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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LAUNCH MEDIA, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 95-4463753
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2700 PENNSYLVANIA AVENUE
SANTA MONICA, CALIFORNIA 90404
(310) 526-4300
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
ROBERT D. ROBACK
PRESIDENT
LAUNCH MEDIA, INC.
2700 PENNSYLVANIA AVENUE
SANTA MONICA, CALIFORNIA 90404
(310) 526-4300
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JAMES M. KOSHLAND, ESQ. KENNETH L. GUERNSEY, ESQ.
SCOTT M. STANTON, ESQ. CYDNEY S. POSNER, ESQ.
WILLIAM A. RODONI, ESQ. MICHAEL W. HAUPTMAN, ESQ.
GRAY CARY WARE & FREIDENRICH LLP COOLEY GODWARD LLP
400 HAMILTON AVENUE ONE MARITIME PLAZA, 20TH FLOOR
PALO ALTO, CALIFORNIA 94301-1825 SAN FRANCISCO, CALIFORNIA 94111
(650) 328-6561 (415) 693-2000
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), please 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 number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock ($0.001 par value).................... $40,250,000 $11,190
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</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 16, 1999
PROSPECTUS
SHARES
[LAUNCH MEDIA LOGO]
COMMON STOCK
This is an initial public offering of common stock by Launch Media, Inc. We
are selling shares of common stock. The estimated initial public
offering price is between $ and $ per share.
-------------------------
There is currently no public market for the common stock. We have applied
to have the common stock approved for quotation on the Nasdaq National Market
under the symbol LAUN.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price........................ $ $
Underwriting discounts and commissions............... $ $
Proceeds to Launch, before expenses.................. $ $
</TABLE>
Launch has granted the underwriters an option for a period of 30 days to
purchase up to additional shares of common stock.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
HAMBRECHT & QUIST
ALLEN & COMPANY INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 26
Selected Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 41
Management.................................................. 60
Certain Transactions........................................ 68
Principal Stockholders...................................... 71
Description of Capital Stock................................ 75
Shares Eligible For Future Sale............................. 78
Underwriting................................................ 79
Legal Matters............................................... 81
Experts..................................................... 81
Additional Information...................................... 82
Index to Financial Statements............................... F-1
</TABLE>
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We maintain a worldwide Web site at www.launch.com. The reference to our
worldwide Web address does not constitute incorporation by reference of the
information contained at this site. LAUNCH and THE HANG are registered
trademarks of Launch. "Discover New Music" and www.launch.com are also
trademarks of Launch. All brand names and trademarks appearing in this
prospectus are the property of their respective holders.
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<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision.
LAUNCH
Launch is a digital media company focused on creating the premier
destination for discovering new music. Leveraging the inherent advantages of
digital media, Launch offers a compelling music discovery experience for
consumers and provides a valuable marketing platform for record labels, artists,
advertisers and merchants. Our content is designed to attract the valuable 12 to
34 year old audience, including the subset of that group that is part of the 5
to 20 year old group known as Generation Y. We deliver our content on the
Internet at www.launch.com and on the monthly Launch on CD-ROM. As of February
1, 1999, launch.com had approximately 1.0 million registered users. Media Metrix
reported that, in December 1998, launch.com reached 1.5% of all Internet users,
approximately 849,000 unique users. As of February 1, 1999, Launch on CD-ROM had
approximately 275,000 subscribers.
Music is one of the most popular forms of entertainment and a multi-billion
dollar consumer industry. Consumers in the 12 to 34 age group purchased 67% of
the music sold in the U.S. in 1997. According to Soundscan, Inc., more than
32,000 new albums were released in 1997, but fewer than 100 sold more than
500,000 copies. This same small group of titles accounted for 47% of new music
sales in 1997, highlighting the significant ongoing challenge for the music
industry to promote its new releases. Historically, the music industry and music
consumers have looked to music media, such as MTV and radio, to serve as outlets
for marketing and discovering new music. However, traditional music media have
increasingly de-emphasized the introduction of new music in favor of programming
strategies designed to aggregate the largest possible audience for advertisers.
For individuals in the 12 to 34 age group, digital media such as the Internet
are quickly becoming the media of choice. We believe a significant opportunity
exists to create a music brand in digital media that serves as a single
destination for the music consumer to discover new music, the music industry to
market new releases and the advertising community to target a highly attractive
demographic.
We create engaging music content focused on both new and established
artists, spanning almost all musical genres. We deliver personalized music
content, such as music news, exclusive artist interviews and performances,
concert reviews, music samples and music videos, to our members in an
interactive format based on members' musical tastes and preferences. Launch
works closely with many record labels, providing them an opportunity to market
new music to a broad market that can be difficult to reach through traditional
media. We have featured several of the biggest names in music, including Alanis
Morissette, Smashing Pumpkins, R.E.M., Matchbox 20, Wyclef Jean, Seal and Jewel,
and have introduced our audience to many new artists.
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We design our music content to appeal to consumers in the 12 to 34 age
group because we believe that consumers in this group, and in particular those
who are members of Generation Y, identify strongly with the music they like and
value being the first to discover new music. We also believe that Generation Y
has been a critical factor in driving the success of new major acts, such as the
Spice Girls, Matchbox 20 and Hanson. Advertisers are beginning to realize,
however, that traditional brand marketing and advertising techniques may be less
effective in reaching this important group and are increasingly exploring new
ways to attract this demographic.
As part of our strategy to attract and retain registered members from our
target audience, we have created a vibrant community of users who help each
other discover new music by virtual word-of-mouth. Our music content encourages
our members to engage in community activities, such as creating home pages,
chatting online, listing friends and favorite artists, and developing online
friendships with others sharing similar tastes. This user-generated content
provides an additional source of music discovery and encourages regular, active
participation in the community. We believe that members with strong ties to the
community tend to spend significant amounts of time interacting with others and
are less likely to switch to a different music site. We also believe that the
growth of an active community based on personalized music tastes distinguishes
launch.com from other music Web sites.
Our objective is to establish Launch as the premier destination for
discovering new music. Our strategy to achieve that objective is to attract and
retain active music consumers with compelling music content and community
features, thereby creating a valuable environment for advertisers, merchants and
record labels to market their products to an elusive, critical audience.
Our headquarters are located at 2700 Pennsylvania Avenue, Santa Monica,
California 90404, and our telephone number is (310) 526-4300.
-------------------------
Unless otherwise noted, the information in this prospectus assumes (a) a
1-for-5 reverse stock split to be effected prior to completion of this offering,
(b) conversion of all outstanding shares of Launch's preferred stock into an
equal number of shares of common stock, which will occur automatically upon
completion of this offering, (c) conversion of outstanding convertible notes
into shares of common stock which will occur automatically upon completion of
this offering and (d) no exercise of the underwriters' over-allotment option.
See "Certain Transactions." Additionally, unless otherwise noted, the
information in this prospectus, other than historical financial information,
assumes completion of the acquisition of Musicvideos.com. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Events" for a more complete description of the terms of the
musicvideos.com acquisition.
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THE OFFERING
Common stock offered by Launch........... shares
Common stock to be outstanding after this
offering............................... shares(1)
Use of proceeds.......................... General corporate purposes,
including sales and marketing,
capital expenditures and working
capital. See "Use of Proceeds."
Risk factors............................. For a discussion of certain risks
you should consider before
investing in the common stock, see
"Risk Factors."
Proposed Nasdaq National Market symbol... LAUN
- ---------------
(1) Outstanding share information excludes 1,112,555 shares subject to
outstanding options and warrants at a weighted average exercise price of
$1.58 per share and 474,432 shares issuable upon exercise of outstanding
warrants at an exercise price equal to the lower of the per share proceeds
to Launch from the sale of the common stock offered hereby or $22.95 per
share. Unless otherwise indicated, all information in the prospectus
relating to outstanding shares of Launch common stock or options or warrants
to purchase Launch common stock is based upon information as of December 31,
1998. See "Capitalization."
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The selected historical financial data presented below are derived from the
financial statements of Launch at the end of this prospectus. The financial
statements for each of the years in the three-year period ended December 31,
1998 have been audited by PricewaterhouseCoopers LLP, independent accountants.
The pro forma data summarized below give effect to (a) the conversion of all
outstanding shares of Launch's preferred stock into an equal number of shares of
common stock, which will occur automatically upon completion of this offering
and (b) the Musicvideos.com acquisition. The pro forma as adjusted balance sheet
data summarized below also reflect (a) the conversion of outstanding convertible
notes into shares of common stock, which will occur automatically upon
completion of this offering, and (b) the application of the estimated net
proceeds from the sale of the shares of common stock offered
hereby at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 1,375 $ 3,137 $ 5,014
Loss from operations.............................. (4,653) (6,675) (13,804)
Net loss.......................................... $(4,488) $(6,692) $(13,419)
Basic and diluted net loss per share(1)........... $ (5.37) $ (7.89) $ (16.07)
Shares used in per share calculation(1)........... 920 925 934
Pro forma basic and diluted net loss per share.... $ (2.30)
Shares used in pro forma per share calculation.... 7,055
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ 6,728 $ 6,435 $
Working capital................................. 4,366 4,126
Total assets.................................... 13,164 20,702
Long-term obligations, net of current portion... 639 668
Mandatory redeemable convertible preferred
stock........................................ 37,876 --
Total stockholders' equity (deficit)............ (28,996) 16,322
</TABLE>
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(1) See Note 2 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used to compute per share amounts.
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RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Additional risks
and uncertainties that are not yet identified or that we currently think are
immaterial may also materially adversely affect our business and financial
condition in the future. Any of the following risks could materially adversely
affect our business, operating results and financial condition and could result
in a complete loss of your investment.
WE HAVE A LIMITED OPERATING HISTORY
We incorporated in February 1994 and published the first issue of Launch on
CD-ROM in May 1995. We first made launch.com available over the Internet in
October 1997. Historically, Launch on CD-ROM has accounted for the majority of
Launch's audience. Accordingly, Launch has derived its revenues principally from
advertising sales against the Launch on CD-ROM audience and, to a lesser extent,
from subscriptions for Launch on CD-ROM. Launch expects that future growth, if
any, in revenue will largely depend upon increasing the launch.com audience.
Because we have a limited operating history, you must consider the risks and
difficulties frequently encountered by early-stage companies such as Launch in
new and rapidly evolving markets, including the market for advertising on the
Internet and other digital media. These risks include our ability to do the
following:
- attract a larger audience to launch.com;
- increase advertising revenues;
- increase awareness of the Launch brand;
- strengthen user loyalty;
- offer compelling music and entertainment content;
- maintain our current, and develop new, strategic relationships;
- respond effectively to competitive pressures;
- continue to utilize technology effectively; and
- attract, retain and motivate qualified personnel.
We cannot assure you that we will successfully address these risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE INCREASED LOSSES
We incurred net losses of $4.5 million in 1996, $6.7 million in 1997 and
$13.4 million in 1998. As of December 31, 1998, our accumulated deficit was
$27.8 million. We have not achieved profitability and expect to incur operating
losses for the foreseeable future. We expect these operating losses to increase
for at least the next year. We will need to generate significant revenues to
achieve and maintain profitability, and we cannot assure you that we will be
able to do so. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or an annual basis in the
future. If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations,
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our financial performance will likely be adversely affected. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. These factors include the following:
- our ability to attract and retain advertisers;
- our ability to attract and retain our audience;
- new Web sites, services or products introduced by us or by our
competitors;
- the timing and uncertainty of sales cycles;
- mix of online advertisements sold;
- seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
- the level of Web and online services usage;
- our ability to attract, integrate and retain qualified personnel;
- our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
- technical difficulties or system downtime affecting the Internet
generally or the operation of launch.com; and
- general economic conditions, as well as economic conditions specific to
digital media and the music industry.
Our revenues for the foreseeable future will be substantially dependent on
advertising and sponsorships. Advertising revenues are difficult to forecast,
especially because the market for advertising on digital media has emerged
relatively recently. In 1998, we derived 26.8% of our net revenues from
advertising barter transactions; however, we expect to substantially reduce both
the dollar volume and frequency of such transactions will decline substantially
in future periods. Further, advertising orders are typically short term and
subject to cancellation without penalty until shortly before the advertisement
runs. In each quarterly period, we derive a significant portion of our revenues
from sales of advertising to a limited number of customers. Accordingly, the
loss of a key advertising relationship or the cancellation or deferral of even a
limited number of orders could adversely affect our quarterly performance.
To attract and retain a larger audience, we plan to significantly increase
our expenditures for sales and marketing, content development, and technology
and infrastructure development. Many of these expenditures are planned or
committed in advance in anticipation of future revenues. If our revenues in a
particular quarter are lower than we anticipate, we may be unable to reduce
spending in that quarter. As a result, any shortfall in revenues would likely
adversely affect our quarterly operating results.
Due to the factors noted above and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our
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results of operations may be below the expectations of public market analysts
and investors. In this event, the price of our common stock may decline. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our quarterly operating results.
WE DEPEND ON ADVERTISING SALES
Our revenues for the foreseeable future will depend substantially on sales
of advertising. In 1997, advertising sales accounted for 59.3% of our net
revenues, and in 1998 they accounted for 60.6% of our net revenues. If we do not
increase advertising revenues, our business may not grow or survive. Increasing
our advertising revenues depends upon many factors, including our ability to do
the following:
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of the launch.com audience;
- increase the amount of revenues per advertisement;
- aggregate our target demographic group of 12 to 34 year old active music
consumers, and, in particular, the Generation Y segment of this group;
- increase awareness of the Launch brand among advertisers;
- target advertisements to appropriate segments of our audience;
- make Launch available through evolving broadband distribution channels;
and
- accurately measure the size and demographic characteristics of our
audience.
Our failure to achieve one or more of these objectives could adversely affect
our business.
