shares and any repurchase right of
the Company applicable to Shares previously issued upon exercise of an award
lapsing as to one hundred percent (100%) of the underlying Shares. Any
acceleration provided for under this Section 14(c) shall occur effective
immediately prior to consummation of the Change of Control upon such conditions
as the Administrator shall determine. To the extent that an award is not
exercised prior to consummation of a Change of Control transaction in which the
award is not being assumed or replaced with an equivalent option or stock
purchase right by the Successor Corporation, such Option or Stock Purchase Right
shall terminate upon such consummation.
For purposes of this Section 14(c), an Option or a Stock Purchase
Right shall be considered assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon a Corporate Transaction or a
Change of Control, as the case may be, each holder of an Option or Stock
Purchase Right would be entitled to receive upon exercise of the award the same
number and kind of shares of stock or the same amount of property, cash or
securities as such holder would have been entitled to receive upon the
occurrence of the transaction if the holder had been, immediately prior to such
transaction, the holder of the number of Shares of Common Stock covered by the
award at such time (after giving effect to any adjustments in the number of
Shares covered by the Option or Stock Purchase Right as provided for in this
Section 14); provided that if such consideration received in the transaction is
not solely common stock of the Successor Corporation, the Administrator may,
with the consent of the Successor Corporation, provide for the consideration to
be received upon exercise of the award to be solely common stock of the
Successor Corporation equal to the Fair Market Value of the per Share
consideration received by holders of Common Stock in the transaction.
(d) Limitation on Payments. In the event that the vesting
acceleration or lapse of a repurchase right provided for in Section 14(c) above
(x) constitutes "parachute payments" within the meaning of Section 280G of the
Code, and (y) but for this Section 14(d) would be subject to the excise tax
imposed by Section 4999 of the Code (or any corresponding provisions of state
income tax law), then such vesting acceleration or lapse of a repurchase right
shall be either
(A) delivered in full, or
(B) delivered as to such lesser extent which would result
in no portion of such severance benefits being subject to excise tax under Code
Section 4999,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Code Section 4999,
results in the receipt by the Participant on an after-tax basis of the greater
amount of acceleration or lapse of repurchase rights benefits, notwithstanding
that all or some portion of such benefits may be taxable under Code Section
4999. Any determination required under this Section 14(d) shall be made in
writing by the Company's independent accountants, whose determination shall be
conclusive and binding for all purposes on the Company and any affected
Participant. In the event that (A) above applies, then the Participant shall be
responsible for any excise taxes imposed with respect
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<PAGE>
to such benefits. In the event that (B) above applies, then each benefit
provided hereunder shall be proportionately reduced to the extent necessary to
avoid imposition of such excise taxes.
(e) Certain Distributions. In the event of any distribution to the
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination of the Plan.
(a) Authority to Amend or Terminate. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation (other than an adjustment pursuant to Section 14 above) shall
be made that would materially and adversely affect the rights of any Optionee or
holder of Stock Purchase Rights under any outstanding grant, without his or her
consent. In addition, to the extent necessary and desirable to comply with the
Applicable Laws, the Company shall obtain stockholder approval of any Plan
amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
of the Plan shall materially and adversely affect Options or Stock Purchase
Rights already granted, unless mutually agreed otherwise between the Optionee or
holder of the Stock Purchase Rights and the Administrator, which agreement must
be in writing and signed by the Optionee or holder and the Company.
17. Conditions Upon Issuance of Shares. Notwithstanding any other
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel. As a condition to the
exercise of an Option or Stock Purchase Right, the Company may require the
person exercising the award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
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<PAGE>
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
Option Agreements and Restricted Stock Purchase Agreements, respectively, in
such form(s) as the Administrator shall from time to time approve.
20. Stockholder Approval. If required by the Applicable Laws, continuance
of the Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the manner and to the degree required
under the Applicable Laws.
21. Information and Documents to Optionees and Purchasers. Prior to the
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information.
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<PAGE>
LOUDEYE TECHNOLOGIES, INC.
2000 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
(post-IPO form of agreement)
Optionee's Name and Address:
[Optionee]
[OptioneeAddress1]
[OptioneeAddress2]
You have been granted an option to purchase Common Stock of Loudeye
Technologies, Inc., (the "Company") as follows:
Board Approval Date:
--------------------
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): [GrantDate]
Exercise Price Per Share: [ExercisePrice]
Total Number of Shares Granted: [SharesGranted]
Total Price of Shares Granted: [TotalExercisePrice]
Type of Option: [NoSharesISO] Shares Incentive Stock
Option
[NoSharesNSO] Shares Nonstatutory
Stock Option
Expiration Date: [Term]/[ExpirDate]
Vesting Commencement Date: [VestingStartDate]
Vesting/Exercise Schedule: So long as your employment or consulting
relationship with the Company continues,
the Shares underlying this Option shall
vest and become exercisable in
accordance with the following schedule:
___________ of the Shares subject to the
Option shall vest and become exercisable
on the ________ month anniversary of the
Vesting Commencement Date and _______ of
the total number of Shares
<PAGE>
subject to the Option shall vest and
become exercisable each month
thereafter.
Termination Period: Option may be exercised for ____ days
after termination of employment or
consulting relationship except as set
out in Section 5 of the Stock Option
Agreement (but in no event later than
the Expiration Date). Optionee is
responsible for keeping track of these
exercise periods following termination
for any reason of his or her service
relationship with the Company. The
Company will not provide further notice
of such periods.
Transferability: This Option may not be transferred under
any circumstances.
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the Loudeye Technologies, Inc. 2000 Stock Option Plan
and the Stock Option Agreement, all of which are attached and made a part of
this document.
In addition, you agree and acknowledge that your rights to any Shares
underlying the Option will be earned only as you provide services to the Company
over time, that the grant of the Option is not as consideration for services you
rendered to the Company prior to your Vesting Commencement Date, and that
nothing in this Notice or the attached documents confers upon you any right to
continue your employment or consulting relationship with the Company for any
period of time, nor does it interfere in any way with your right or the
Company's right to terminate that relationship at any time, for any reason, with
or without cause.
OPTIONEE: LOUDEYE TECHNOLOGIES, INC.
By:
- ------------------------------- -------------------------------------
Signature
Title:
- ------------------------------- ----------------------------------
Print Name
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<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Loudeye Technologies, Inc., a Delaware corporation
(the "Company"), hereby grants to the Optionee named in the Notice of Stock
Option Grant (the "Notice") attached to this Agreement ("Optionee"), an option
(the "Option") to purchase the total number of shares of Common Stock (the
"Shares") set forth in the Notice, at the exercise price per share set forth in
the Notice (the "Exercise Price") subject to the terms, definitions and
provisions of the 2000 Stock Option Plan (the "Plan") adopted by the Company,
which is incorporated in this Agreement by reference. Unless otherwise defined
in this Agreement, the terms used in this Agreement shall have the meanings
defined in the Plan. This Stock Option Agreement shall be deemed executed by the
Company and Optionee upon execution by such parties of the Notice.
2. Designation of Option. This Option is intended to be an Incentive
Stock Option as defined in Section 422 of the Code only to the extent so
designated in the Notice, and to the extent it is not so designated or to the
extent the Option does not qualify as an Incentive Stock Option, it is intended
to be a Nonstatutory Stock Option.
Notwithstanding the above, if designated as an Incentive Stock Option, in
the event that the Shares subject to this Option (and all other Incentive Stock
Options granted to Optionee by the Company or any Parent or Subsidiary,
including under other plans of the Company) that first become exercisable in any
calendar year have an aggregate fair market value (determined for each Share as
of the date of grant of the option covering such Share) in excess of $100,000,
the Shares in excess of $100,000 shall be treated as subject to a Nonstatutory
Stock Option, in accordance with Section 5(c) of the Plan.
3. Exercise of Option. This Option shall be exercisable during its term
in accordance with the Vesting/Exercise Schedule set out in the Notice and with
the provisions of Section 10 of the Plan as follows:
(a) Right to Exercise.
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Section 5 below, subject to the limitations contained in paragraphs (iii) and
(iv) below.
(iii) In no event may this Option be exercised after the
Expiration Date of the Option as set forth in the Notice.
(b) Method of Exercise.
(i) This Option shall be exercisable by delivering to the
Company a written notice of exercise (in the form attached as Exhibit A or in
any other form of notice
<PAGE>
approved by the Plan Administrator) which shall state Optionee's election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such Shares as may be required by the
Company pursuant to the provisions of the Plan. Such written notice shall be
signed by Optionee and shall be delivered to the Company by such means as are
determined by the Plan Administrator in its discretion to constitute adequate
delivery. The written notice shall be accompanied by payment of the Exercise
Price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option and as
further set forth in Section 12 of the Plan, Optionee agrees to make adequate
provision for federal, state or other tax withholding obligations, if any, which
arise upon the vesting or exercise of the Option, or disposition of Shares,
whether by withholding, direct payment to the Company, or otherwise.
(iii) The Company is not obligated, and will have no liability
for failure, to issue or deliver any Shares upon exercise of the Option unless
such issuance or delivery would comply with the Applicable Laws, with such
compliance determined by the Company in consultation with its legal counsel.
This Option may not be exercised until such time as the Plan has been approved
by the stockholders of the Company, or if the issuance of such Shares upon such
exercise or the method of payment of consideration for such shares would
constitute a violation of any applicable federal or state securities or other
law or regulation, including any rule under Part 221 of Title 12 of the Code of
Federal Regulations as promulgated by the Federal Reserve Board. As a condition
to the exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by the Applicable
Laws. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to Optionee on the date on which the Option is exercised
with respect to such Shares.
4. Method of Payment. Payment of the Exercise Price shall be by any of
the following, or a combination of the following, at the election of Optionee:
(a) cash or check; or
(b) following the date, if any, upon which the Common Stock is a
Listed Security, delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price.
5. Effect of Termination of Relationship on Exercisability. Following the
date of termination of Optionee's Continuous Service Status for any reason (the
"Termination Date"), Optionee may exercise the Option only as set forth in the
Notice and this Section 5. To the extent that Optionee is not entitled to
exercise this Option as of the Termination Date, or if Optionee does not
exercise this Option within the Termination Period set forth in the Notice or
the termination periods set forth below, the Option shall terminate in its
entirety. In no event may any Option be exercised after the Expiration Date of
the Option as set forth in the Notice.
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<PAGE>
(a) Termination. In the event of termination of Optionee's Continuous
Service Status other than as a result of Optionee's disability or death,
Optionee may, to the extent otherwise so entitled at the date of such
termination (the "Termination Date"), exercise this Option during the
Termination Period set forth in the Notice.
(b) Other Terminations. In connection with any termination other than
a termination covered by Section 5(a), Optionee may exercise the Option only as
described below:
(i) Termination upon Disability of Optionee. In the event of
termination of Optionee's Continuous Service Status as a result of Optionee's
disability, Optionee may, but only within twelve months from the Termination
Date, exercise this Option to the extent Optionee was entitled to exercise it as
of such Termination Date.
(ii) Death of Optionee. In the event of the death of Optionee
(a) during the term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Service Status since the date of grant of
the Option, or (b) within thirty (30) days after Optionee's Termination Date,
the Option may be exercised at any time within twelve months following the date
of death by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent Optionee was
entitled to exercise the Option as of the Termination Date.
6. Non-Transferability of Option. [Except as set forth in the Notice,]
[T]his Option may not be transferred in any manner otherwise than by will or by
the laws of descent or distribution and may be exercised during the lifetime of
Optionee only by him or her. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
7. Tax Consequences. Below is a brief summary as of the date of this
Option of certain of the federal tax consequences of exercise of this Option and
disposition of the Shares under the laws in effect as of the Date of Grant. THIS
SUMMARY IS INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(a) Incentive Stock Option.
(i) Tax Treatment upon Exercise and Sale of Shares. If this
Option qualifies as an Incentive Stock Option, there will be no regular federal
income tax liability upon the exercise of the Option, although the excess, if
any, of the fair market value of the Shares on the date of exercise over the
Exercise Price will be treated as an adjustment to the alternative minimum tax
for federal tax purposes and may subject Optionee to the alternative minimum tax
in the year of exercise. If Shares issued upon exercise of an Incentive Stock
Option are held for at least one year after exercise and are disposed of at
least two years after the Option grant date, any gain realized on disposition of
the Shares will also be treated as long-term capital gain for federal income tax
purposes. If Shares issued upon exercise of an Incentive Stock Option are
disposed of within such one-year period or within two years after the Option
grant date, any gain
-3-
<PAGE>
realized on such disposition will be treated as compensation income (taxable at
ordinary income rates) to the extent of the difference between the Exercise
Price and the lesser of (i) the fair market value of the Shares on the date of
exercise, or (ii) the sale price of the Shares.
(ii) Notice of Disqualifying Dispositions. With respect to any
Shares issued upon exercise of an Incentive Stock Option, if Optionee sells or
otherwise disposes of such Shares on or before the later of (i) the date two
years after the Option grant date, or (ii) the date one year after the date of
exercise, Optionee shall immediately notify the Company in writing of such
disposition. Optionee acknowledges and agrees that he or she may be subject to
income tax withholding by the Company on the compensation income recognized by
Optionee from the early disposition by payment in cash or out of the current
earnings paid to Optionee.
(b) Nonstatutory Stock Option. If this Option does not qualify as an
Incentive Stock Option, there may be a regular federal (and state) income tax
liability upon the exercise of the Option. Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the fair market value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise. If Shares issued upon exercise of a
Nonstatutory Stock Option are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes.
8. Effect of Agreement. Optionee acknowledges receipt of a copy of the
Plan and represents that he or she is familiar with the terms and provisions
thereof (and has had an opportunity to consult counsel regarding the Option
terms), and hereby accepts this Option and agrees to be bound by its contractual
terms as set forth herein and in the Plan. Optionee hereby agrees to accept as
binding, conclusive and final all decisions and interpretations of the Plan
Administrator regarding any questions relating to the Option. In the event of a
conflict between the terms and provisions of the Plan and the terms and
provisions of the Notice and this Agreement, the Plan terms and provisions shall
prevail. The Option, including the Plan, constitutes the entire agreement
between Optionee and the Company on the subject matter hereof and supersedes all
proposals, written or oral, and all other communications between the parties
relating to such subject matter.
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<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Loudeye Technologies, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase __________ shares of Loudeye
Technologies, Inc. Common Stock, under and pursuant to the Company's 2000 Stock
Option Plan and the Stock Option Agreement dated ___________, as follows:
Grant Number:
-------------------------------
Date of Purchase:
-------------------------------
Number of Shares:
-------------------------------
Purchase Price:
-------------------------------
Method of Payment
of Purchase Price:
-------------------------------
Social Security No.:
-------------------------------
The shares should be issued as follows:
Name:
---------------------------
Address:
---------------------------
---------------------------
---------------------------
Signed:
---------------------------
Date:
---------------------------
<PAGE>
EXHIBIT 10.5
LOUDEYE TECHNOLOGIES, INC.
2000 DIRECTOR STOCK OPTION PLAN
-------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Change of Control" means a sale of all or substantially all of
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the Common Stock of the Company.
(e) "Company" means Loudeye Technologies, Inc., a Delaware
corporation and formerly encoding.com, Inc.
(f) "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
(g) "Corporate Transaction" means a dissolution or liquidation of the
Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.
(h) "Director" means a member of the Board.
(i) "Employee" means any person, including any officer or Director,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
(k) "Option" means a stock option granted pursuant to the Plan. All
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(l) "Optioned Stock" means the Common Stock subject to an Option.
(m) "Optionee" means an Outside Director who receives an Option.
(n) "Outside Director" means a Director who is not an Employee.
(o) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 2000 Directors' Stock Option Plan.