SALES CYCLES VARY FOR ADVERTISING
Our dependence on advertising subjects us to additional risks because the
sales cycles for these sales vary significantly. The time between the date of
initial contact with a potential advertiser or sponsor and receipt of a purchase
order from the advertiser may range from as little as six weeks to up to nine
months. Advertising sales are subject to delays over which we have little or no
control, including the following:
- advertisers' budgetary constraints;
- internal acceptance reviews by advertisers and their agencies;
- the timing of completion of advertisements by advertisers; and
- the possibility of cancellation or delay of projects by advertisers or
sponsors.
During these sales cycles, we may expend substantial funds and management
resources but not obtain advertising revenues. Therefore, if these sales are
delayed or do not otherwise occur, our operating results for a particular period
may be adversely affected.
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WE MUST INCREASE THE SIZE OF OUR AUDIENCE
Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. To attract and retain our audience, we must do the
following:
- continue to offer compelling music content;
- encourage our users to become part of our community;
- conduct effective marketing campaigns to acquire new members;
- develop new and maintain existing distribution relationships with other
Web sites;
- update and enhance the features of launch.com;
- increase awareness of the Launch brand;
- make Launch available through broadband distribution channels as they
achieve widespread consumer acceptance; and
- offer targeted, relevant products and services.
Our failure to achieve one or more of these objectives could adversely affect
our business, and we cannot assure you that we will be successful in these
efforts.
A significant element of our strategy is to build a loyal community of
registered members on launch.com because we believe community features help
retain actively engaged users. The concept of developing such a community on the
Web is unproven, and if it is not successful, then it may be more difficult to
increase the size of our audience.
We also depend on establishing and maintaining distribution relationships
with high-traffic Web sites to increase our audience. There is intense
competition for placements on these sites, and we may not be able to enter into
such relationships on commercially reasonable terms or at all. Even if we enter
into distribution relationships with these Web sites, they themselves may not
attract significant numbers of users. Therefore, launch.com may not obtain
additional users from these relationships. Moreover, we have paid in the past,
and may pay in the future, significant fees to establish these relationships.
We also intend to increase our financial expenditures on marketing the
Launch brand because we believe brand awareness will be critical to increasing
our audience, especially because there are few barriers to entry for Internet
businesses. If we do not increase our revenues as a result of our branding and
other marketing efforts or if we otherwise fail to promote our brand
successfully, our business could be adversely affected.
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WE NEED TO CONTINUE TO DEVELOP COMPELLING CONTENT
Our future success depends on our ability to continue to develop content
that is interesting and engaging to our target audience. Our ability to develop
compelling content depends on several factors, including the following:
- quality of our editorial staff;
- technical expertise of our production staff;
- access to recording artists; and
- access to content controlled by record labels, publishers and artists.
Further, consumer tastes change, particularly those of Generation Y, and we may
be unable to react to those changes effectively or in a timely manner. If our
audience determines that our content does not reflect their tastes, then our
audience size could decrease or the demographic characteristics of our audience
could change. Either of these results would adversely affect our ability to
attract advertisers.
WE DEPEND ON THE MUSIC INDUSTRY FOR OUR CONTENT
Because much of our content, including recording artist interviews, audio
and video performances and music, are provided to us by record labels and
artists at minimal or no charge, we depend on our good relations with record
labels and artists to offer compelling content. We have no long-term contracts
with any of the record labels or artists, and we cannot assure you that they
will continue to make their content available to us on reasonable terms or at
all. If record labels, music publishers or artists charge significant fees for
their content or discontinue their relationships with us, then our content
offering could be adversely affected.
WE NEED NEW DISTRIBUTION TECHNOLOGIES TO INCREASE ACCESSIBILITY OF OUR CONTENT
To experience the full extent of our high-quality audio and full-motion
video content, consumers must access such content either from a CD-ROM, DVD-ROM
or over a high-bandwidth connection, such as cable or direct subscriber line
("DSL") modem or satellite data broadcast. If such broadband distribution
networks do not achieve widespread consumer acceptance, we may be unable to
effectively distribute our audio and video content in its most compelling
format. We cannot assure you that broadband distribution networks will ever
achieve consumer acceptance, and if they do not, our growth may be limited.
WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS
Historically, a limited number of advertisers has accounted for a
significant percentage of our revenues. Although no advertiser accounted for
more than 10% of total net revenues in 1998, our four largest advertisers
accounted for 23.5% of total net revenues. We anticipate that our results of
operations in any given period will continue to depend to a significant extent
upon revenues from a small number of advertisers. In addition, particularly
because few advertisers are contractually obligated to purchase any advertising
in the future, we anticipate that the mix of advertisers in each fiscal period
will continue to vary. In order to increase our revenues, we will need to
attract additional significant advertisers on an ongoing basis. Our failure to
sell a sufficient number of advertisements or to engage a
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sufficient number of advertisers during a particular period could adversely
affect our results of operations.
WE DEPEND ON STRATEGIC ALLIANCES
In an attempt to increase audience, build brand recognition and enhance
content, distribution and commerce opportunities, we have entered into strategic
alliances with various media and Internet-related companies such as NBC
Multimedia, Inc., America Online, Inc., Microsoft Corporation, Snap LLC and
Infoseek Corporation (Go Network). Our future success depends to a significant
extent upon the success of such alliances. Occasionally, we enter into
agreements with strategic partners that may prohibit us from entering into
similar arrangements with competitors of our strategic partners. Such
exclusivity provisions may limit our ability to enter into favorable
arrangements with complementary businesses and thereby limit our growth. We
cannot assure you that we will achieve the strategic objectives of these
alliances, that any party to a strategic alliance agreement with Launch will
perform its obligations as agreed upon or that such agreements will be
specifically enforceable by Launch. In addition, some of our strategic alliances
are short term in nature and may be terminated by either party on short notice.
Our failure to maintain or renew our existing strategic alliances or to
establish and capitalize on new strategic alliances could have an adverse affect
on our business. See "Business -- Strategic Alliances."
OUR MARKET IS HIGHLY COMPETITIVE
Competition among media companies seeking to attract the active music
consumer is intense. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising
revenues. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:
- publishers and distributors of traditional media, such as television,
radio and print, including MTV, CMT, Rolling Stone and Spin, and their
Internet affiliates;
- online services and Web sites, including those targeted at music
consumers, such as SonicNet and UBL;
- Web retrieval and other Web "portal" companies, such as Excite, Inc.,
Infoseek Corporation, Lycos, Inc. and Yahoo! Inc.; and
- online music retailers, such as CDNow, Inc. and Amazon.com, Inc.
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Increased competition could result in advertising price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business. Because we compete for advertisers with traditional advertising media,
our business could be adversely affected if advertisers do not view digital
media as effective for advertising. Competition is likely to increase
significantly as new companies enter the market and current competitors expand
their services. Many of these potential competitors are likely to enjoy
substantial competitive advantages, including the following:
- larger audiences;
- larger technical, production and editorial staffs;
- greater name recognition;
- better access to content;
- more established Internet presence;
- larger advertiser bases; and
- substantially greater financial, marketing, technical and other
resources.
If we do not compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.
WE DEPEND ON KEY PERSONNEL
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly
David B. Goldberg, Launch's Chief Executive Officer, and Robert D. Roback,
Launch's President. The loss of either of these individuals or certain other key
employees would likely have an adverse effect on our business. We expect that we
will need to hire additional personnel in all areas during 1999. Competition for
personnel throughout our industry is intense. We may be unable to retain our
current key employees or attract, integrate or retain other highly qualified
employees in the future. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
could be adversely affected.
WE NEED TO MANAGE OUR POTENTIAL GROWTH
We have experienced and are currently experiencing a period of significant
growth in our operations. This growth has placed, and our anticipated future
growth in our operations will continue to place, a significant strain on our
resources. As part of this growth, we will have to implement new operational
systems and procedures and controls to expand, train and manage our employee
base and to maintain close coordination among our technical, accounting,
finance, marketing, sales and production staffs. We will also need to continue
to attract, retain and integrate personnel in all aspects of our operations. To
the extent we acquire new businesses, we will also need to integrate new
operations, technologies and personnel. Failure to manage our growth effectively
could adversely affect our business.
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<PAGE> 15
ACCEPTANCE AND EFFECTIVENESS OF DIGITAL MEDIA FOR ADVERTISING ARE UNPROVEN
Our future is highly dependent on an increase in the use of the Internet
and other forms of digital media for advertising. The Internet advertising
market is new and rapidly evolving, and we cannot yet gauge the effectiveness of
advertising on the Internet as compared to traditional media. As a result,
demand for Internet advertising is uncertain.
Many advertisers have little or no experience using the Internet for
advertising purposes. The adoption of Internet advertising, particularly by
companies that have historically relied upon traditional media for advertising,
requires the acceptance of a new way of conducting business, exchanging
information and advertising products and services. Such customers may find
advertising on the Internet to be undesirable or less effective for promoting
their products and services relative to traditional advertising media. If the
Internet advertising market fails to develop or develops more slowly than we
expect, then our business could be adversely affected. Moreover, the market for
advertising on other forms of digital media, such as broadband distribution, is
even less developed than Internet advertising, and if that market does not
develop, then our growth may be limited.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
uncertainty makes it difficult to project our future advertising rates and
revenues. Any failure to adapt to pricing models that develop or respond to
competitive pressures could adversely affect our advertising revenues. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption of
this software could adversely affect the commercial viability of Internet
advertising.
TRACKING AND MEASUREMENT STANDARDS FOR ADVERTISING ARE EVOLVING
There are currently no standards for the measurement of the effectiveness
of advertising on the Internet and other digital media, and the industry may
need to develop standard measurements. We cannot assure you that such standard
measurements will develop. In addition, currently available software programs
that track Internet usage and other tracking methodologies are rapidly evolving.
We cannot assure you that the development of such software or other
methodologies will keep pace with our information needs, particularly to support
the growing needs of our internal business requirements and advertising clients.
The absence or insufficiency of this information could adversely impact our
ability to attract and retain advertisers.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on Launch or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.
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<PAGE> 16
WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED FROM THE WEB
Because users of our Web site may distribute our content to others, third
parties might sue us for defamation, negligence, copyright or trademark
infringement or other matters. These types of claims have been brought,
sometimes successfully, against online services in the past. Others could also
sue us for the content that is accessible from our Web sites through links to
other Web sites or through content and materials that may be posted by
launch.com members. Such claims might include, among others, that by directly or
indirectly hosting the personal Web sites of third parties, we are liable for
copyright or trademark infringement or other wrongful actions by such third
parties through such Web sites. It is also possible that if any third-party
content information provided on launch.com contains errors, third parties could
make claims against us for losses incurred in reliance on such information.
We may also enter into agreements that entitle us to receive a share of
revenue from the purchase of goods and services through direct links from our
Web sites to their Web sites. Such arrangements may subject us to additional
claims, including potential liabilities to consumers of such products and
services, based on the access we provide to such products or services, even if
we do not provide such products or services ourselves. While our agreements with
these parties may provide that we will be indemnified against such liabilities,
such indemnification, if available, may not be adequate. Our insurance may not
adequately protect us against these types of claims and even to the extent that
such claims do not result in liability, we could incur significant costs in
investigating and defending against such claims.
FUTURE ACQUISITIONS MAY CAUSE DILUTION
As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. To date, we have had limited experience
in these types of transactions. While we have no current agreements or
commitments with respect to any such acquisitions, other than the pending
acquisition of musicvideos.com, we may acquire businesses, products or
technologies in the future. Because business acquisitions typically involve
significant amounts of intangible assets, future operating results may be
adversely affected by amortization of intangible assets acquired. In the event
of such future acquisitions or business combinations, we could do the following:
- issue equity securities that would dilute current stockholders'
percentage ownership in us;
- incur substantial debt; or
- assume contingent liabilities.
Such actions could cause our operating results or the price of our common stock
to decline.
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<PAGE> 17
WE MAY BE UNABLE TO INTEGRATE POTENTIAL ACQUISITIONS EFFECTIVELY
Acquisitions and business combinations entail numerous operational risks,
including the following:
- difficulties in the assimilation of acquired operations, technologies or
products;
- diversion of management's attention from other business concerns;
- risks of entering markets in which we have no or limited experience; and
- potential loss of key employees of acquired organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could damage our business.
ADDITIONAL FINANCING IS UNCERTAIN
We currently anticipate that our available cash resources, combined with
the net proceeds from this offering, will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the 12 months
following the date of this prospectus. We may need to raise additional funds,
however, in order to do the following:
- fund more rapid expansion;
- develop new or enhance existing services or products;
- fund distribution relationships;
- respond to competitive pressures; or
- acquire complementary products, businesses or technologies.
If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of such stockholders. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. This limitation could adversely affect our business. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
discussion of our working capital and capital expenditures.
WE DEPEND ON CONTINUED GROWTH IN USE OF DIGITAL MEDIA, INCLUDING THE INTERNET
Our market is new and rapidly evolving. If usage of digital media, and in
particular the Internet, does not continue to grow, our business will be
adversely affected. A number of factors may inhibit such usage, including, but
not limited to the following:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- limited availability of cost-effective, high-speed access.
Even if digital media usage grows, the infrastructure necessary for such
growth may not be able to support the demands placed on it by this growth, and
its
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<PAGE> 18
performance and reliability may decline. In addition, Web sites have experienced
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, digital media and, in particular, Internet
usage, as well as the usage of launch.com, could grow more slowly than we expect
or even decline.
WE NEED TO ADAPT TO RAPID TECHNOLOGICAL CHANGE
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of digital media, and in particular, the Internet, and intense
competition in our industry exacerbate these market characteristics. To achieve
our goals, we need to effectively integrate the various software programs and
tools required to enhance and improve our product offerings and manage our
business. Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our products and services. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. In addition, new enhancements must meet the
requirements of our current and prospective users and must achieve significant
market acceptance. We could also incur substantial costs if we need to modify
our service or infrastructures or adapt our technology to respond to these
changes.