(q) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be sold under the
Plan is 250,000 Shares of Common Stock (the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
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<PAGE>
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who is an Outside Director on the
effective date of this Plan shall automatically be granted an Option to purchase
20,000 Shares on the effective date of this Plan (the "IPO Option").
(iii) Each Outside Director who becomes an Outside Director after
the effective date of this Plan shall be automatically granted an Option to
purchase 20,000 Shares (the "First Option") on the date on which such person
first becomes an Outside Director, whether through election by the stockholders
of the Company or appointment by the Board of Directors to fill a vacancy.
(iv) Each Outside Director shall be automatically granted an
Option to purchase 7,500 Shares (the "Subsequent Option") on the date of each
Annual Meeting of the Company's stockholders immediately following which such
Outside Director is serving on the Board, provided that, on such date, he or she
shall have served on the Board for at least six (6) months prior to the date of
such Annual Meeting.
(v) Notwithstanding the provisions of subsections (ii), (iii)
and (iv) hereof, in the event that a grant would cause the number of Shares
subject to outstanding Options plus the number of Shares previously purchased
upon exercise of Options to exceed the Pool, then each such automatic grant
shall be for that number of Shares determined by dividing the total number of
Shares remaining available for grant by the number of Outside Directors
receiving an Option on the automatic grant date. Any further grants shall then
be deferred until such time, if any, as additional Shares become available for
grant under the Plan through action of the stockholders to increase the number
of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(vi) Notwithstanding the provisions of subsections (ii), (iii)
and (iv) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vii) The terms of each Option granted hereunder shall be as
follows:
(1) each Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section 9
below;
(2) except with respect to the IPO Options, the exercise
price per Share shall be 100% of the fair market value per Share on the date of
grant of each Option, determined in accordance with Section 8 below;
(3) the exercise price of the IPO Options shall be equal to
the price at which Shares are first sold to the public pursuant to the Company's
registration statement
-3-
<PAGE>
under the Securities Act of 1933, as amended, relating to the Company's initial
public offering of securities;
(4) each IPO Option and each First Option shall vest and
become exercisable as to 25% of the Shares subject to the Option on each of the
first, second, third and fourth anniversaries of the date of grant; and
(5) each Subsequent Option shall vest and become
exercisable as to 100% of the Shares subject to the Option on the first
anniversary of the date of grant.
(c) Powers of the Board. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per Share of Options to be granted, which exercise price
shall be determined in accordance with Section 8 of the Plan; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
-4-
<PAGE>
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
Street Journal, or if there is a public market for the Common Stock but the
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System). For purposes of the First Options granted on the effective
date of this Plan, the fair market value per Share shall be the Price to Public
as set forth in the final prospectus filed with the Securities Exchange
Commission pursuant to Rule 424 under the Securities Act of 1933, as amended.
(c) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided
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<PAGE>
however that no Options shall be exercisable prior to stockholder approval of
the Plan in accordance with Section 17 below has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee: (A)
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or
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<PAGE>
(B) three (3) months after the termination of Continuous Status as a Director,
the Option may be exercised, at any time within twelve (12) months following the
date of death, by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of death or the date of
termination, as applicable. Notwithstanding the foregoing, in no event may the
Option be exercised after its term set forth in Section 7 has expired. To the
extent that an Optionee was not entitled to exercise the Option at the date of
death or termination or if he or she does not exercise such Option (to the
extent he or she was entitled to exercise) within the time specified above, the
Option shall terminate and the Shares underlying the unexercised portion of the
Option shall revert to the Plan.
10. Nontransferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii),
(iii) and (iv) above, and the number of Shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per Share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(b) Corporate Transactions; Change of Control. In the event of a
Corporate Transaction, each outstanding Option shall be assumed or an equivalent
option shall be substituted by the successor corporation or a Parent or
Subsidiary of such successor corporation, unless the successor corporation does
not agree to assume the outstanding Options or to substitute equivalent options,
in which case the Options shall terminate upon the consummation of the
transaction; provided however that in the event of any transaction that
qualifies as a Change of Control and notwithstanding whether or not outstanding
Options are
-7-
<PAGE>
assumed, substituted for or terminated in connection with the transaction, the
vesting of each outstanding Option shall accelerate in full such that each
Optionee shall have the right to exercise his or her Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable, immediately prior to consummation of the transaction
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Corporate Transaction or Change of Control, each
Optionee would be entitled to receive upon exercise of an Option the same number
and kind of shares of stock or the same amount of property, cash or securities
as the Optionee would have been entitled to receive upon the occurrence of such
transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option as provided for in this Section 11); provided however that if such
consideration received in the transaction was not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received upon
exercise of the Option to be solely common stock of the successor corporation or
its Parent equal to the Fair Market Value of the per Share consideration
received by holders of Common Stock in the transaction.
(c) Certain Distributions. In the event of any distribution to the
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
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<PAGE>
14. Conditions Upon Issuance of Shares. Notwithstanding any other
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the Company
in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
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<PAGE>
LOUDEYE TECHNOLOGIES, INC.
2000 DIRECTOR STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee]
You have been granted an option to purchase Common Stock of Loudeye
Technologies, Inc. (the "Company") as follows:
Date of Grant [GrantDate]
Vesting Commencement Date [VestingStartDate]
Exercise Price per Share [ExercisePrice]
Total Number of Shares Granted [SharesGranted]
Total Exercise Price [TotalExercisePrice]
Expiration Date [ExpirDate]
Vesting Schedule This Option shall vest and become
exercisable according to the following
schedule: ________________________.
Termination Period This Option may be exercised for 90 days
after termination of Optionee's
Continuous Status as a Director, or
such longer period as may be applicable
upon death or Disability of Optionee as
provided in the Plan, but in no event
later than the Expiration Date as
provided above.
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 2000 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: LOUDEYE TECHNOLOGIES, INC.
______________________________ By:_____________________________
[Optionee]
Title:__________________________
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<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
to the Optionee named in the Notice of Stock Option Grant (the "Optionee")
attached to this Agreement an option (the "Option") to purchase a number of
Shares, as set forth in the Notice of Stock Option Grant, at the exercise price
per share set forth in the Notice of Stock Option Grant (the "Exercise Price"'),
subject to the terms and conditions of the 2000 Directors' Stock Option Plan
(the "Plan"), which is incorporated herein by reference. Capitalized terms not
defined herein shall have the meanings ascribed to such terms in the Plan. In
the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Nonstatutory Stock Option Agreement, the terms and
conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's service as a Director, the exercisability of the Option is governed
by the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment of
the aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
<PAGE>
(c) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
federal and California tax consequences relating to this Option under the law in
effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR
HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal and California income tax liability upon exercise. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the fair market value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. Long-term capital gain will be taxed for federal income tax and
alternative minimum tax purposes at a maximum rate of 20% if the Shares are held
more than one year after exercise.
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<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
LOUDEYE TECHNOLOGIES, INC.
___________________________________ By:_____________________________________
[Optionee]
Title:__________________________________
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Nonstatutory Stock Option Agreement. In
consideration of the Company's granting his or her spouse the right to purchase
Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Nonstatutory Stock Option Agreement and further
agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the
undersigned with respect to any amendment or exercise of rights under the Plan
or this Nonstatutory Stock Option Agreement.
________________________________________
Spouse of Optionee
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<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Loudeye Technologies, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase __________ shares of Loudeye
Technologies, Inc. Common Stock, under and pursuant to the Company's 2000
Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated
_______________, as follows:
Grant Number: __________________________________
Date of Purchase: __________________________________
Number of Shares: __________________________________
Purchase Price: __________________________________
Method of Payment of
Purchase Price: __________________________________
Social Security No.: __________________________________
The shares should be issued as follows:
Name: ______________________________
Address: ______________________________
______________________________
______________________________
Signed: ______________________________
Date: ______________________________
<PAGE>
EXHIBIT 10.6
LOUDEYE TECHNOLOGIES, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of Loudeye Technologies, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Loudeye Technologies, Inc., a Delaware
corporation and formerly encoding.com, Inc.