GOVERNMENTAL REGULATION OF THE WEB MAY RESTRICT OUR BUSINESS
There are currently few laws or regulations that specifically regulate
communications or commerce on the Web. Laws and regulations may be adopted in
the future, however, that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting certain types of
information and content over the Web. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers and online services providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. Any imposition
of access fees could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Web. Any new laws or regulations relating to the Web could
adversely affect our business.
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC
Substantially all of our launch.com communications hardware and computer
hardware operations are located at Exodus Communications, Inc.'s facilities in
Irvine, California. Fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems and cause
interruptions in our services. Computer viruses, electronic break-ins or other
similar disruptive problems could result in reductions or termination of our
services by our customers or otherwise adversely affect our Web site. Our
business could be adversely affected if our systems were affected by any of
these occurrences. Our insurance policies may not adequately compensate us for
any losses that may occur due to any failures or
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<PAGE> 19
interruptions in our systems. We do not presently have any backup systems or a
formal disaster recovery plan.
Our Web site must be able to accommodate a high volume of traffic and
deliver frequently updated information. Our Web site has experienced in the past
and may in the future experience slower response times or decreased traffic for
a variety of reasons. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet network infrastructure may not
be able to support continued growth. Any of these problems could adversely
affect our business.
WE MAY BE SUBJECT TO LIABILITY FOR MISUSE OF USERS' PRIVATE INFORMATION
Our privacy policy provides that we will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is displayed to users of
our personalized services when they initially register and is easily accessible
on launch.com. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. These
could include claims for unauthorized purchases with credit card information,
impersonation or other similar fraud claims. They could also include claims for
other misuses of personal information, such as for unauthorized marketing
purposes. These claims could result in litigation. In addition, the Federal
Trade Commission and certain state and local authorities have been investigating
certain Internet companies regarding their use of personal information. We could
incur additional expenses if new regulations regarding the use of personal
information are introduced or if these authorities choose to investigate our
privacy practices.
Like most Web sites, we typically place certain information commonly
referred to as cookies on a user's hard drive without the user's knowledge or
consent. We use cookies for a variety of reasons, including enabling us to limit
the frequency with which a user is shown a particular advertisement. Certain
currently available Internet browsers allow users to modify their browser
settings to remove cookies at anytime or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. Any reduction or limitation in the use of cookies could limit the
effectiveness of this technology.
WEB SECURITY CONCERNS COULD HINDER E-COMMERCE
A significant barrier to e-commerce and communications over the Internet
has been the need for secure transmission of confidential information. Internet
usage may not increase at the rate we expect unless some of these concerns are
adequately addressed and found acceptable by the market. Internet usage could
also decline if any well-publicized compromise of security occurred. We may
incur significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Any such protections may not be
available at a reasonable price or at
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<PAGE> 20
all. If a third person were able to misappropriate our users' personal
information, users could sue us or bring claims against us.
WE DEPEND UPON INTELLECTUAL PROPERTY RIGHTS AND LICENSED MATERIAL
A significant portion of the music content available on Launch is licensed
from publishers, record labels and artists. We frequently either do not have
written contracts or have short-term contracts with copyright owners, and,
accordingly, our access to copyrighted content depends upon the willingness of
such parties to continue to make their content available. If the fees for music
content increase substantially or if significant music content becomes
unavailable, our ability to offer music content could be materially limited. Any
limit on our content offering could adversely affect our business.
Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights, are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate. We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our proprietary information. We cannot assure you that the steps
we have taken will prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States. If third
parties were to use or otherwise misappropriate our copyrighted materials,
trademarks or other proprietary rights without our consent or approval, our
competitive position could be harmed, or we could become involved in litigation
to enforce our rights. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such changes of trademarks, alteration of content or payment of
financial damages will not adversely affect our business.
SALES AND OTHER TAXES
Launch generally does not collect sales or other taxes in respect of goods
sold to users on launch.com. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as Launch,
which engage in or facilitate online commerce. A number of proposals have been
made at the state and local level that would impose additional taxes on the sale
of goods and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect our opportunity to derive financial benefit from electronic commerce.
Moreover, if any state or foreign country were to successfully assert that
Launch should collect sales or other taxes on the exchange of merchandise on its
system, our results of operations could be adversely affected.
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<PAGE> 21
Legislation limiting the ability of states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. We cannot
assure you that this legislation will ultimately become law or that the tax
moratorium in the final version of this legislation will be ongoing. Failure to
enact or renew this legislation, once enacted, could allow various states to
impose taxes on Internet-based commerce, which could adversely affect our
business.
YEAR 2000 COMPLIANCE
Launch may discover Year 2000 compliance problems in its systems that will
require substantial revision. In addition, third-party software, hardware or
services incorporated into Launch's material systems may need to be revised or
replaced, all of which could be time-consuming and expensive. The failure of
Launch to fix or replace its internally developed systems or third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on Launch's
business. Moreover, the failure to adequately address Year 2000 compliance
issues in its internally developed systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, governmental
agencies, utility companies, Internet access companies, third-party service
providers and others outside of Launch's control may not be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond the control of Launch, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent Launch from
publishing its content, decrease the use of the Internet or prevent users from
accessing launch.com, which could have a material adverse effect on Launch's
business. The failure by Launch's advertisers to be Year 2000 compliant could
cause them to defer or cancel advertisements scheduled to appear in the Launch
media properties, which could adversely affect Launch's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS OF LAUNCH WILL CONTROL
% OF OUR COMMON STOCK
After this offering, executive officers, directors and holders of 5% or
more of the outstanding Launch common stock will, in the aggregate, beneficially
own approximately % of our outstanding common stock. These stockholders
would be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of
Launch and may make some transactions more difficult or impossible without the
support of these stockholders.
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
There has not previously been a public market for our common stock. We
cannot predict the extent to which investor interest in Launch will lead to the
development of a permanent trading market or how liquid that market might
become. The initial public offering price for the shares will be determined by
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<PAGE> 22
negotiations between us and the representatives of the Underwriters and may not
be indicative of prices that will prevail in the trading market.
OUR STOCK PRICE MAY BE VOLATILE
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be able
to resell their shares at or above the initial public offering price. See
"Underwriting."
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO DECLINE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could decline. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate or necessary. The number of shares of common stock available
for sale in the public market is limited by restrictions under federal
securities law and under certain agreements that Launch's stockholders have
entered into with the underwriters. Those agreements restrict Launch's
stockholders from selling, pledging or otherwise disposing of their shares for a
period of 180 days after the date of this prospectus without the prior written
consent of Hambrecht & Quist LLC. Hambrecht & Quist LLC may, in its sole
discretion, release all or any portion of the common stock from the restrictions
of the lockup agreements before the end of the 180-day period. After this
offering, we will have outstanding shares of common stock (based
upon shares outstanding as of December 31, 1998), assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants after December 31, 1998. Of these shares, the shares
sold in this offering are freely tradable. Of the remaining shares, (a) 22,839
shares sold to certain employees of Launch may not be transferred for two years
after the closing of this offering without the approval of Launch's Board of
Directors, (b) 7,260,618 are subject to the lock-up agreements and will become
eligible for resale upon the expiration of those agreements and (c) 469,394
shares will be eligible for resale in the public market beginning on the date of
this prospectus.
On or prior to the 180th day following the date of this prospectus, we
intend to register under federal securities laws an additional 276,094 shares of
common stock previously issued or reserved for issuance under our employee stock
plans. Of the shares issuable upon exercise of outstanding options to be
registered, approximately shares will be vested and eligible for
sale on the 180th day following the date of this prospectus, and 42,839 shares
will be vested but not eligible for sale or transfer until two years after the
completion of this offering.
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DILUTION; DISPARITY IN SHARE PURCHASE PRICE
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. Accordingly, purchasers of common stock in
this offering will experience immediate and substantial dilution of
approximately $ in net tangible book value per share, or approximately
% of the offering price of $ per share. In contrast, existing
stockholders paid an average price of $ per share. Investors will incur
additional dilution upon the exercise of outstanding stock options and warrants.
MANAGEMENT WILL HAVE BROAD DISCRETION IN USE OF PROCEEDS
We intend to use the net proceeds from the sale of the common stock offered
hereby for expansion of sales and marketing, brand promotion, working capital
and general corporate purposes, including content development or expansion of
our offices and possible acquisitions. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. Until the
proceeds are needed, we plan to invest them in investment-grade,
interest-bearing securities. The failure of management to apply such funds
effectively could adversely affect our business and financial condition. See
"Use of Proceeds."
OUR CHARTER DOCUMENTS CONTAIN CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of our Certificate of Incorporation and our Bylaws will
specify certain procedures for nominating directors and submitting proposals for
consideration at stockholder meetings. These provisions and Delaware General
Corporation Law could discourage potential acquisition proposals and could delay
or prevent a change in control transaction and could have the effect of
discouraging others from making tender offers for Launch's common stock. As a
result, these provisions may prevent the market price of the common stock from
reflecting the effects of actual or rumored takeover attempts. These provisions
may also prevent changes in the management of Launch. See "Description of
Capital Stock."
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements," which may include,
but are not limited to, Launch's business strategy, timing of and plans for the
introduction or phase-out of products, services, enhancements, plans for hiring
additional personnel, entering into strategic alliances, and the adequacy of
anticipated sources of funds, including the proceeds from this offering, to fund
our operations for at least the 12 months following the date of this prospectus,
and other statements about our plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts. When used in this
prospectus, the words "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, actual results could differ materially from those
expressed or implied by these forward-looking statements for a number of
reasons, including those discussed under "Risk Factors" and elsewhere in this
prospectus. Launch assumes no obligation to update any forward-looking
statements.
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USE OF PROCEEDS
Launch will receive net proceeds of $ from the sale of the
shares of common stock in the offering, after deducting estimated
offering expenses of $900,000 and estimated underwriting discounts and
commissions, at an assumed initial public offering price of $ per share. If
the underwriters exercise their over-allotment option in full, Launch will
receive net proceeds of $ , after deducting estimated expenses of
$900,000 and estimated underwriting discounts and commissions of $ , at
an assumed initial public offering price of $ per share.
We intend to use the net proceeds for expansion of sales and marketing
including brand promotion, and for general corporate purposes, including capital
expenditures and working capital. The amounts actually expended for such
purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenues and the other factors described
under "Risk Factors." Accordingly, we will retain broad discretion in the
allocation of the net proceeds of this offering. A portion of the net proceeds
may also be used to acquire or invest in complementary businesses, technologies,
product lines or products. We currently have no agreements or commitments with
respect to any such acquisition, other than our pending acquisition of
musicvideos.com. Pending such uses, we intend to invest the net proceeds of the
offering in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends. We intend to retain any
future earnings for future growth and do not anticipate paying any cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998:
- on an actual basis;
- on a pro forma basis to reflect (a) the issuance of 875,557 shares of
common stock in connection with the acquisition of Musicvideos.com and
(b) the conversion upon completion of the offering of all outstanding
shares of preferred stock into 5,918,230 shares of common stock; and
- on a pro forma basis as adjusted to reflect (a) conversion of outstanding
convertible notes into shares of common stock, which will occur
automatically upon completion of this offering and (b) the sale of the
common stock offered hereby at an assumed initial public offering price
of $ per share and the application of the net proceeds therefrom. See
"Use of Proceeds."
The outstanding share information excludes (a) 1,112,555 shares of common
stock issuable upon the exercise of outstanding stock options and warrants, at a
weighted average exercise price of $1.58 per share, (b) 557,347 shares of common
stock reserved for future issuance under the 1998 Stock Option Plan, (c) 300,000
shares of common stock reserved for future issuance under the Employee Stock
Purchase Plan and (d) 474,432 shares of Series D Stock (convertible into 474,432
shares of common stock) issuable upon the exercise of outstanding warrants at an
exercise price equal to the lower of the per share net proceeds to Launch from
the sale of the common stock offered hereby or $22.95 per share. See
"Description of Capital Stock" and Notes 11 and 12 of Notes to Financial
Statements.
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This information is qualified by, and should be read in conjunction with,
the more detailed financial statements of Launch and related notes thereto
appearing at the end of this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings........................... $ 760 $ 780 $ 780
======== ======== ========
Long-term debt, less current portion............ $ 639 $ 668 $ 668
Mandatory Redeemable Convertible Preferred
Stock:
Series A through D, $0.001 par value,
6,580,406 shares authorized; 5,918,230
shares issued and outstanding, actual; none
issued and outstanding, pro forma and pro
forma as adjusted.......................... 37,876 -- --
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000
shares authorized; none issued and
outstanding, actual, pro forma and pro
forma as adjusted.......................... -- -- --
Common Stock, $0.001 par value, 9,000,000
shares authorized actual and pro forma as
adjusted; 934,333 shares issued and
outstanding, actual; 7,728,120 shares
issued and outstanding, pro forma; and
shares issued and outstanding,
pro forma as adjusted...................... 1 8
Additional paid-in capital.................... -- 45,311
Unearned deferred compensation................ (1,208) (1,208) (1,208)
Accumulated deficit........................... (27,789) (27,789) (27,789)
-------- -------- --------
Total stockholders' equity
(deficit).......................... (28,996) 16,322
-------- -------- --------
Total capitalization.................. $ 9,519 $ 16,990 $
======== ======== ========
</TABLE>
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DILUTION
As of December 31, 1998, Launch had a pro forma net tangible book value of
approximately $ million or $ per share of common stock after giving effect
to (a) the conversion of the outstanding preferred stock into common stock which
will occur automatically upon completion of this offering, (b) conversion of
outstanding convertible notes into shares of common stock which will occur
automatically upon completion of this offering and (c) the issuance of common
stock in connection with the Musicvideos.com acquisition. "Pro forma net
tangible book value" per share represents the amount of total pro forma tangible
assets less total pro forma liabilities divided by the total pro forma number of
shares of common stock outstanding. Dilution in pro forma net tangible book
value per share represents the difference between the per share amount paid by
purchasers of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. Without taking into account any other change in the pro forma net
tangible book value after December 31, 1998, other than to give effect to the
receipt by Launch of the net proceeds from the sale of the shares of
common stock offered hereby at an assumed initial public offering price of
$ per share, the pro forma net tangible book value of Launch as of December
31, 1998 would have been approximately $ or $ per share. This
represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ per
share to new investors. If the initial public offering price is higher or lower,
the dilution to new investors will be, respectively, greater or less. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........ $
Pro forma net tangible book value per share before
the offering........................................ $
Increase per share attributable to new investors.....