(e) "Compensation" means regular straight time gross earnings, and
shall not include commissions, payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.
(h) "Corporate Transaction" means a sale of all or substantially all
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the
<PAGE>
Plan; provided however that the Board shall only have the discretion to
designate Subsidiaries if the issuance of options to such Subsidiary's Employees
pursuant to the Plan would not cause the Company to incur adverse accounting
charges.
(j) "Employee" means any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Offering Date" means the first business day of each Offering
Period of the Plan.
(m) "Offering Period" means a period of twenty-four (24) months
commencing on May 1 and November 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
(p) "Purchase Date" means the last day of each Purchase Period of the
Plan.
(q) "Purchase Period" means a period of six (6) months within an
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(r) "Purchase Price" means with respect to a Purchase Period an
amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below)
of a Share of Common Stock on the Offering Date or on the Purchase Date,
whichever is lower; provided, however, that in the event (i) of any increase in
the number of Shares available for issuance under the Plan as a result of a
stockholder-approved amendment to the Plan, and (ii) all or a portion of such
additional Shares are to be issued with respect to one or more Offering Periods
that are underway at the time of such increase ("Additional Shares"), and (iii)
the Fair Market Value of a Share of Common Stock on the date of such increase
(the "Approval Date Fair Market Value") is higher than the Fair Market Value on
the Offering Date for any such Offering Period, then in such instance the
Purchase Price with respect to Additional Shares shall be 85% of the Approval
Date Fair Market Value or the Fair Market Value of a Share of Common Stock on
the Purchase Date, whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
with Section 19 of the Plan.
(t) "Subsidiary" means a corporation, domestic or foreign, of which
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
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<PAGE>
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
(a) Offering Periods. The Plan shall be implemented by a series of
Offering Periods of twenty-four (24) months duration, with new Offering Periods
commencing on or about May 1 and November 1 of each year (or at such other time
or times as may be determined by the Board of Directors). The first Offering
Period shall commence on the beginning of the effective date of the Registration
Statement on Form S-1 for the initial public offering of the Company's Common
Stock (the "IPO Date") and continue until April 30, 2002. The Plan shall
continue until terminated in accordance with Section 20 hereof. The Board of
Directors of the Company shall have the power to change the duration and/or the
frequency of Offering Periods with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
consecutive Purchase Periods of six (6) months' duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on May 1 shall end on the next October 31. A
Purchase Period commencing on November 1 shall end on the next April 30. The
first Purchase Period shall commence on the IPO Date and shall end on October
31, 2000. The Board of Directors of the Company shall have the power to change
the duration and/or frequency of Purchase Periods with respect to future
purchases without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Purchase Period to be
affected.
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<PAGE>
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given Offering Period. The
subscription agreement shall set forth the percentage of the participant's
Compensation (subject to Section 6(a) below) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll paid
following the Offering Date and shall end on the last payroll paid on or prior
to the last Purchase Period of the Offering Period to which the subscription
agreement is applicable, unless sooner terminated by the participant as provided
in Section 10.
6. Method of Payment of Contributions.
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than twenty percent (20%) (or such greater percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during a Purchase
Period may increase and on one occasion only during a Purchase Period may
decrease the rate of his or her Contributions with respect to the Offering
Period by completing and filing with the Company a new subscription agreement
authorizing a change in the payroll deduction rate. The change in rate shall be
effective as of the beginning of the next calendar month following the date of
filing of the new subscription agreement, if the agreement is filed at least ten
(10) business days prior to such date and, if not, as of the beginning of the
next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b), a participant's payroll
deductions may be decreased by the Company to 0% at any time during a Purchase
Period. Payroll deductions shall re-commence at the rate provided in such
participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10. In addition, a
participant's payroll deductions may be decreased by the Company to 0% at any
time during a Purchase Period in order to avoid unnecessary payroll
contributions as a result of application of the maximum share limit set forth in
Section 7(a), in which case payroll deductions shall re-commence at the rate
provided in such participant's subscription agreement at the beginning of the
next Purchase Period, unless terminated by the participant as provided in
Section 10.
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<PAGE>
7. Grant of Option.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Purchase Period shall be 2,000
Shares (subject to any adjustment pursuant to Section 19 below), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date under the first
Offering Period under the Plan, the Fair Market Value of a share of the Common
Stock of the Company shall be the Price to Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, the Shares purchased upon exercise of his or her option. No
fractional Shares shall be purchased; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full Share shall be
retained in the participant's account for the subsequent Purchase Period or
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 below. Any other amounts left over in a participant's account after
a Purchase Date shall be returned to the participant.
-5-
<PAGE>
10. Voluntary Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the Fair Market Value of the Shares on any
Purchase Date of an Offering Period is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period. Participants shall automatically be
withdrawn as of April 30, 2000 from the Offering Period beginning on the IPO
Date and re-enrolled in the Offering Period beginning on May 1, 2000 if the Fair
Market Value of the Shares on the IPO Date is greater than the Fair Market Value
of the Shares on April 30, 2000, unless a participant notifies the Administrator
prior to April 30, 2000 that he or she does not wish to be withdrawn and re-
enrolled.
12. Interest. No interest shall accrue on the Contributions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
200,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of (i) 300,000 Shares, (ii) three-quarters of one percent
-6-
<PAGE>
(3/4%) of the Shares outstanding on the last day of the immediately preceding
fiscal year, or (iii) such lesser number of Shares as is determined by the
Board. If the Board determines that, on a given Purchase Date, the number of
shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Offering Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Purchase Date, the Board may in
its sole discretion provide (x) that the Company shall make a pro rata
allocation of the Shares of Common Stock available for purchase on such Offering
Date or Purchase Date, as applicable, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Purchase Date, and continue all Offering Periods then in effect, or (y) that the
Company shall make a pro rata allocation of the shares available for purchase on
such Offering Date or Purchase Date, as applicable, in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common Stock on
such Purchase Date, and terminate any or all Offering Periods then in effect
pursuant to Section 20 below. The Company may make pro rata allocation of the
Shares available on the Offering Date of any applicable Offering Period pursuant
to the preceding sentence, notwithstanding any authorization of additional
Shares for issuance under the Plan by the Company's stockholders subsequent to
such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such
-7-
<PAGE>
participant's death, the Company shall deliver such Shares and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
16. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. Use of Funds. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the stockholders of
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
Common Stock which may be purchased by a participant in a Purchase Period, the
number of shares of Common Stock set forth in Section 13(a) above, and the price
per Share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
(b) Corporate Transactions. In the event of a dissolution or
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate
-8-
<PAGE>
immediately prior to the consummation of such action, unless otherwise provided
by the Board. In the event of a Corporate Transaction, each option outstanding
under the Plan shall be assumed or an equivalent option shall be substituted by
the successor corporation or a parent or Subsidiary of such successor
corporation. In the event that the successor corporation refuses to assume or
substitute for outstanding options, each Purchase Period and Offering Period
then in progress shall be shortened and a new Purchase Date shall be set (the
"New Purchase Date"), as of which date any Purchase Period and Offering Period
then in progress will terminate. The New Purchase Date shall be on or before the
date of consummation of the transaction and the Board shall notify each
participant in writing, at least ten (10) days prior to the New Purchase Date,
that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option will be exercised automatically on the
New Purchase Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this Section 19, an
option granted under the Plan shall be deemed to be assumed, without limitation,
if, at the time of issuance of the stock or other consideration upon a Corporate
Transaction, each holder of an option under the Plan would be entitled to
receive upon exercise of the option the same number and kind of shares of stock
or the same amount of property, cash or securities as such holder would have
been entitled to receive upon the occurrence of the transaction if the holder
had been, immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving effect
to any adjustments in the number of Shares covered by the option as provided for
in this Section 19); provided however that if the consideration received in the
transaction is not solely common stock of the successor corporation or its
parent (as defined in Section 424(e) of the Code), the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the stockholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally accepted accounting rules applicable to the
Plan. Except as provided in Section 19 and in this Section 20, no amendment to
the Plan shall make any change in any option previously granted
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<PAGE>
which adversely affects the rights of any participant. In addition, to the
extent necessary to comply with Rule 16b-3 under the Exchange Act, or under
Section 423 of the Code (or any successor rule or provision or any applicable
law or regulation), the Company shall obtain stockholder approval in such a
manner and to such a degree as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
the IPO Date. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20.
-10-
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
Loudeye Technologies, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for
the Offering Period ______________, ____ to _______________, ____, and subscribe
to purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to any increase and one occasion only with respect to
any decrease during any Purchase Period by completing and filing a new
Subscription Agreement with such increase or decrease taking effect as of the
beginning of the calendar month following the date of filing of the new
Subscription Agreement, if filed at least ten (10) business days prior to the
beginning of such month. Further, I may change the rate of deductions for
future Offering Periods by filing a new Subscription Agreement, and any such
change will be effective as of the beginning of the next Offering Period. In
addition, I acknowledge that, unless I discontinue my participation in the Plan
as provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Loudeye Technologies, Inc. 2000 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
------------------------------------
------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) -----------------------------------------------
(First) (Middle) (Last)
- -------------------------- -----------------------------------------------
(Relationship) (Address)
-----------------------------------------------
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
10. In connection with the initial public offering of the Company's
securities and upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, I agree not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company, however or whenever I acquired them, without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed 180 days) from the effective date of
such registration as may be requested by the Company or such managing
underwriters and to execute an agreement reflecting the foregoing as may be
requested by the underwriters at the time of the public offering.
11. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:
------------------------------
SOCIAL SECURITY #:
----------------------
DATE:
-----------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ----------------------------------------
(Signature)
- ----------------------------------------
(Print name)
-3-
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Loudeye Technologies, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
for the Offering Period that began on _________ ___, _____. This withdrawal
covers all Contributions credited to my account and is effective on the date
designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:
------------------- --------------------------------------------
Signature of Employee
--------------------------------------------
Social Security Number
<PAGE>
EXHIBIT 10.26
June 23, 1999
Dave Bullis
PO Box 2022
Kirkland WA. 98083
Dear Dave,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
position of President and Chief Operating Officer of the Company. Speaking for
myself, as well as the other members of the Company's management team, we are
all very impressed with your credentials and we look forward to your future
success in this position.
The terms of your new position with the Company are as set forth below:
1. Position.
a. You will become the President and Chief Operating Officer of the
Company, working out of the Company's headquarters office in
Seattle, Washington. You will report to the Company's CEO.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties
and obligations required of and from you pursuant to the express
and implicit terms hereof, and to the reasonable satisfaction of
the Company. During the term of your employment, you further agree
that you will devote all of your business time and attention to
the business of the Company, the Company will be entitled to all
of the benefits and profits arising from or incident to all such
work services and advice, you will not render commercial or
professional services of any nature to any person or organization,
whether or not for compensation, without the prior written consent
of the Company's Board of Directors, and you will not directly or
indirectly engage or participate in any business that is
competitive in any manner with the business of the Company.
Nothing in this letter agreement will prevent you from -accepting
speaking or presentation engagements in exchange for honoraria or
from serving on boards of charitable organizations, or from owning
no more than one percent (1%) of the outstanding equity securities
of a corporation whose stock is listed on a national stock
exchange.
c. As President and Chief Operating Officer, you will have the right
to attend meetings of the Company's Board of Directors.
<PAGE>
Page 2
2. Start Date. Subject to fulfillment of any conditions imposed by this
letter agreement, you will commence this new position with the Company
on July 12, 1999.
3. Proof of Right to Work. For purposes of federal immigration law, you
will be required to provide to the Company documentary evidence of your
identity and eligibility for employment in the United States. Such
documentation must be provided to us within three (3) business days of
your date of hire, or our employment relationship with you may be
terminated.
4. Compensation.
a. Base Salary. You will be paid a monthly salary of $12,500.00,
which is equivalent to $150,000.00 on an annualized basis. Your
salary will be payable in two equal payments per month pursuant to
the Company's regular payroll policy (or in the same manner as
other officers of the Company).
b. Annual Review. Your base salary will be in March as part of the
Company's normal salary review process.
c. Bonus. You will be eligible to receive an incentive bonuses of
$50,000 if the Company achieve's the business plan milestones
established by the Board of Directors, in consultation with you.
You will also be eligible to earn incentive bonuses in future
years, again based on the achievement of objectives met by Company
established by the management team and the CEO.
5. Stock Options.
a. You will be eligible to participate in any stock option or other
incentive programs available to officers or employees of the
Company. Your initial grant amount will be 450,000 shares of non-
qualified options at a strike price of .25 cents. Within a month
of your start date you will receive the Stock Option Plan and
subscription agreement which will enroll you in the program.
b. You will be eligible to vest your grant of incentive stock options
at a rate of 18.75% of the total number of options granted after
nine months of employment and 6.25% of the total number of options
every quarter thereafter until fully vested (pro-rated for any
periods less than a full calendar quarter).
<PAGE>
Page 3
You may exercise these options prior to their vesting subject to
the Company's right of repurchase which will lapse in accordance
with the above vesting schedule. If the Company merges or becomes
acquired the vesting of your options will be accelerated as
specified in the company's current stock options agreement. If the
merger occures within your first two years of employment, the
vesting of your options will be accelerated such that a minimum
50% of the total number of options will be vested upon
consummation of the acquisition.
c. You will also have the opportunity to invest $200,000.00 in the
Series C round with the same rights and the same price as the
other Series C investors according to the term sheet of the
current round set to close in July, 1999.
6. Benefits.
a. Insurance Benefits. The Company will provide you with standard
medical and optional dental insurance benefits. The Company will
purchase coverage for your dependents under The Company's medical
and dental insurance program. In addition, the Company currently
indemnifies all officers and directors to the maximum extent
permitted by law, and you will be requested to enter into the
Company's standard form of Indemnification Agreement giving you
such protection. Pursuant to the Indemnification Agreement, the
Company will agree to advance any expenses for which
indemnification is available to the extent allowed by applicable
law.
7. Confidential Information and Invention Assignment Agreement. Your
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an officer of
the Company, of the Company's Confidential Information and Invention
Assignment Agreement, a copy of which is enclosed for your review and
execution (the "Confidentiality Agreement"), prior to or on your Start
Date.
8. Severance Agreement. If your employment is terminated by the Company
or its successor for any reason other than cause, as determined by the
Company's Board of Directors, you will be entitled to receive
continuation of your base salary and insurance benefits for two months
following the date of termination of your employment.
9. Confidentiality of Terms. You agree to follow the Company's strict
policy that employees must not disclose, either directly or indirectly,
any information, including any of the terms of this agreement,
regarding salary, bonuses, or stock
<PAGE>
Page 4
purchase or option allocations to any person, including other employees
of the Company; provided, however, that you may discuss such terms with
members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting
advice.
10. At-Will Employment. Notwithstanding the Company's obligation described
in Section 8 above, your employment with the Company will be on an "at
will" basis, meaning that either you or the Company may terminate your
employment at any time for any reason or no reason, without further
obligation or liability.
<PAGE>
Page 5
We are all delighted to be able to extend you this offer and look forward
to working with you. To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Confidentiality Agreement. This letter,
together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Martin Tobias
Martin Tobias,
Minister of Order and Reason
ACCEPTED AND AGREED:
Dave Bullis
/s/ Dave Bullis
- ------------------------------------
Signature
June , 1999
- ------------------------------------
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 10.27
August 3, 1999
Larry Culver
16018 224/th/ Ave. NE
Woodinville, WA 98072
Dear Larry,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
-------
position of Chief Financial Officer of the Company. Speaking for myself, as
well as the other members of the Company's management team, we are all very
impressed with your credentials and we look forward to your future success in
this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Chief Financial Officer of the Company,
working out of the Company's headquarters office in Seattle,
Washington. You will report to the Company's President, Dave Bullis.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the express and
implicit terms hereof, and to the reasonable satisfaction of the
Company. During the term of your employment, you further agree that
you will devote all of your business time and attention to the
business of the Company, the Company will be entitled to all of the
benefits and profits arising from or incident to all such work
services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not
for compensation, without the prior written consent of the Company's
Board of Directors, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the
business of the Company. Nothing in this letter agreement will
prevent you from -accepting speaking or presentation engagements in
exchange for honoraria or from serving on
<PAGE>
Page 2
boards of charitable organizations, or from owning no more than one
percent (1%) of the outstanding equity securities of a corporation
whose stock is listed on a national stock exchange.