-----
Pro forma net tangible book value per share after this
offering..............................................
------
Dilution per share to new investors.................... $
======
</TABLE>
The following table summarizes on a pro forma basis as of December 31,
1998, the differences between the number of shares of common stock purchased
from Launch, the total consideration paid (or to be paid), and the average price
per share paid (or to be paid) by existing stockholders and by new investors at
an assumed initial public offering price of $ per share, before deducting
estimated offering expenses and estimated underwriting discounts and
commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... % $ % $
New investors.............
---------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume that no
options or warrants have been or are exercised after December 31, 1998. As of
December 31, 1998, options and warrants were outstanding to purchase an
aggregate of 1,112,555 shares of common stock at a weighted average exercise
price of $1.58 per share. In addition, warrants to purchase 474,432 shares of
Series D Stock (convertible into 474,432 shares of common stock) are outstanding
at an exercise price equal to the lower of the per share net proceeds from the
sale of the common stock offered hereby or $22.95 per share. To the extent that
any shares are issued upon exercise of options or warrants that are presently
outstanding or granted in the future, there will be further dilution to new
investors. See "Capitalization," "Management -- 1998 Stock Option Plan,"
"Description of Capital Stock" and Notes 11 and 12 of Notes to Financial
Statements.
26
<PAGE> 28
SELECTED FINANCIAL DATA
The selected historical financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The statement
of operations data for each of the years in the three-year period ended December
31, 1998, and the balance sheet data at December 31, 1997 and 1998, are derived
from financial statements of Launch, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The balance sheet data at December 31, 1994, 1995 and 1996
and the statement of operations data for each of the years in the two-year
period ended December 31, 1995, are derived from audited financial statements of
Launch not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising.................................... $ -- $ 720 $ 837 $ 1,859 $ 3,038
Subscription................................... -- 10 65 798 1,463
Merchandise and other.......................... -- 390 473 480 513
------- ------- ------- ------- --------
Total net revenues.......................... -- 1,120 1,375 3,137 5,014
Operating expenses:
Cost of goods sold and distribution............ -- 373 812 1,735 3,185
Sales and marketing............................ -- 1,593 3,189 4,225 9,011
Content and product development................ 64 330 1,006 2,454 4,407
General and administrative..................... 303 787 1,021 1,398 2,215
------- ------- ------- ------- --------
Loss from operations............................. (367) (1,963) (4,653) (6,675) (13,804)
Interest income (expense), net................... -- (16) 167 (14) 389
------- ------- ------- ------- --------
Loss before provision for income taxes........... (367) (1,979) (4,486) (6,689) (13,415)
Provision for income taxes....................... (1) (1) (2) (3) (4)
------- ------- ------- ------- --------
Net loss......................................... (368) (1,980) (4,488) (6,692) (13,419)
Accretion of mandatory redeemable convertible
preferred stock................................ -- -- (456) (608) (1,586)
------- ------- ------- ------- --------
Net loss attributable to common stockholders..... $ (368) $(1,980) $(4,944) $(7,300) $(15,005)
======= ======= ======= ======= ========
Basic and diluted net loss per share(1).......... $ (0.46) $ (2.30) $ (5.37) $ (7.89) $ (16.07)
======= ======= ======= ======= ========
Weighted average shares outstanding used in basic
and diluted per share calculation(1)........... 808 862 920 925 934
Pro forma basic and diluted net loss per
share(2)....................................... $ (2.30)
========
Weighted average shares outstanding used in pro
forma per share calculation(2)................. 7,055
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1994 1995 1996 1997 1998
----- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 433 $ 78 $ 808 $ 644 $ 6,728
Working capital (deficit).............................. 412 (141) 3,038 (3,724) 4,366
Total assets........................................... 597 932 4,784 1,790 13,164
Long-term obligations, net of current portion.......... 16 32 58 77 639
Mandatory redeemable convertible preferred stock....... 660 2,403 10,458 11,065 37,876
Total stockholders' equity (deficit)................... (109) (2,053) (7,006) (14,186) (28,996)
</TABLE>
- ---------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the method
used to determine the number of shares used to compute per share amounts.
(2) Pro forma basic and diluted net loss per share data include the effects of
the conversion of all outstanding shares of preferred stock into common
stock upon completion of this offering and the issuance of shares of common
stock in connection with the Musicvideos.com acquisition.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Launch's
financial statements and the notes thereto and the other financial information
appearing elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain
forward-looking information that involves risks and uncertainties. Launch's
actual results could differ materially from those anticipated by such
forward-looking information due to factors discussed under "Risk Factors,"
"Business" and elsewhere in this prospectus.
OVERVIEW
Launch is a digital media company focused on creating the premier
destination for discovering new music. Leveraging the inherent advantages of
digital media, Launch offers a compelling music discovery experience for
consumers and provides a valuable marketing platform for record labels, artists,
advertisers and merchants. Our content is delivered on the Internet at
www.launch.com and on the monthly Launch on CD-ROM.
Launch was incorporated in February 1994, and we published the first issue
of Launch on CD-ROM in May 1995. Through July 1998, we distributed Launch on
CD-ROM bi-monthly, and since that time, we have distributed it monthly.
Launch.com was first made available in October 1997. As of February 1, 1999,
launch.com had approximately 1.0 million registered members, and Launch on
CD-ROM had approximately 275,000 subscribers. In December 1998, there were
approximately 849,000 unique visitors to launch.com.
Launch has incurred significant net losses and negative cash flows from
operations since its inception, and as of December 31, 1998, had an accumulated
deficit of approximately $27.8 million. Launch intends to continue to make
significant financial investments in marketing and promotion, content
development and technology and infrastructure development. As a result, Launch
believes that it will incur operating losses and negative cash flows from
operations for the foreseeable future, and that such losses and negative cash
flows will increase for at least the next year. See "Risk Factors -- We Have a
Limited Operating History" and "-- We Have a History of Losses and Anticipate
Increasing Losses."
To date, Launch's revenues have been derived primarily from the sale of
advertising, including sponsorships, and, to a lesser extent, from annual
subscriptions relating to Launch on CD-ROM. Launch derives revenue from
advertising sales against the total audience viewing content on both launch.com
and Launch on CD-ROM. Historically, Launch on CD-ROM has accounted for the
majority of Launch's audience, and, accordingly, Launch has derived the majority
of its revenues from advertising sales against the Launch on CD-ROM audience.
Launch expects that future growth, if any, in advertising revenue will largely
depend upon increasing the launch.com audience. Revenues for sponsorships across
the Launch media properties are recognized ratably over the sponsorship term
which is typically one month. Revenues from advertisements for Launch on CD-ROM
are recognized upon the release date of the issue in which the advertisement
appears. With respect to launch.com, revenues from advertisements are recognized
ratably in the period in
28
<PAGE> 30
which the advertisement is displayed, provided that no significant Launch
obligations remain.
We derive subscription revenues from annual subscription fees for Launch on
CD-ROM. Advance payments for Launch on CD-ROM subscriptions are recognized as
revenue ratably over the term of the subscription.
Advertising revenues also include barter revenues, which represent an
exchange of advertising space on Launch on CD-ROM for reciprocal advertising
space on third parties' Web sites or for rights under online distribution
agreements. Revenues from these barter transactions are recorded as advertising
revenues at the lower of estimated fair value of the advertisements received or
delivered and are recognized upon publication of the advertisements on Launch on
CD-ROM. Barter expenses are also recorded at the lower of estimated fair value
of the advertisements received or delivered and are recognized when Launch's
advertisements run on the reciprocal media property, which is typically in the
same period in which the advertisements run on Launch on CD-ROM. Although Launch
believes these barter transactions have been important in the marketing of the
Launch brand, we expect to significantly decrease both the dollar value and
frequency of these transactions in the future.
We have entered into various license arrangements, strategic alliances and
business acquisitions in order to build our audience, provide music-specific
content, generate additional online traffic, increase subscriptions and
memberships and establish additional sources of revenue. These acquisitions,
arrangements and alliances have resulted in a variety of non-cash charges that
will affect our operating results over the next several fiscal periods. The
acquisition of Musicvideos.com will be accounted for using the purchase method
of accounting and, accordingly, the purchase price, estimated to be $7.7
million, will be allocated to net tangible and intangible assets acquired. The
excess purchase price over net tangible assets is estimated to be $7.6 million
and will be amortized over an expected estimated average useful life of 36
months. The consideration for the NBC.com and NBC Interactive Neighborhood
strategic alliance and content agreement was Series D Stock valued at $3.0
million. This non-cash amount is being amortized over the 26-month term of the
agreement. We expect that we will continue to enter into such arrangements.
Because Internet business acquisitions typically involve significant amounts of
intangible assets, future operating results may be adversely affected by
amortization of the intangible assets acquired.
29
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth the results of operations for Launch
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net revenues:
Advertising..................................... 60.9% 59.3% 60.6%
Subscription.................................... 4.7 25.4 29.2
Merchandise and other........................... 34.4 15.3 10.2
------ ------ ------
Total net revenues...................... 100.0 100.0 100.0
Operating expenses:
Cost of goods sold and distribution............. 59.0 55.3 63.5
Sales and marketing............................. 231.9 134.7 179.7
Content and product development................. 73.2 78.2 87.9
General and administrative...................... 74.3 44.6 44.2
------ ------ ------
Loss from operations.............................. (338.4) (212.8) (275.3)
Interest income (expense), net.................... 12.2 (0.4) 7.8
------ ------ ------
Loss before provision for income taxes............ (326.2) (213.2) (267.5)
Provision for income taxes........................ 0.2 0.1 0.1
------ ------ ------
Net loss.......................................... (326.4)% (213.3)% (267.6)%
====== ====== ======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Revenues
Net revenues increased 61% from $3.1 million in 1997 to $5.0 million in
1998. The increase in net revenues was primarily attributable to an increase in
advertising and subscription revenues.
Advertising Revenues. Advertising revenues increased 58% from $1.9 million,
or 59.3% of net revenues, in 1997 to $3.0 million, or 60.6% of net revenues, in
1998. Advertising revenues increased in 1998 due to an increase in the number of
advertisers and number of advertisements sold. Launch expects advertising
revenue will continue to represent the most significant portion of its net
revenues for the forseeable future. Included in advertising revenues are
revenues recognized from barter transactions of $903,000 in 1997 and $1.3
million in 1998.
Subscription Revenues. Subscription revenues increased 88% from $798,000,
or 25.4% of net revenues, in 1997 to $1.5 million, or 29.2% of net revenues, in
1998. Subscription revenues increased in 1998 due to an increase in the paid
subscription base for Launch on CD-ROM. We intend to phase out Launch on CD-ROM
delivery, as more efficient broadband distribution systems achieve more
widespread consumer acceptance. As a result, Launch anticipates that
subscription revenues from Launch on CD-ROM will decline substantially over
time.
Merchandise and Other Revenues. Merchandise and other revenues increased 7%
from $480,000, or 15.3% of net revenues, in 1997 to $513,000, or 10.2% of net
30
<PAGE> 32
revenues, in 1998. Merchandise and other revenues increased in 1998 due
primarily to $269,000 earned under a nonrecurring development agreement with
Intel. The total amount to be paid to Launch under the Intel agreement is $1.0
million, and the development efforts under this agreement are expected to be
completed in 1999. Excluding this development agreement revenue, merchandise and
other revenues were $244,000 in 1998, reflecting a 49% decrease from 1997
primarily related to a decrease in single copy retail sales of Launch on CD-ROM.
This decrease was due to Launch's efforts to build circulation of Launch on
CD-ROM through subscriptions rather than single copy retail sales and to a
reduction in the retail sales price. See "Business -- Strategic Alliances." At
December 31, 1998, Launch had deferred revenues of $482,000 consisting primarily
of prepaid subscriptions for Launch on CD-ROM.
Operating Expenses
Cost of Goods Sold and Distribution. Cost of goods sold and distribution
consist primarily of CD-ROM manufacturing and packaging costs and CD-ROM
subscription distribution costs. Cost of goods sold and distribution increased
88% from $1.7 million, or 55.3% of net revenues, in 1997 to $3.2 million, or
63.5% of net revenues, in 1998. As a percentage of net revenues, cost of goods
sold and distribution increased in 1998 due primarily to a one-time distribution
of one million copies of a customized issue of Launch on CD-ROM to college
students in August 1998 and, to a lesser extent, to a reduction in the retail
and subscription sales prices.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of advertising and marketing costs, promotional costs and the cost of
the direct marketing and advertising sales force. Sales and marketing expenses
increased 114% from $4.2 million, or 134.7% of net revenues, in 1997 to $9.0
million, or 179.7% of net revenues, in 1998. As a percentage of net revenues,
sales and marketing expenses increased in 1998 due to the cost of acquiring new
subscribers, the hiring of additional sales and marketing personnel, increased
marketing to promote the Launch brand and amortization of approximately $1.2
million of a $3.0 million non-cash deferred charge resulting from the issuance
of Series D Stock as consideration for a strategic alliance with NBC. The
remaining balance of the deferred charge will be amortized through April 2000.
Launch expects sales and marketing expenses to increase significantly in
absolute dollars as it pursues an aggressive marketing campaign to increase the
audience on launch.com, expands marketing of the Launch brand and hires
additional sales and marketing personnel. See "Business -- Strategic Alliances."