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the Company
on August 26, 1999.
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of
your identity and eligibility for employment in the United States.
Such documentation must be provided to us within three (3) business
days of your date of hire, or our employment relationship with you may
be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $11,666.66,
-----------
which is equivalent to $140,000.00 on an annualized basis. Your
salary will be payable in two equal payments per month pursuant
to the Company's regular payroll policy (or in the same manner as
other officers of the Company).
b. Annual Review. Your base salary will be reviewed in March as
-------------
part of the Company's normal salary review process.
c. Bonus. You will be eligible to receive an incentive bonus of
-----
$35,000 if the Company achieves the business plan milestones
established by the Board of Directors. You will also be eligible
to earn incentive bonuses in future years, again based on the
achievement of objectives met by Company established by the
management team and the CEO.
5. Stock Options.
-------------
a. You will be eligible to participate in any stock option or other
incentive programs available to officers or employees of the
Company. Your initial grant amount will be 400,000 shares. Within
two weeks of your start date you will receive the Stock Option Plan
and subscription agreement which will enroll you in the program.
a. You will be eligible to vest your grant of incentive stock options
at a rate of 18.75% of the total number of options granted after
nine months of employment
<PAGE>
Page 3
and 6.25% of the total number of options every quarter thereafter
until fully vested (pro-rated for any periods less than a full
calendar quarter). You may exercise these options prior to their
vesting subject to the Company's right of repurchase which will
lapse in accordance with the above vesting schedule. If the Company
merges or becomes acquired the vesting of your options will be
accelerated as specified in the company's current stock options
agreement. If the merger occurs within your first two years of
employment, the vesting of your options will be accelerated such
that a minimum 50% of the total number of options will be vested
upon consummation of the acquisition.
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and optional dental insurance benefits. The Company will also
purchase coverage for your dependents under The Company's medical and
dental insurance program. In addition, the Company currently
indemnifies all officers and directors to the maximum extent permitted
by law, and you will be requested to enter into the Company's standard
form of Indemnification Agreement giving you such protection.
Pursuant to the Indemnification Agreement, the Company will agree to
advance any expenses for which indemnification is available to the
extent allowed by applicable law.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an officer
of the Company, of the Company's Confidential Information and
Invention Assignment Agreement, a copy of which is enclosed for your
review and execution (the "Confidentiality Agreement"), prior to or on
-------------------------
your Start Date.
8. Severance Agreement. If your employment is terminated by the Company
-------------------
or its successor for any reason other than cause, as determined by the
Company's Board of Directors, you will be entitled to receive
continuation of your base salary and insurance benefits for one month
following the date of termination of your employment.
9. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or
indirectly, any information, including any of the terms of this
agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the
<PAGE>
Page 4
Company; provided, however, that you may discuss such terms with
members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting
advice.
10. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Section 8 above, your employment with the Company will be
on an "at will" basis, meaning that either you or the Company may
terminate your employment at any time for any reason or no reason,
without further obligation or liability.
<PAGE>
Page 5
We are all delighted to be able to extend you this offer and look forward
to working with you. To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Confidentiality Agreement. This letter,
together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Martin Tobias
Martin Tobias,
Minister of Order and Reason
ACCEPTED AND AGREED:
Larry Culver
/s/ Larry Culver
_____________________________
Signature
August , 1999
_____________________________
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 10.28
August 30, 1999
Doug Schulze
4208 185/th/ Place SE
Issaquah, WA 98027
Dear Doug,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
-------
position of Vice President of Marketing of the Company. Speaking for myself, as
well as the other members of the Company's management team, we are all very
impressed with your credentials and we look forward to your future success in
this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Vice President of Marketing of the Company,
working out of the Company's headquarters office in Seattle,
Washington. You will report to the Company's President, Dave Bullis.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the express and
implicit terms hereof, and to the reasonable satisfaction of the
Company. During the term of your employment, you further agree that you
will devote all of your business time and attention to the business of
the Company, the Company will be entitled to all of the benefits and
profits arising from or incident to all such work services and advice,
you will not render commercial or professional services of any nature
to any person or organization, whether or not for compensation, without
the prior written consent of the Company's Board of Directors, and you
will not directly or indirectly engage or participate in any business
that is competitive in any manner with the business of the Company.
Nothing in this letter agreement will prevent you from -accepting
speaking or presentation engagements in exchange for honoraria or from
serving on boards of charitable organizations, or from owning no more
than one percent (1%)
<PAGE>
Page 2
of the outstanding equity securities of a corporation whose stock
is listed on a national stock exchange.
2. Start Date. Subject to fulfillment of any conditions imposed by
----------
this letter agreement, you will commence this new position with the
Company on September 30, 1999.
3. Proof of Right to Work. For purposes of federal immigration law,
----------------------
you will be required to provide to the Company documentary evidence
of your identity and eligibility for employment in the United
States. Such documentation must be provided to us within three (3)
business days of your date of hire, or our employment relationship
with you may be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $12,083.33,
-----------
which is equivalent to $145,000.00 on an annualized basis. Your
salary will be payable in two equal payments per month pursuant
to the Company's regular payroll policy (or in the same manner
as other officers of the Company).
b. Signing Bonus. You also be paid a $10,000 signing bonus upon
-------------
commencement of employment. Should you voluntarily leave the
Company or if your employment is terminated for cause within
your first nine months of employment, you will be required to
return the signing bonus to the Company.
b. Bonus. You will also be eligible to receive up to $50,000.00 in
-----
incentive bonuses in your first year employment according to
the achievement of objectives defined by the Board of
Directors. You will also be eligible to earn incentive bonuses
in future years.
5. Stock Options.
-------------
You will be eligible to participate in any stock option or other
incentive programs available to officers or employees of the
Company. Your initial grant amount will be 350,000 shares. Within
two weeks of your start date you will receive the Stock Option Plan
and subscription agreement which will enroll you in the program.
You will be eligible to vest your grant of incentive stock options
at a rate of 12.5% of the total number of options granted after
nine months of employment and 6.25% of the total number of options
every quarter thereafter until fully vested (pro-rated for any
periods less than a full calendar quarter). You may exercise these
options prior
<PAGE>
Page 3
to their vesting subject to the Company's right of repurchase which
will lapse in accordance if the Company merges or becomes acquired.
Upon merger or acquisition, the vesting of your options will be
accelerated as specified in the company's current stock options
agreement if the merger occurs with the above vesting schedule. As
an officer, if within twelve months from the date of acquisition
your position is terminated, the vesting of your options will be
accelerated such that 100% of the total number of options will be
vested.
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and optional dental insurance benefits. The Company will
also purchase coverage for your dependents under The Company's
medical and dental insurance program. In addition, the Company
currently indemnifies all officers and directors to the maximum
extent permitted by law, and you will be requested to enter into
the Company's standard form of Indemnification Agreement giving you
such protection. Pursuant to the Indemnification Agreement, the
Company will agree to advance any expenses for which
indemnification is available to the extent allowed by applicable
law.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an
officer of the Company, of the Company's Confidential Information
and Invention Assignment Agreement, a copy of which is enclosed for
your review and execution (the "Confidentiality Agreement"), prior
-------------------------
to or on your Start Date.
8. Severance Agreement. If your employment is terminated by the
-------------------
Company or its successor for any reason other than cause, as
determined by the Company's Board of Directors, you will be
entitled to receive continuation of your base salary and insurance
benefits for six months following the date of termination of your
employment.
9. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or
indirectly, any information, including any of the terms of this
agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the
Company; provided, however, that you may discuss such terms with
members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or
accounting advice.
<PAGE>
Page 4
10. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Section 8 above, your employment with the Company
will be on an "at will" basis, meaning that either you or the
Company may terminate your employment at any time for any reason
or no reason, without further obligation or liability.
We are all delighted to be able to extend you this offer and look
forward to working with you. To indicate your acceptance of the Company's offer,
please sign and date this letter in the space provided below and return it to
me, along with a signed and dated copy of the Confidentiality Agreement. This
letter, together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Martin Tobias
Martin Tobias,
Minister of Order and Reason
ACCEPTED AND AGREED:
Doug Schulze
/s/ Doug Schulze
________________________
Signature
August , 1999
_______________________
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 10.29
November 5, 1999
James Van Kerkhove
3105 NW Circle A Drive
Portland, OR 97229
Dear Jim,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
-------
position of Vice President of Production of the Company. Speaking for myself,
as well as the other members of the Company's management team, we are all very
impressed with your credentials and we look forward to your future success in
this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Vice President of Production of the Company,
working out of the Company's headquarters office in Seattle,
Washington. You will report to the Company's President.
b. You agree to the best of your ability and experience that you
will at all times loyally and conscientiously perform all of the
duties and obligations required of and from you pursuant to the
express and implicit terms hereof, and to the reasonable
satisfaction of the Company. During the term of your employment,
you further agree that you will devote all of your business time
and attention to the business of the Company, the Company will
be entitled to all of the benefits and profits arising from or
incident to all such work services and advice, you will not
render commercial or professional services of any nature to any
person or organization, whether or not for compensation, without
the prior written consent of the Company's Board of Directors,
and
<PAGE>
Page 2
you will not directly or indirectly engage or participate in any
business that is competitive in any manner with the business of
the Company. Nothing in this letter agreement will prevent you
from accepting speaking or presentation engagements in exchange
for honoraria or from serving on boards of charitable
organizations, or from owning no more than one percent (1%) of
the outstanding equity securities of a corporation whose stock is
listed on a national stock exchange.
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the
Company on November 29, 1999.
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of
you identity and eligibility for employment in the United States.
Such documentation must be provided to us within three (3) business
days of your date of hire, or our employment relationship with you
may be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $11,666, which
-----------
is equivalent to $140,000 on an annualized basis. Your salary
will be payable in two equal payments per month pursuant to the
Company's regular payroll policy (or in the same manner as other
employees of the Company).
b. Bonus. You will also be eligible to receive up to $40,000 in
-----
incentive bonuses in your first year employment according to the
achievement of objectives defined by the Board of Directors. You
will also be eligible to earn incentive bonuses in future years.
c. Relocation Bonus. You will be eligible for a relocation bonus of
----------------
up to $15,000.
d. Annual Review. Your base salary will be reviewed in March as part
-------------
of the Company's normal salary review process.
<PAGE>
Page 3
5. Stock Options. You will be eligible to participate in any stock
-------------
option or other incentive programs available to officers or employees
of the Company. Your initial grant amount will be 250,000 shares.
Within two weeks of your start date you will receive the Stock Option
Plan and subscription agreement, which will enroll you in the
program. You will be eligible to vest your grant of incentive stock
options at a rate of 18.75% of the total number of options granted
after nine months of employment and 6.25% of the total number of
options every quarter thereafter until fully vested (pro-rated for
any periods less than a full calendar quarter). You may exercise
these options prior to their vesting subject to the Company's right
of repurchase which will lapse in accordance with the Option Plan. If
the Company merges or becomes acquired the vesting of your options
will be accelerated as specified in the company's current stock
options agreement. As an officer, if within twelve months from the
date of acquisition your position is terminated, the vesting of your
options will be accelerated such that 100% of the total number of
options will be vested.
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and optional dental insurance benefits. You will be
eligible to purchase coverage for your dependents under the
Company's medical and dental insurance program. The Company will
subsidize 50% of these premiums. In addition, the Company
currently indemnifies all officers and directors to the maximum
extent permitted by law, and you will be requested to enter into
the Company's standard for of Indemnification Agreement giving
you such protection. Pursuant to the Indemnification Agreement,
the Company will agree to advance any expenses for which
indemnification is available to the extent allowed by applicable
law.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an officer
of the Company, of the Company's Confidential Information and
Inventions Assignment Agreement, a copy of which is enclosed for your
review and execution (the "Confidentiality Agreement"), prior to or
-------------------------
on your Start Date.
<PAGE>
Page 4
8. Severance Agreement. If your employment is terminated by the Company
-------------------
or its successor for any reason other than cause, as determined by
the Company's Board of Directors, you will be entitled to receive
continuation of your base salary and insurance benefits for six
months following the date of termination of your employment and will
be allowed to purchase your vested stock options including a prorated
portion of the initial 18.75% of your option grant.
9. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or
indirectly, any information, including any of the terms of this
agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the Company;
provided, however, that you may discuss such terms with members of
your immediate family and any legal, tax or accounting specialists
who provide you with individual legal, tax or accounting advice.
10. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Section 8 above, your employment with the Company will
be on an "at will" basis, meaning that either you or the Company may
terminate your employment at any time for any reason or no reason,
without further obligation or liability.
<PAGE>
Page 5
We are all delighted to be able to extend you this offer and look
forward to working with you. To indicate your acceptance of the Company's offer,
please sign and date this letter in the space provided below and return it to
me, along with a signed and dated copy of the Confidentiality Agreement. This
letter, together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Dave Bullis
Dave Bullis
President
ACCEPTED AND AGREED:
James Van Kerkhove
/s/ James Van Kerkhove
_______________________________
Signature
November , 1999
________________________________
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBT 10.30
December 2, 1999
David L. Weld Jr.
615 Bellevue Ave. E., #301
Seattle, WA 98102
Dear David,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
-------
position of Senior Vice President of Product Development of the Company.
Speaking for myself, as well as the other members of the Company's management
team, we are all very impressed with your credentials and we look forward to
your future success in this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Senior Vice President of Product Development of
the Company, working out of the Company's headquarters office in
Seattle, Washington. You will report to the Company's President.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the express and
implicit terms hereof, and to the reasonable satisfaction of the
Company. During the term of your employment, you further agree that
you will devote all of your business time and attention to the
business of the Company, the Company will be entitled to all of the
benefits and profits arising from or incident to all such work
services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not
for compensation, without the prior written consent of the Company's
Board of Directors, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the
business of the Company. Nothing in this letter agreement will prevent
you from -accepting speaking or presentation engagements in exchange
for honoraria or from serving on boards of charitable organizations,
or from owning no more than one percent (1%) of the outstanding equity
securities of a corporation whose stock is listed on a national stock
exchange.
<PAGE>
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the Company
on approximately December 15, 1999, determined by the date of close of
the Company's purchase of alive.com.
2. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of
your identity and eligibility for employment in the United States.
Such documentation must be provided to us within three (3) business
days of your date of hire, or our employment relationship with you may
be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $12,083.33,
-----------
which is equivalent to $145,000 on an annualized basis. Your
salary will be payable in two equal payments per month pursuant
to the Company's regular payroll policy (or in the same manner as
other employees of the Company). This compensation plan will
commence on January 1, 2000.
b. Bonus. You will also be eligible for a $40,000 end of the year
-----
bonus, $24,000.00 of which will be based on the overall revenue
achievements of the Company, and $16,000.00 will be based on
performance objectives established by you and the President.
b. Annual Review. Your base salary will be reviewed in March as
-------------
part of the Company's normal salary review process.