Content and Product Development Expenses. Content and product development
expenses consist primarily of editorial (video production and editorial
writers), art production and software and Web development costs. Content and
product development expenses increased 76% from $2.5 million, or 78.2% of net
revenues, in 1997 to $4.4 million, or 87.9% of net revenues, in 1998. As a
percentage of net revenues, content and product development expenses increased
in 1998 due to the costs of developing and enhancing the launch.com Web site.
Content and product development expenses in 1998 also included a non-cash charge
of $500,000 resulting from the issuance of Series D Stock to Intel in
consideration of the development by Intel of technology to enable delivery of
Launch music content through satellite data broadcast. Launch believes that
significant investments in content and product
31
<PAGE> 33
development are required to remain competitive. Therefore, Launch expects that
its content and product development expenses will continue to increase in
absolute dollars for the foreseeable future.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance and accounting, facilities and fees for professional services.
General and administrative expenses increased 57% from $1.4 million, or 44.6% of
net revenues, in 1997 to $2.2 million, or 44.2% of net revenues, in 1998. The
absolute dollar increase in general and administrative expenses in 1998 was due
to an increase in the number of administrative personnel necessary to support
the growth of Launch's operations. Launch anticipates hiring additional
personnel and incurring additional costs related to being a public company,
including costs related to investor relations programs and professional service
fees. Accordingly, Launch anticipates that general and administrative expenses
will continue to increase in absolute dollars.
Interest Income (Expense), Net
Interest income (expense), net consists of interest earned on cash and cash
equivalents and short-term investments, offset by interest expense on
borrowings. Net interest expense was $14,000 in 1997, and net interest income
was $389,000 in 1998. The increase in net interest income in 1998 was the result
of interest earned on the net proceeds from Launch's sales of Series D Stock in
February and May of 1998.
Income Taxes
Launch's income taxes consist of minimum state franchise taxes. At December
31, 1998 Launch had approximately $26.8 million of federal and state net
operating loss carryforwards, respectively, available to offset future taxable
income. Launch's federal and state net operating loss carryforwards expire
beginning in 2009 and 1999, respectively. Due to the change in Launch's
ownership interests in connection with this offering and prior private
placements, future utilization of the net operating loss carryforwards may be
subject to certain annual limitations. See Note 9 of Notes to Financial
Statements.
Preferred Stock and Accretion
At December 31, 1998 the Company had outstanding four series of preferred
stock aggregating 5,918,230 shares. The shares of preferred stock are
convertible into common stock on a share-for-share basis. In addition, all
series of preferred stock are redeemable, at the option of the holders,
beginning on February 27, 2003. The shares are redeemable at the original
issuance price plus 6% per annum from February 27, 1998 through the redemption
date for Series A, B and D Stock and from March 29, 1996 through the redemption
date for Series C Stock. The carrying amount of the preferred stock is being
increased by periodic accretions so that the amount reflected in the balance
sheet will equal the mandatory redemption amount at the redemption date.
Accretions were $456,000, $608,000 and $1.6 million in 1996, 1997 and 1998,
respectively. The carrying amount of the preferred stock was $37.9 million
32
<PAGE> 34
at December 31, 1998. As a result of this offering, each outstanding share of
preferred stock will be converted into one share of common stock.
Unearned Compensation
In connection with the grant of stock options to employees in 1998, Launch
recorded unearned compensation of $1.4 million representing the difference
between the deemed value of Launch's common stock for accounting purposes and
the exercise price of such options at the date of grant. Such amount, net of
amortization, is presented as a reduction of stockholders' equity and amortized
over the four-year vesting period of the options. Amortization of unearned
compensation was $193,000 for the year ended December 31, 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Revenues
Net revenues increased 121% from $1.4 million in 1996 to $3.1 million in
1997. The increase in net revenues was primarily attributable to an increase in
advertising and subscription revenues.
Advertising Revenues. Advertising revenues increased 127% from $837,000, or
60.9% of net revenues, in 1996 to $1.9 million, or 59.3% of net revenues, in
1997. Advertising revenues increased in 1997 due to an increase in the number of
advertisers and the number of advertisements sold. Included in advertising
revenues were revenues recognized from barter transactions of $131,000 in 1996
and $903,000 in 1997.
Subscription Revenues. Subscription revenues increased from $65,000, or
4.7% of net revenues, in 1996 to $798,000, or 25.4% of net revenues, in 1997.
The increase in 1997 was due to an increase in the paid subscription base of
Launch on CD-ROM.
Merchandise and Other Revenues. Merchandise and other revenues increased 1%
from $473,000, or 34.4% of net revenues, in 1996 to $480,000, or 15.3% of net
revenues, in 1997. The decrease in 1997 as a percentage of net revenues was due
to the significant increases in both advertising and subscription revenues.
Operating Expenses
Cost of Goods Sold and Distribution. Cost of goods sold and distribution
increased 109% from $812,000, or 59.0% of net revenues, in 1996 to $1.7 million,
or 55.3% of net revenues, in 1997. As a percentage of net revenues, cost of
goods sold and distribution decreased in 1997 due to the growth in net revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased 31%
from $3.2 million, or 231.9% of net revenues, in 1996 to $4.2 million, or 134.7%
of net revenues, in 1997. Sales and marketing expenses increased in absolute
dollars in 1997 due to the hiring of additional sales and marketing staff and
increased advertising and marketing activity. As a percentage of net revenues,
sales and marketing expenses decreased in 1997 due to the growth in net
revenues.
33
<PAGE> 35
Content and Product Development Expenses. Content and product development
expenses increased 150% from $1.0 million, or 73.2% of net revenues, in 1996 to
$2.5 million, or 78.2% of net revenues, in 1997. Content and product development
expenses increased in absolute dollars in 1997 due to the increase in the
development costs for launch.com and remained relatively constant as a
percentage of net revenues.
General and Administrative Expenses. General and administrative expenses
increased 40% from $1.0 million, or 74.3% of net revenues, in 1996 to $1.4
million, or 44.6% of net revenues, in 1997. The absolute dollar increase in
general and administrative expenses in 1997 was due to an increase in the number
of administrative personnel necessary to support the growth of Launch's
operations.
Interest Income (Expense), Net
Net interest expense increased from net interest income of $167,000 in 1996
to net interest expense of $14,000 in 1997. The net interest expense in 1997 was
the result of interest expense incurred on bridge loans and a decrease in
interest income due to lower average balances of funds available for investment.
34
<PAGE> 36
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited statements of operations
data on an absolute basis and as a percentage of net revenues for Launch's six
most recent quarters. The information for each of these quarters has been
prepared on substantially the same basis as the audited financial statements
included elsewhere in this prospectus, and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such periods.
Historical results are not necessarily indicative of the results to be expected
in the future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Advertising.......................... $ 648 $ 709 $ 297 $ 554 $ 1,230 $ 958
Subscription......................... 141 346 251 514 268 430
Merchandise and other................ 95 162 63 42 58 349
------- ------- ------- ------- ------- -------
Total net revenues........... 884 1,217 611 1,110 1,556 1,737
Operating expenses:
Cost of goods sold and
distribution...................... 461 591 417 647 1,112 1,010
Sales and marketing.................. 1,022 1,315 1,515 2,218 2,723 2,555
Content and product development...... 524 824 625 1,102 1,112 1,567
General and administrative........... 348 440 405 476 593 742
------- ------- ------- ------- ------- -------
Loss from operations................... (1,471) (1,953) (2,351) (3,333) (3,984) (4,137)
Interest income (expense), net......... (15) (50) (38) 172 166 90
------- ------- ------- ------- ------- -------
Loss before provision for income
taxes................................ (1,486) (2,003) (2,389) (3,161) (3,818) (4,047)
Provision for income taxes............. -- -- (3) -- (1) --
------- ------- ------- ------- ------- -------
Net loss............................... $(1,486) $(2,003) $(2,392) $(3,161) $(3,819) $(4,047)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Advertising........................... 73.3% 58.3% 48.6% 49.9% 79.0% 55.2%
Subscription.......................... 16.0 28.4 41.1 46.3 17.2 24.8
Merchandise and other................. 10.7 13.3 10.3 3.8 3.8 20.0
------ ------ ------ ------ ------ ------
Total net revenues............ 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of goods sold and distribution... 52.1 48.6 68.2 58.3 71.5 58.2
Sales and marketing................... 115.6 108.1 248.0 199.8 175.0 147.1
Content and product development....... 59.3 67.7 102.3 99.3 71.5 90.2
General and administrative............ 39.4 36.1 66.3 42.9 38.1 42.7
------ ------ ------ ------ ------ ------
Loss from operations.................... (166.4) (160.5) (384.8) (300.3) (256.1) (238.2)
Interest income (expense), net.......... (1.7) (4.1) (6.2) 15.5 10.7 5.2
------ ------ ------ ------ ------ ------
Loss before provision for income
taxes................................. (168.1) (164.6) (391.0) (284.8) (245.4) (233.0)
Provision for income taxes.............. -- -- 0.5 -- -- --
------ ------ ------ ------ ------ ------
Net loss................................ (168.1)% (164.6)% (391.5)% (284.8)% (245.4)% (233.0)%
====== ====== ====== ====== ====== ======
</TABLE>
35
<PAGE> 37
The decrease in advertising revenues during the quarter ended March 31,
1998 was the result of releasing only one issue of Launch on CD-ROM during that
quarter. The significant increase in advertising revenues and the associated
increase in cost of goods sold in the quarter ended September 30, 1998 was
primarily the result of the release of an additional issue of Launch on CD-ROM,
which was customized for college students.
The decrease in subscription revenues during the quarter ended September
30, 1998 was the result of commencing monthly publication of Launch on CD-ROM in
August 1998 without changing the subscription price. Subscription revenue
declined because deferred revenue was amortized over an increased number of
units. The increase in the subscription revenue in the quarter ended December
31, 1998 was a result of releasing a greater number of issues of Launch on
CD-ROM in that quarter.
Sales and marketing expenses increased in the quarters ended June 30, 1998
and September 30, 1998 as a result of increased direct and brand marketing
designed to increase the Launch audience and brand awareness.
General and administrative expenses increased during the quarter ended
December 31, 1998 as a result of costs associated with moving to new corporate
facilities, increased depreciation relating to the purchase of computers, studio
and leasehold improvements and increased facility lease payments.
Our revenues and operating results are likely to vary significantly from
quarter to quarter in the future due to a number of factors, many of which are
outside of our control. These factors include: our ability to attract and retain
advertisers; our ability to attract and retain our audience; our ability to
attract and retain customers for our existing and future e-commerce businesses;
new sites, services or products introduced by us or by our competitors; the
timing and uncertainty of sales cycles; user traffic on launch.com; mix of
online advertisements sold; seasonal declines in advertising sales, which
typically occur in the first and third calendar quarters; the level of Web and
online services usage; our ability to attract, integrate and retain qualified
personnel; our ability to successfully integrate operations and technologies
from acquisitions or other business combinations; technical difficulties or
system downtime affecting the Internet generally or the operation of launch.com;
and general economic conditions, as well as economic conditions specific to
digital media and the music industry.
Our revenues for the foreseeable future will be substantially dependent on
advertising and sponsorships. Further, advertising orders are typically short
term and subject to cancellation without penalty until shortly before
publication. In each quarterly period, we derive a significant portion of our
revenues from sales of advertising to a limited number of customers.
Accordingly, the loss of a key advertising relationship, or the cancellation or
deferral of even a limited number of orders could adversely affect our quarterly
performance. As a result of these and other factors, you should not rely on
quarter-to-quarter comparisons of our operating results as an indication of
future performance. See "Risk Factors -- Our Quarterly Operating Results May
Fluctuate."
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Launch has financed its operations primarily through
private placements of preferred stock and, to a lesser extent, from the revenues
generated by operations. As of December 31, 1998, Launch had approximately $6.7
million in cash, cash equivalents and short-term investments. On February 15,
1999, Launch entered into a note purchase agreement in which it agreed to issue
a convertible subordinated promissory note in the amount of $1.0 million to
Avalon Technology LLC, an 8.6% stockholder, and a convertible subordinated
promissory note in the amount of $500,000 to Goran Enterprises Limited, a 12.7%
stockholder. The notes accrue interest at 8.5% per annum from the issuance date
and are due February 29, 2000. The notes automatically convert into shares of
Launch stock upon the earlier of (a) Launch's consummation of an initial public
offering with a sales price per share of at least $10.00 and aggregate gross
proceeds to Launch of at least $15.0 million, (b) an acquisition transaction in
which the stockholders of Launch prior to such transaction own less than 50% of
the voting securities of the surviving entity after such transaction or (c)
February 29, 2000. If Launch consummates an initial public offering prior to
August 31, 1999, the notes and any accrued interest thereon automatically
convert to common stock at a per share price equal to 80% of the initial public
offering price per share. If Launch does not consummate an initial public
offering by August 31, 1999, then, at the option of the holder which may be
exercised at any time between August 31, 1999 and February 29, 2000, the notes
and any accrued interest thereon are convertible into Series D Stock at a per
share price equal to $7.65. If the conversion occurs in connection with an
acquisition transaction, the notes and any accrued interest thereon
automatically convert into Series D Stock at a per share price equal to $7.65.
Net cash used in operating activities increased to $10.8 million for 1998
from $5.8 million for 1997. The increase in net cash used in operating
activities can be substantially attributed to the increased net loss, net of
adjustment for the increased non-cash charges.
Net cash used in investing activities increased to $6.9 million for 1998,
from net cash provided from investing activities of $2.6 million for 1997. The
increase in net cash used in investing activities resulted primarily from the
purchase of securities for investment purposes and, to a lesser extent, to the
purchase of property and equipment for the new corporate offices.
Net cash provided by financing activities increased to $18.8 million for
1998, from $3.0 million for 1997. The increase in net cash provided by financing
activities resulted primarily from the proceeds from the issuance of Series D
Stock.