5. Stock Options.
-------------
Upon formal close of the Company's purchase of alive.com, the Company
will assume the stock option plan of alive.com and you will be
eligible to participate in any stock option or other incentive
programs available to officers or employees of the Company and your
official conversion ratio to the Company's stock option plan will be
determined. Your alive.com option grant of 169,141 shares on December
10, 1998 will have an approximate conversion ratio of .49, or
approximately 82,879 shares. Your price per share for your alive.com
grant was .25 cents, which will have an approximate conversions ratio
of .49, or approximately .51 cents. Within one month of your start
date you will receive the Stock Option Plan and subscription agreement
which will enroll you in the program. You will be eligible to
participate in any stock option or other incentive programs available
to officers or employees of the Company.
<PAGE>
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and optional dental insurance benefits. You will be eligible
to purchase coverage for your dependents under The Company's medical
and dental insurance program and the Company will pay a to be
determined percentage of the medical and dental premiums. In addition,
the Company currently indemnifies all officers and directors to the
maximum extent permitted by law, and you will be requested to enter
into the Company's standard form of Indemnification Agreement giving
you such protection. Pursuant to the Indemnification Agreement, the
Company will agree to advance any expenses for which indemnification
is available to the extent allowed by applicable law.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the Company
is contingent upon the execution, and delivery to an officer of the
Company, of the Company's Confidential Information and Invention
Assignment Agreement, a copy of which is enclosed for your review and
execution (the "Confidentiality Agreement"), prior to or on your Start
-------------------------
Date.
8. Severance Agreement. If your employment is terminated by the
--------------------
Company or its successor for any reason other than cause, as determined by
the Company's Board of Directors, you will be entitled to receive
continuation of your base salary and insurance benefits for six months
following the date of termination of your employment.
9. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding
salary, bonuses, or stock purchase or option allocations to any person,
including other employees of the Company; provided, however, that you may
discuss such terms with members of your immediate family and any legal, tax
or accounting specialists who provide you with individual legal, tax or
accounting advice.
10. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Section 8 above, your employment with the Company will be on
an "at will" basis, meaning that either you or the Company may terminate
your employment at any time for any reason or no reason, without further
obligation or liability.
<PAGE>
We are all delighted to be able to extend you this offer and look forward
to working with you. To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Confidentiality Agreement. This letter,
together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Martin Tobias
Martin Tobias,
Minister of Order and Reason
ACCEPTED AND AGREED:
David Weld Jr.
/s/ David Weld Jr.
_______________________________
Signature
December , 1999
_______________________________
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 10.31
January 7, 2000
Tom Hodge
Dear Tom,
On behalf of Encoding.com (the "Company"), I am pleased to offer you the
-------
position of Minister of Law and Order (Vice President, General Counsel) of the
Company. Speaking for myself, as well as the other members of the Company's
management team, we are all very impressed with your credentials and we look
forward to your future success in this position.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become the Minister of Law and Order (Vice President,
General Counsel) of the Company, working out of the Company's
headquarters office in Seattle, Washington. You will report to the
Company's CFO.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the express and
implicit terms hereof, and to the reasonable satisfaction of the
Company. During the term of your employment, you further agree that
you will devote all of your business time and attention to the
business of the Company, the Company will be entitled to all of the
benefits and profits arising from or incident to all such work
services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not
for compensation, without the prior written consent of the Company's
Board of Directors, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the
business of the Company. Nothing in this letter agreement will
prevent you from -accepting speaking or presentation engagements in
exchange for honoraria or from serving on boards of charitable
organizations, or from owning no more than one percent (1%) of the
outstanding equity securities of a corporation whose stock is listed
on a national stock exchange or NASDAQ.
<PAGE>
Page 2
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position with the Company
on January 17, 2000.
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of
your identity and eligibility for employment in the United States.
Such documentation must be provided to us within three (3) business
days of your date of hire, or our employment relationship with you may
be terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $10,833.33,
-----------
which is equivalent to $130,000.00 on an annualized basis. Your
salary will be payable in two equal payments per month pursuant
to the Company's regular payroll policy (or in the same manner as
other officers of the Company).
b. Bonus. You will also be eligible to receive up to $20,000.00 in
-----
end of the year incentive bonuses according to the achievement of
objectives defined by the President and Board of Directors. You
will also be eligible to earn incentive bonuses in future years.
5. Stock Options.
-------------
You will be eligible to participate in any stock option or other
incentive programs available to officers or employees of the Company.
Your initial grant amount will be a qualified option to purchase of
140,000 shares. You will be eligible to vest your grant of incentive
stock options at a rate of 18.75% of the total number of options
granted after nine months of employment and 6.25% of the total number
of options every quarter thereafter until fully vested (pro-rated for
any periods less than a full calendar quarter). Your purchase price
will be determined at the Board of Directors meeting following your
date of hire. You may exercise these options prior to their vesting
subject to the Company's right of repurchase which will lapse in
accordance with the Option Plan. If the Company experiences a change
in control and your position is not terminated, vesting will
accelerate with respect to 25% of these options. If the Company
experience a change in control and your position is terminated within
twelve months of acquisition, vesting will accelerate with respect to
100% of these options. Upon Board of Director approval of your option
grant, you will receive the Stock Option Plan and subscription
agreement which will enroll you in the program.
<PAGE>
Page 3
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and dental insurance benefits. The Company will also purchase
coverage for your dependents under The Company's medical and dental
insurance program. In addition, the Company currently indemnifies all
officers and directors to the maximum extent permitted by law, and you
will be requested to enter into the Company's standard form of
Indemnification Agreement giving you such protection. Pursuant to the
Indemnification Agreement, the Company will agree to advance any
expenses for which indemnification is available to the extent allowed
by applicable law.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an officer
of the Company, of the Company's Confidential Information and
Invention Assignment Agreement, a copy of which is enclosed for your
review and execution (the "Confidentiality Agreement"), prior to or on
-------------------------
your Start Date.
8. Severance Agreement. If your employment is terminated by the Company
-------------------
or its successor for any reason other than cause, as determined by the
Company's Board of Directors, you will be entitled to receive
continuation of your base salary and insurance benefits for six months
following the date of termination.
9. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or
indirectly, any information, including any of the terms of this
agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the Company;
except to the extent such information is the public domain other than
as a result of a breach of this agreement and except as required by
law; provided, however, that you may discuss such terms with members
of your immediate family and any legal, tax or accounting specialists
who provide you with individual legal, tax or accounting advice.
10. At-Will Employment. Notwithstanding the Company's obligation
------------------
described in Section 8 above, your employment with the Company will be
on an "at will" basis, meaning that either you or the Company may
terminate your employment at any time for any reason or no reason,
without further obligation or liability.
<PAGE>
Page 4
We are all delighted to be able to extend you this offer and look forward
to working with you. To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Confidentiality Agreement. This letter,
together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersedes any prior representations or
agreements, whether written or oral. This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.
Very truly yours,
ENCODING.COM
/s/ Martin Tobias
Martin Tobias,
Minister of Order and Reason
ACCEPTED AND AGREED:
Tom Hodge
/s/ Tom Hodge
________________________________
Signature
January , 2000
________________________________
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Seattle, Washington
February 3, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 49,273 1,442
<SECURITIES> 0 0
<RECEIVABLES> 955 87
<ALLOWANCES> (187) (20)
<INVENTORY> 0 0
<CURRENT-ASSETS> 51,355 1,556
<PP&E> 5,282 1,383
<DEPRECIATION> (1,152) (229)
<TOTAL-ASSETS> 72,558 2,939
<CURRENT-LIABILITIES> 7,323 797
<BONDS> 0 0
0 0
58,536 2,981
<COMMON> 22,790 (133)
<OTHER-SE> (18,054) (1,607)
<TOTAL-LIABILITY-AND-EQUITY> 72,558 2,939
<SALES> 2,645 286
<TOTAL-REVENUES> 2,645 286
<CGS> 2,871 504
<TOTAL-COSTS> 11,701 1,465
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 183 21
<INCOME-PRETAX> (11,905) (1,650)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (11,905) (1,650)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (26,025) (1,650)
<EPS-BASIC> (4.81) (0.41)
<EPS-DILUTED> (4.81) (0.41)
</TABLE>