Launch has a capital lease line of credit for $1.0 million. At December 31,
1998, $531,000 was outstanding under this line of credit. This facility bears
interest at the bank's prime rate (7.75% at December 31, 1998). The leased
assets collateralize any borrowings under this line of credit.
Launch has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, consistent with the growth
in Launch's operations and staffing, and anticipates that this will continue for
the foreseeable future. Additionally, Launch will continue to evaluate possible
investments in businesses, products and technologies, and plans to expand its
sales
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and marketing programs and conduct more aggressive brand promotions. Launch
currently expects that the net proceeds from this offering, together with its
existing capital lease line of credit and available funds, will be sufficient to
meet its anticipated needs for working capital and capital expenditures for at
least the next 12 months. There can be no assurance, however, that the
underlying assumed levels of revenues and expenses will prove to be accurate.
Launch may seek additional funding through public or private financings or other
arrangements prior to such time. Adequate funds may not be available when needed
or may not be available on terms favorable to Launch. If additional funds are
raised through the issuance of equity securities, dilution to existing
stockholders may result. If funding is insufficient at any time in the future,
Launch may be unable to develop or enhance its products or services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on Launch's business, financial
condition and results of operations. See "Risk Factors -- Uncertainty of
Additional Financing."
YEAR 2000 COMPLIANCE
Compliance. Many currently installed computer systems and software products
are coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness. Launch has made a preliminary assessment of the Year
2000 readiness of its operating financial and administrative systems, including
the hardware and software that support Launch's systems. Launch has developed an
assessment plan consisting of (a) quality assurance testing of its internally
developed proprietary software; (b) contacting third-party vendors and licensors
of material hardware, software and services that are both directly and
indirectly related to the delivery of Launch's services to its users; (c)
contacting vendors of third-party systems; (d) assessing repair or replacement
requirements; (e) implementing repair or replacement; and (f) creating of
contingency plans in the event of Year 2000 failures. Launch plans to perform a
Year 2000 simulation on its systems during the first quarter of 1999 to test
system readiness. Based on the results of its Year 2000 simulation test, Launch
intends to revise its internally developed systems as necessary to improve the
Year 2000 compliance of such systems. Many vendors of material hardware and
software components of its systems have indicated that the products used by
Launch are currently Year 2000 compliant. Launch intends to require vendors of
its other material hardware and software components of its systems to provide
assurances of their Year 2000 compliance. Launch plans to complete this process
during the first half of 1999. Until such testing is completed and such vendors
and providers are contacted, Launch will not be able to completely evaluate
whether its systems will need to be revised or replaced.
Costs. To date, Launch has not incurred any material expenditures in
connection with identifying, evaluating or addressing Year 2000 compliance
issues. Most of Launch's expenses have related to, and are expected to continue
to relate to, the operating costs associated with time spent by employees in the
evaluation process
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and Year 2000 compliance matters generally. At this time, Launch does not
possess the information necessary to estimate the potential costs of revisions
to its systems should such revisions be required or of the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although Launch does not anticipate that such expenses will be
material, such expenses, if higher than anticipated, could adversely affect
Launch's financial performance.
Risks. Launch is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on Launch's
business, results of operations and financial condition, without taking into
account Launch's efforts to avoid or fix such problems. There can be no
assurance that Launch will not discover Year 2000 compliance problems in its
systems that will require substantial revision. In addition, there can be no
assurance that third-party software, hardware or services incorporated into
Launch's material systems will not need to be revised or replaced, all of which
could be time-consuming and expensive. The failure of Launch to fix or replace
its internally developed systems or third-party software, hardware or services
on a timely basis could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions, any of which could have a
material adverse effect on Launch's business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in its internally developed systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of Launch's control
will be Year 2000 compliant. The failure by such entities to be Year 2000
compliant could result in a systemic failure beyond the control of Launch, such
as a prolonged Internet, telecommunications or electrical failure, which could
also prevent Launch from publishing its content, decrease the use of the
Internet or prevent users from accessing launch.com, which could have a material
adverse effect on Launch's business, results of operations and financial
condition. The failure by Launch's advertisers to be Year 2000 compliant could
cause them to defer or cancel advertisements scheduled to appear in the Launch
media properties, which could adversely affect Launch's operating results.
Contingency Plan. As discussed above, Launch is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
Launch's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Launch does not
anticipate that the adoption of SOP No. 98-1 will have a material impact on
Launch's financial statements.
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In April 1998, the AICPA issued SOP No. 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. As Launch has expensed these
costs historically, the adoption of this standard will not have a significant
impact on Launch's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Launch does not
expect the adoption of this statement to have a significant impact on its
financial statements.
RECENT EVENTS
On January 15, 1999, Launch entered into a definitive agreement to acquire
AreohveeOnline Partnership, doing business as Musicvideos.com, a provider of
music videos over the Internet. Under the terms of the agreement, which has been
filed as Exhibit 2.1 to the Registration Statement of which this prospectus is a
part, Launch will issue a total of 875,557 shares of its common stock and
$301,944 in cash to the six partners of AreohveeOnline Partnership in exchange
for all of such partners' interests in the partnership. The transaction is
intended to qualify as a tax-free reorganization and is expected to close by the
end of February 1999. The acquisition will be accounted for using the purchase
method of accounting and, accordingly, the purchase price will be allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date. See "Pro Forma Combined
Financial Information."
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BUSINESS
OVERVIEW
Launch is a digital media company focused on creating the premier
destination for discovering new music. Leveraging the inherent advantages of
digital media, Launch offers a compelling music discovery experience for
consumers and provides a valuable marketing platform for record labels, artists,
advertisers and merchants. Because our content is designed to attract and retain
an audience composed principally of consumers who are 12 to 34 years old,
including the 12 to 20 year old segment that is part of Generation Y,
advertisers on Launch can target a valuable and elusive group of consumers. We
create engaging music content focused on both new and established artists,
spanning almost all musical genres. Launch's consumers are not confined to
receiving music content in the programmed, linear sequences broadcast by radio
and television. Instead, we deliver personalized music content to our users in
an interactive format based on their musical tastes and preferences. As part of
our strategy to attract and retain registered members from our target audience,
we have created a vibrant community of users who help each other discover new
music by virtual word-of-mouth. Our music content encourages our members to
engage in community activities, such as creating home pages, chatting online,
listing friends and favorite artists and developing online friendships with
others sharing similar tastes.
We deliver our content on the Internet at www.launch.com and on the monthly
Launch on CD-ROM. As of February 1, 1999, launch.com had approximately 1.0
million registered users. Media Metrix reported that, in December 1998,
launch.com reached 1.5% of all Internet users, approximately 849,000 unique
users. As of February 1, 1999, Launch on CD-ROM had approximately 275,000
subscribers.
INDUSTRY BACKGROUND
The Music Industry
Marketing of New Music. Music is one of the most popular forms of
entertainment and a multi-billion dollar consumer industry. According to
Soundscan, Inc., approximately 48% of all U.S. households contain at least one
person who purchased three or more CDs or cassettes in a six-month period. As
music consumers converted their record collections to CDs beginning in the
mid-1980's, domestic music sales grew from $5.6 billion in 1987 to $12.2 billion
in 1997, according to the Recording Industry Association of America. With this
conversion now largely complete, continued growth in music sales depends on the
industry's ability to create hit titles from its substantial slate of new albums
each year. According to Soundscan, more than 32,000 new albums were released in
1997, but fewer than 100 sold more than 500,000 copies. This same small group of
titles accounted for 47% of new music sales in 1997, highlighting the
significant ongoing challenge for the music industry to market its new releases.
Historically, the music industry has looked to music media brands focused on
consumers between the ages of 12 and 34 to serve as the critical promotional
outlets for new music.
Music Consumers. Consumers in the 12 to 34 age group purchased 67% of the
music sold in the U.S. in 1997. A core segment of this consumer group, aged 12
to 20, belongs to a demographic group known to marketers as Generation Y.
Generation Y
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consists of approximately 60 million individuals between the ages of five and
20. Generation Y is the largest and fastest growing segment of the population
under age 65. We believe that consumers in the 12 to 34 age group and those in
Generation Y in particular identify strongly with the music they like and value
being the first to discover new music. We also believe that Generation Y has
been a critical factor in driving the success of major new acts, such as the
Spice Girls, Matchbox 20 and Hanson. From an advertising perspective, however,
young music consumers are difficult to reach and have demonstrated a resistance
to traditional advertising techniques. Advertisers are beginning to realize that
traditional brand marketing and advertising techniques may be less effective in
this market and are increasingly spending more money to attract this
demographic.
The Role of Music Media. Increasingly, traditional music media have de-
emphasized the introduction of new music in favor of programming strategies
designed to aggregate the largest possible audience. Because active music
consumers are inclined to change the channel when they hear a song that they
dislike, traditional media programmers are compelled to limit the amount and
range of music or videos they broadcast in order to keep consumers tuned in and
attract advertisers. Music television brands such as MTV have adopted half-hour
programming strategies to avoid the symptomatic channel-changing associated with
programmed music videos. Similarly, radio formats have become more segmented in
an effort to target particular segments of listeners for advertisers. As a
result, fewer new music videos and songs receive airplay, making it more
difficult for record labels to market and for consumers to discover new music.
Compounding the challenge for traditional media, a number of marketers believe
Generation Y consumers respond to advertisements differently from their older
counterparts and prefer to encounter those advertisements through more
interactive and diverse media such as the Internet.
Growth of Digital Media
Significant growth in consumer use of personal computers and other
interactive devices has created new opportunities for digital media, such as the
Web. According to International Data Corporation ("IDC"), U.S. home PC
penetration has grown from 39.4% in 1994 to 45.5% in 1998 and is projected to
reach 53.1% by 2002. Almost all new PCs include modems for Internet access and a
high-speed CD-ROM or DVD-ROM drive. In addition, IDC projects that worldwide
Internet usage will grow from approximately 69 million users at the end of 1997
to 320 million by the end of 2002. As a new mass medium, the Internet is already
attracting significant advertising spending. Jupiter Communications estimates
growth in advertising revenue of 42% from $1.9 billion in 1998 to $7.7 billion
by 2002.
The Internet has emerged as a significant mass medium by enabling features
and functions that are unavailable in traditional media. For example, consumers
can quickly access personalized information, and advertisers can target specific
demographic groups based on customer tastes and buying patterns. Digital media
such as the Internet are quickly becoming the media of choice for individuals in
the 12 to 34 age group. Generation Y consumers are particularly attracted to the
features of digital media that enable them to interact with other users who
share their interests. According to eMarketer, the number of teens and college
students who regularly access the Internet will rise from an estimated 12.0
million in 1998 to 22.3 million by 2000, and, according to IDC, approximately
58% of Internet users are between the
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ages of 12 and 34. Internet access also appears to be taking audience share
directly away from television. According to a Nielsen Media Research study,
television use by Generation Y in homes with Internet access declined 6.8% from
1996 to 1997, while television use by that segment remained constant among
non-Internet households.
Despite the popularity of the Internet, most consumers cannot experience
high quality audio and video over their relatively low bandwidth Internet
connections. As bandwidth increases, consumers are likely to demand richer
content in the form of CD-quality audio and full-motion video, particularly in
the entertainment context where consumers are accustomed to such audio and video
quality from traditional media. New platforms, such as cable and direct
subscriber line ("DSL") modem and satellite data broadcast, are already being
created to deliver high-speed access to digital media. High speed Internet
access providers @Home and MediaOne reported that they had an aggregate of
approximately 480,000 subscribers to their cable modem services at the end of
1998.
The Opportunity for a Music Media Brand in Digital Media
We believe that the core group of active music consumers aged 12 to 34, and
particularly those in Generation Y, constitutes a valuable demographic segment
for advertisers because they tend to be early adopters and significant spenders.
Despite their common affinity for music, these consumers have diverse tastes and
interests, and advertisers typically find it difficult to cost-effectively
target them as a group. As traditional music media brands have moved to address
the changing viewing and listening habits of this audience for the benefit of
advertisers, such traditional vehicles have become less effective as outlets for
discovering or marketing new music. The limitations of traditional media have
encouraged (a) active music consumers to seek new ways to discover music, (b)
music industry participants to pursue alternative methods of promoting their new
releases and (c) advertisers to use new media vehicles to promote and sell their
products to an increasingly important demographic group. The rapid growth in
home PC penetration, Internet usage and high-speed Internet services presents
the opportunity to exploit the advantages of digital media to better promote new
music to the valuable demographic group seeking to discover it. Aggregating this
elusive audience in an interactive environment provides advertisers and
merchants the opportunity to target their most valuable consumer. We believe a
significant opportunity exists to create a music brand in digital media that
serves as a single destination for the music consumer to discover new music, the
music industry to promote new releases and the advertising community to target a
highly attractive demographic.
THE LAUNCH SOLUTION
Launch is a digital media company focused on creating the premier
destination for discovering new music. Leveraging the inherent advantages of
digital media, Launch offers a compelling music discovery experience for
consumers and provides a valuable marketing platform for record labels, artists,
advertisers and merchants. Because our content is designed to attract and retain
an audience composed principally of consumers who are 12 to 34 years old,
including the 12 to 20 year old consumers who are part of Generation Y,
advertisers on Launch can target a valuable and elusive group of consumers. We
create engaging music content focused
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on both new and established artists, spanning almost all musical genres.
Launch's consumers are not confined to receiving music content in the
programmed, linear sequences broadcast by radio and television. Instead, we
deliver personalized music content to our users in an interactive format based
on their musical tastes and preferences. We currently deliver our content on the
Internet at www.launch.com and on the monthly Launch on CD-ROM. As broadband
access to the Internet achieves greater consumer acceptance and enables us to
add our richest audio and video content to launch.com, we intend to phase out
delivery of Launch on CD-ROM.
As of February 1, 1999, launch.com had approximately 1.0 million registered
users. Media Metrix reported that, in December 1998, launch.com reached 1.5% of
all Internet users, approximately 849,000 unique users. As of February 1, 1999,
Launch on CD-ROM had approximately 275,000 subscribers.
We believe that Launch offers the active music consumer access to a greater
selection of music and artists than is typically available through traditional
media. In addition, our user-generated content, gathered at minimal cost to us,
provides an additional source of music discovery and encourages regular, active
participation in our community of users. Launch offers record labels the
opportunity to promote and sell new music to a broad market that can be
difficult to reach through traditional media. We work closely with almost every
independent and major record label, including those of Sony Music Entertainment,
Warner Music Group, Universal Music Group, EMI Music and BMG. Through these
relationships, we have featured several of the biggest names in music, including
Alanis Morissette, Smashing Pumpkins, Matchbox 20, Wyclef Jean, Seal, R.E.M. and
Jewel, and have introduced our audience to many new artists.
Key elements of Launch's solution include:
Original and Compelling Music Content. Launch creates exclusive and
original music content, including video interviews and performances, news,
biographies and album and concert reviews. Launch also offers localized concert
and tour information as well as radio station play lists and on-demand music
videos. Our musical coverage spans all genres, including country, blues, jazz,
rap, R&B, folk, rock, excluding only classical. We can offer this broad range of
music content because digital media permit users to navigate to content that
interests them. As a promotional outlet for the music industry, Launch has
regular access to a broad range of artists who are the subjects of exclusive
video and audio content for Launch. Our success with Launch on CD-ROM has
allowed us to leverage our access to artists to create compelling features for
launch.com. We believe that our relationships with the music industry as well as
our expertise in digital media production will provide us a strategic advantage
in offering broadband music content to our users as broadband distribution
systems gain greater consumer acceptance.
Personalization of Content Based on Music Preference. Digital media
enables personalization that allows our members to focus on musical genres that
interest them and to avoid unappealing types of music without exiting Launch.
Our members register free with launch.com by providing zip code, age and gender
information. They also actively add information about their music preferences by
rating artists and albums and indicating favorites. We collect this data in a
database that grows as our members spend more time on the site. As of February
1, 1999, launch.com users
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had contributed over 14 million artist and album ratings. We use this
information to personalize our content for our members based on their stated
musical preferences. For example, a member interested in country music but not
heavy metal would receive targeted features and reviews on country artists to
the exclusion of heavy metal. We believe that personalization increases the time
a user spends on launch.com and discourages changing to another site.
Active Membership and Community Participation. We have created a vibrant
community of users who help each other discover new music by virtual word-of-
mouth. We believe that active music consumers consider musical tastes to be an
important part of personal identity. Music is a shared experience and a powerful
catalyst for community formation. Our music content encourages our members to
engage in community activities, such as creating home pages, chatting online,
listing friends and favorite artists and developing online friendships with
others sharing similar tastes. As of February 1, 1999, there were approximately
1.0 million registered members of launch.com. Our members can also post their
favorite artists and albums on their personalized launch.com home pages and
write their own reviews. This user-generated content, gathered at minimal cost
to us, provides an additional source of music discovery and encourages regular,
active participation in the community. We believe that members with strong ties
to the community tend to spend significant amounts of time interacting with
others and are less likely to switch to a different music site.
Powerful Promotional Outlet for Record Labels and Artists. Record labels
and artists can work with Launch to promote their new releases to the large
group of active music buyers who make up the Launch user community. Because
consumers can avoid music they dislike but still remain in the Launch
environment, Launch can cover a broader spectrum of musical genres and expose
users to a greater number of artists. Record companies, including Sony, Warner,
Universal, BMG and EMI, use Launch to introduce users to a variety of new
artists and to inform them of new releases from established artists. We often
feature established artists in order to draw users in to discover new names.
Because of the synergistic relationships we have developed with the record
labels, we have access to high-profile personalities in music. Since May 1995 we
have featured exclusive interviews and performances by popular recording artists
such as Alanis Morissette, Jewel, Smashing Pumpkins, R.E.M., Sheryl Crow, Aqua,
Matchbox 20, No Doubt and Wyclef Jean.
Attractive, Targeted Demographic Group. Launch focuses on the valuable
12-34 year old audience, including the 12 to 20 year old segment that is part of
Generation Y, who has begun spending more time using the Internet than
traditional media. Our research, conducted by Mediamark Research Inc. (MRI),
demonstrates that our audience is principally composed of members of Generation
Y and others in the 12 to 34 age group, and that our audience members generally:
- invest substantial amounts of time and money in music and music-related
merchandise;
- identify strongly with music they like;
- value being the first to discover new music;
- enjoy being a member of a community built around music;
- adopt technological advancements early; and
- watch less television than they used to.
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Advertisers who have difficulty reaching this audience can turn to Launch for
targeted advertising and direct marketing to this valuable, yet elusive group.
Effective Environment for Advertising and Commerce. Launch provides
advertisers with access to a highly desirable group of consumers in an active
entertainment environment. The Launch environment captures consumers for long
periods of time, and advertisements can be targeted to specific users. Launch
collects demographic and music preference information from its users that can be
used to target advertising and commerce opportunities. We believe that Launch's
access to a large audience of active music consumers will provide us a strategic
advantage in selling digitally downloaded music once the appropriate technology
matures and industry standards develop.
STRATEGY
Our objective is to establish Launch as the premier destination for
discovering new music. Our strategy to achieve that objective is to attract and
retain active music consumers with compelling music content and community
features, thereby creating a valuable environment for record labels, advertisers
and merchants to market their products. Key elements of Launch's strategy are:
Continue to Develop Compelling Music Content. Launch believes that
continuing to develop compelling new audio, visual and text content about music
is critical to expanding its audience. We plan to continue to increase our
offering of exclusive music features to attract and retain new consumers,
especially those in the Generation Y demographic group. Our editorial staff
focuses on identifying new artists that will likely appeal to our users as well
as established artists creating new music. We intend to emphasize video
production because we believe that video is the best way for our users to
experience new music. In addition, our expertise in digital media production
will better position Launch for broadband distribution. We are also committed to
adding new features and services, such as programmed streaming audio channels,
on launch.com.
Aggressively Grow Registered Membership. Launch believes that increasing
the size and loyalty of its launch.com audience is critical to its success. In
addition to continuing to provide compelling, personalized content and community
features, we believe that we can continue to build our audience through
distribution agreements with high-traffic Web sites and through a variety of
marketing techniques designed to increase awareness of Launch. We recognize that
our most valuable asset is the registered member who willingly provides
information about himself or herself, and who is more likely to spend
considerable time on Launch. These members help to increase traffic on
launch.com by building and promoting their launch.com home pages and encouraging
new registrations. To encourage launch.com users to become registered members,
we limit access to certain features of launch.com, including personalization and
community, to registered users.
Build Brand Awareness. Increasing awareness of the Launch brand is
essential to our ability to increase our audience and attract advertisers. We
intend to build brand awareness through online advertising and strategic
alliances with high traffic Web sites and through off-line advertising such as
print, television and billboard advertising. To increase awareness of the Launch
brand, we are developing a half-hour television show. Our television concept
leverages our expertise in video
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production as well as our access to content to create an entertainment show
designed to drive traffic to launch.com. We also believe that increased
awareness of the Launch brand will enable us to increase our attractiveness to
advertisers who target the Launch audience of 12 to 34 year old consumers.
Increase Advertising Revenue by Capitalizing on Attractive Audience
Demographics. Launch seeks to increase its advertising revenues by offering
advertisers access to the Generation Y consumer group and other active music
consumers. Our strategy is to focus on large consumer and direct marketers who
seek to target Generation Y in a relevant environment. Launch offers an
interactive and engaging environment where leading brand marketers, such as
Coca-Cola, Nintendo, Lee Jeans and Visa, can target their messages to an elusive
audience that is making its early brand decisions.
Leverage New Distribution Technologies. The increased commercial
availability of new technologies enabling broadband access to the Internet will
allow Launch to increase distribution of the rich content currently available
only on Launch on CD-ROM. We believe that our extensive experience in developing
high quality, rich media content will provide a competitive advantage over other
content providers as technologies permitting high-speed access to the Internet
become more widely available. Our intention is to phase out CD-ROM delivery as
these more efficient distribution systems achieve more widespread consumer
acceptance and enable us to migrate our richest video and audio content to
launch.com.
Generate E-Commerce Revenues. We are aggressively pursuing strategic and
marketing relationships with retailers focused on Web distribution to enable us
to exploit electronic commerce opportunities. We believe that, as standards for
digital downloads of music evolve, Launch will be well positioned to sell music
through digital downloads. Launch also intends to build on strategic
relationships with record labels, music distributors and concert promoters to
offer our users the ability to easily and economically purchase CDs, concert
tickets, clothing and music paraphernalia. In the meantime, Launch now offers
its visitors the opportunity to purchase music CDs and cassettes.
Pursue Strategic Alliances and Acquisitions. We believe that our strategic
relationships with NBC, Microsoft, Infoseek, (Go Network), AOL and Snap will
help attract users, facilitate advertising sales and increase access to
high-profile personalities. As opportunities arise, we may seek to increase
traffic on launch.com, market share and revenues through strategic acquisitions
in the music content business.
Pursue International Expansion. We believe the global popularity of music
and the growth of digital media in international markets present opportunities
to extend Launch globally. Accordingly, over the longer term, we intend to
create localized versions of Launch in international markets where digital media
is pervasive. In so doing, we believe that we can offer local advertisers a
valuable environment in which to reach their target consumers.
THE LAUNCH MEDIA PROPERTIES
Launch seeks to create the premier destination for music discovery. There
are currently two primary distribution platforms for Launch's music content and
community: launch.com and Launch on CD-ROM. We are also aggressively pursuing
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several other broadband distribution alternatives, such as cable modems and
satellite data broadcast. Such systems will enable us to deliver electronically
the rich media content currently delivered on CD-ROM and to eliminate the
manufacturing and distribution of Launch on CD-ROM.
Launch.com
Launch.com is the place for active music consumers to discover new music
and meet other music fans with similar tastes. The music content we produce for
launch.com consists of audio samples, music videos, text and photographs.
Launch.com enables users to personalize the content they view to focus on music
that appeals to them individually. Further, registered members of launch.com can
share their tastes and preferences with other members of the community by
creating reviews, rating artists and albums and setting up personalized home
pages that other members can visit. Launch covers all musical genres other than
classical. Some of the key features available on launch.com include the
following:
- music news updated daily;
- artists interviews and feature articles;
- concert reviews;
- album reviews;
- artist biographies, photographs and discographies;
- album artwork, track listings and song samples;
- new and upcoming album release information;
- concert tour information;
- radio station playlists;
- on-demand music videos; and
- CD and cassette purchasing.
Although we currently offer streaming audio and music videos, the music
content we produce for launch.com generally consists of text and photographs
because the slow connections most consumers use limit the quality of audio and
video available on the Internet. As more consumers gain faster access to the
Internet through broadband distribution systems, we intend to increase the
amount of higher-quality audio and video content available on launch.com.
Because we have created, and continue to produce, exclusive, high-quality audio
and visual content for Launch on CD-ROM, we believe that Launch will have a
strategic advantage in offering broadband music content to our users as
broadband distribution systems gain greater consumer acceptance.
Launch believes a large and active membership base is critical to its
success. Membership is free and available to launch.com visitors who disclose
their e-mail addresses, zip codes, ages and genders, and choose a member name
and password to be used throughout the site. Members form launch.com's core
audience and are its most valuable users. Launch is currently engaged in an
aggressive campaign to acquire new members, having reached 1.0 million members
as of February 1, 1999. Launch recognizes the importance of maintaining
confidentiality of member information and has established a privacy policy to
protect such information.
Registered members have the ability to enhance their Launch experience by
rating artists and albums according to their preferences. By providing Launch
with confidential, voluntary data based on musical tastes, members can enrich
their own
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content experience when interacting with the site. This information also creates
a robust community rating base.
We believe that active music consumers consider musical tastes to be an
important part of personal identity. Music is a shared experience and a powerful
catalyst for community formation. Our goal is to make each registered member an
active participant in the Launch community. Key elements of our community
services that are available free to registered users include the following:
- personal home pages, plus simple tools for customizing the page;
- ability to mark artists or albums as favorites and display them on your
homepage;
- ability to mark other users as friends, list them on your home page, and
display when they, or their friends, are online;
- chats with artists and other users;
- instant messaging;
- internal message boxes; and
- ability to write and post artist or album reviews both on the page
dedicated to the artist/album and on your home page.
A key benefit of our community is that user-generated content is obtained
at minimal cost to us. In addition, we believe that users who have invested
considerable amounts of time developing community ties are less likely to switch
to another site for music content.
Launch on CD-ROM
Because fixed media such as CD-ROM do not share the Internet's bandwidth
limitations, we can offer rich graphics, CD-quality audio and full-motion video
in Launch on CD-ROM. The interface for Launch on CD-ROM is a graphically rich
virtual city where users navigate to particular content by visiting different
buildings. Various buildings such as "The Hang," housing most music content, and
devices such as "The Vibreaker," which contains album reviews, have become
consistent, recognized features of Launch's environment. Advertising on the
CD-ROM is principally in the form of television commercials, product placements
and interactive advertisements. The city environment permits conspicuous yet
natural advertising placements. The familiar look of billboards within the city
or, for example, candy in a theater concession stand encourages users to click
the branded icons to view the advertising. Many of the advertisements pop up in
the environment on video billboards. We track how users spend time within the
CD-ROM and which advertisements they see. Users voluntarily send this
information back to Launch, along with basic demographic information, so that we
can provide advertisers with a profile of our audience and which advertisements
they saw. Launch offers prizes and other incentives for users who furnish this
information.
Each issue of Launch on CD-ROM includes the following:
- album reviews with CD-quality song samples, photographs and album
artwork;
- exclusive video performances by popular recording artists;
- exclusive video interviews with recording artists presented in
distinctive three-dimensional environments where users can choose
interview topics;
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- direct links to the Internet for downloading additional content, chatting
with other users, visiting launch.com or viewing an advertiser's Web site
related to an advertisement on the CD-ROM;
- interactive video interviews with movie actors, directors or producers;
- video game demonstrations; and
- television-quality advertisements.
We published the first issue of Launch on CD-ROM in May 1995, and have
distributed it monthly since August 1998. We sell subscriptions to Launch on
CD-ROM for $19.95 annually and individual issues for $4.95 at retail outlets. As
of December 31, 1998, total monthly distribution for the CD-ROM was
approximately 300,000 units, including 275,000 subscription units. We intend to
phase out CD-ROM delivery as more efficient broadband distribution systems
achieve more widespread consumer acceptance and enable us to migrate our richest
audio and video content to launch.com.
New Distribution Opportunities
We are committed to maximizing Launch's distribution through all viable
distribution systems for digital media. The proliferation of high-speed access
to the Internet through cable or DSL modem presents new opportunities to
distribute our most compelling content, including personalization and community
features, directly to consumers without publishing a CD-ROM. Launch is currently
part of consumer trials with both MediaOne and @Home for cable modem delivery of
Launch content. We believe that, by leveraging its access to content and video
production expertise, Launch will have a strategic advantage in providing true
broadband content. In addition, satellite data broadcasting of digital media
content downloaded directly to a consumer's hard drive will, when available,
allow Launch to deliver customized versions of its rich media content. We have
strategic alliances with Intel for technology development and with Echostar for
distribution using this data broadcast system. If such broadband distribution
systems do not achieve widespread consumer acceptance, we may be unable to
distribute our richest audio and video content in its most compelling form. See
"Risk Factors -- We Need New Distribution Technologies to Increase Accessibility
of Our Content."
CONTENT DEVELOPMENT
We have developed strong working relationships with most of the major and
independent record labels, including those of Sony Music, Warner Music,
Universal Music, EMI Music and BMG, and with many popular artists. Our core
editorial team is in regular contact with record labels and with independent
publicists who arrange for artists to spend time filming interviews and
performances for use in Launch. The Launch editorial team has extensive
experience in many facets of music journalism and also uses a diverse group of
freelance writers to contribute many of the written features in Launch. Our
strategy is to employ core groups of editors, artists, video producers and other
content creators on a full time basis and also capitalize on a talented network
of freelancers as needed. Although we create most of Launch's content, from time
to time we license content from third parties. We have no long-term contracts
with any record labels or recording artists, and we cannot assure you that
labels or artists will continue to make their content available to us on
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reasonable terms, or at all. See "Risk Factors -- We Need to Continue to Develop
Compelling Content" and "We Depend on the Music Industry for Our Content."
At our headquarters in Santa Monica, California we operate a production
stage that doubles as a recording studio. We use this space to film and record
many of the artists appearing in Launch. Each session with an artist typically
results in content that we can use on both launch.com and Launch on CD-ROM. This
allows us to minimize our production costs while providing the artist with the
broadest possible exposure.
Launch has created exclusive video and text interviews and/or performances
with a variety of new and established artists across multiple genres including:
<TABLE>
<S> <C> <C>
311 Goo Goo Dolls Sarah McLachlan
Tori Amos Buddy Guy Alanis Morissette
Erykah Badu Natalie Imbruglia No Doubt
Ben Folds Five Chris Isaak Shaquille O'Neal
Blues Traveler Wyclef Jean Radiohead
Bush Jewel R.E.M.
The Cardigans B.B. King Joshua Redman
Paula Cole Korn Seal
Sheryl Crow Jonny Lang Smashing Pumpkins
Des'ree Live Third Eye Blind
Everclear Matchbox 20 The Verve Pipe
</TABLE>
ADVERTISING AND SPONSORSHIPS
We sell advertising and sponsorships against the cumulative audience
viewing content on launch.com and Launch on CD-ROM. Launch sells advertisements
that include placement on both launch.com and Launch on CD-ROM. Launch's
strategy is to focus on large, consumer brand advertisers who seek to reach the
active music consumer in a relevant environment. Launch understands that
advertisers aiming to reach young consumers making first time brand decisions
desire advertising capable of making an emotional connection with the viewer.
Launch offers advertisers the opportunity to make such connections with their
potential consumers by delivering engaging advertising to a targeted audience or
sponsoring a relevant content area. Advertisers derive significant value from
targeted users who choose to spend time interacting with the content and the
advertisement. Our research indicates that users who view advertisements in
Launch tend to remember those advertisements more than advertisements appearing
on traditional media.
Launch derives a portion of its advertising revenues from banner
advertisements that are prominently displayed at the top of pages throughout
launch.com. From each banner advertisement, viewers can hyperlink directly to
the advertiser's own Web site, thus providing the advertiser the opportunity to
directly interact with an interested customer. Advertisers have the opportunity
to purchase either run-of-site banners or banners specifically targeted to a
subset of Launch members based on zip code, age, gender or musical preference.
Launch charges premium advertising rates for any level of targeting.
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Launch has derived a significant amount of its revenues to date from the
sale of advertising. In 1997, advertising sales accounted for 59.3% of our
revenues, and in 1998 they accounted for 60.6% of our revenues. Advertising
orders are short term and subject to cancellation without penalty until shortly
before the advertisement runs. Launch employs a direct sales force of nine
professionals, and we intend to increase our staff in 1999. Although no
advertiser accounted for more than 10% of net revenues in 1998, our four largest
advertisers accounted for 23.5% of net revenues. Accordingly, we depend upon a
limited number of advertisers in any quarterly period. The loss of a key
advertising relationship or the cancellation or deferral of even a limited
number of orders could adversely affect our quarterly financial performance.
Advertisers in Launch in 1997, 1998 and/or 1999 include the following:
<TABLE>
<S> <C> <C>
ABC Gillette Nestle
AT&T Intel Nintendo
Certs Jack Daniels Procter & Gamble
Citibank Jim Beam Sony
Coca-Cola Lee Jeans Toyota
Dentyne Levi's Universal Pictures
Dr. Pepper Mazda VH-1
Ford Merck Visa
The GAP Miller
</TABLE>
Our revenues for the foreseeable future will depend substantially on sales
of advertising and this dependence subjects us to certain risks. See "Risk
Factors -- We Depend on Advertising Sales," "-- We Must Increase the Size of Our
Audience," "-- Sales Cycles Vary for Advertising," "-- We Depend on a Limited
Number of Advertisers" and "-- Effectiveness and Acceptance of Digital Media for
Advertising are Unproven."
COMMERCE OPPORTUNITY
Launch currently sells pre-recorded music directly to consumers on both
launch.com and Launch on CD-ROM. Either independently or through partnerships
with leading merchants, Launch also intends to offer its users a variety of
music related products such as concert tickets, artist merchandise, and
eventually digital downloads of music. In addition, Launch intends to pursue
opportunities to sell other lifestyle products relevant to its audience. We
believe that aggregating active music consumers and understanding their tastes
by leveraging our substantial database of information about our users positions
Launch to be a valuable channel for merchants who are focused on the 12 to 34
year old demographic group.
STRATEGIC ALLIANCES
Launch pursues strategic relationships to increase audience, build brand
recognition and enhance content and distribution opportunities. We currently
have strategic relationships in three principal areas: Media; Distribution; and
Content and Technology. Our future success depends to a significant extent upon
the execution and success of these strategic relationships. See "Risk
Factors -- We Depend on Strategic Alliances."
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Media Arrangement
Launch is the exclusive branded music content provider for the
entertainment areas of NBC.com. Launch is also the primary provider of music
content for NBC Interactive Neighborhood. The alliance is designed primarily to
provide visitors to NBC.com a more robust entertainment experience and to
provide Launch with promotion and traffic for launch.com. NBC retains the rights
to publish music content that it owns and to accept sponsorships other than from
identified competitors. In addition, the agreement provides that NBC is the
exclusive television network to which Launch has the right to provide online
music content.
NBC and Launch have jointly created a co-branded music site on NBC.com,
which is accessible both via the NBC.com homepage and through numerous
"gateways" within the NBC.com environment. Gateway pages exist within any area
of NBC.com that has an appropriate music component. For example, gateway pages
reside in the areas for The Tonight Show with Jay Leno, Late Night with Conan
O'Brien, Saturday Night Live, Homicide, and Teen NBC. In addition, special
content areas have also been created within these gateways, such as the "Kevin
Eubanks' Jazz Pick of the Week" (Tonight Show with Jay Leno), "Late Night Rocks!
Trivia" (Late Night with Conan O'Brien), and a special "60s" music area in
support of NBC's miniseries event, "The '60s." This content includes artist
interviews, live performances, acoustic performances and music videos. Launch
sells and the parties share advertising revenue generated from the co-branded
site.
Pursuant to the agreement, NBC provides on-air time to promote the
availability of music content on NBC.com. As consideration for this agreement,
NBC received 392,156 shares of Launch Series D stock in February 1998, certain
of which shares are subject to forfeiture if NBC does not provide agreed-upon
amounts of on-air promotion. The agreement expires in April 2000 and can be
extended by consent of the parties for an additional two years if certain
performance criteria are met. NBC may cancel the agreement upon 90 days notice,
subject to certain penalties.
Distribution Agreements
In February 1999, Launch entered into a strategic alliance with AOL
pursuant to an interactive services agreement, which provides, among other
things, for Launch to be an anchor tenant on the AOL Music Channel and its genre
specific sub-channels. Launch has also been assigned specific keywords within
the AOL service. Launch pays AOL a carriage fee and AOL guarantees Launch a
minimum number of impressions per year. In addition, the contract entitles AOL
to a portion of advertising revenues from the transition page between the AOL
service and launch.com. The agreement has a 14-month term.
In January 1999, Launch entered into a strategic relationship with
Microsoft pursuant to a promotion agreement that provides, among other things,
for Launch to be the primary provider of content for the music category on the
MSN Entertainment Channel. This agreement promotes launch.com on the MSN
Entertainment Channel and encourages users to visit launch.com. Launch provides
music content headlines on MSN which link to launch.com for the full story.
Certain pages where Launch provides content are co-branded and Microsoft retains
the advertising revenue. Launch pays Microsoft a carriage fee and provides
certain promotion on
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Launch on CD-ROM. The agreement terminates in March 2000 and may be extended by
mutual agreement.
In September 1998, Launch entered into a distribution agreement with
Infoseek pursuant to which Launch provides content headlines to both the Go.com
and Infoseek entertainment and music sub-channels. Launch pays a carriage fee to
Infoseek and provides certain promotion on Launch on CD-ROM in return for a
guaranteed minimum number of impressions. The agreement terminates in November
1999 or upon 60 days notice by either party, and may be extended by mutual
agreement.
In January 1999, Launch entered into agreements with Snap LLC, an Internet
search and portal service. Pursuant to these agreements, Launch provides Snap
with links to certain music content. The Launch content headlines are found on
both My Snap (Snap's personalized home page) and on the Snap Entertainment news
headlines page. All links take the user to a co-branded Launch page. Either
agreement may be terminated by either party upon 30 days notice.
In February 1999, Launch entered into a further agreement with Snap LLC to
provide Snap with music content for Cyclone, Snap's enhanced, high-speed version
of its general Internet search and portal service that focuses on rich media
content. All Launch music links and portions of content on Cyclone take the user
to a co-branded Launch page. The initial term of the agreement expires in August
1999 and thereafter may be terminated by either party upon 15 days notice.
Content and Technology
The music videos and audio channels available on launch.com use Microsoft's
Windows Media Player technology for displaying the content. Launch has a
strategic alliance with Microsoft pursuant to which Microsoft is the premier
sponsor for Launch's programmed audio channels that use the Windows Media Player
platform.
We are working closely with various strategic partners in order to deliver
Launch content over broadband distribution channels as they achieve more
widespread consumer acceptance. In February 1998, Launch entered into a
strategic agreement with Intel Corporation pursuant to which Intel is developing
technology to enable delivery of Launch music content over broadband
distribution systems such as cable modem and satellite data broadcast. Prior to
the completion of the development contemplated by the agreement, either party
may terminate this agreement upon written notice. In consideration of Intel's
entry into this agreement, Launch issued 65,359 shares of Series D Stock to
Intel. In addition, Intel acquired 516,340 additional shares in Launch's
February 1998 financing.
MARKETING AND BRAND AWARENESS
Launch employs a variety of methods to increase its audience and build
brand recognition and loyalty. We believe that the most effective means of
consumer marketing is creating programs that allow a potential user the
opportunity to sample the product. As a result, Launch has used various direct
marketing techniques, such as the distribution agreements described above for
launch.com, and Internet and direct response television advertisements offering
no-risk subscriptions to Launch on
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CD-ROM. A portion of our marketing staff is dedicated to these types of direct
marketing programs.
In addition to direct marketing, certain of our marketing staff focuses on
other forms of brand awareness including traditional media advertising such as
print, radio and outdoor. Launch also has a dedicated public relations team
focused on generating press coverage in both trade and consumer media.
Launch is developing a half-hour, entertainment show for television
entitled Launch TV. The primary purposes of the show are to build brand
awareness for Launch and to drive traffic to our digital media properties. Much
of the video production for Launch on CD-ROM is similar to television
production, and we believe that we can effectively leverage our access to
content and production resources to create a high-quality television show that
increases Launch's audience.
OPERATIONS AND INFRASTRUCTURE
Launch.com's operating infrastructure has been designed and implemented to
support the reliable and swift delivery of millions of page views a day. Key
attributes of this infrastructure include scalability, performance and service
availability.
Web pages are generated and delivered, in response to end-users requests,
by any one of seven front-end Web and applications servers, and two database
servers. Launch's servers run on the Microsoft Windows NT operating system and
Microsoft's IIS Web server software. Launch uses a variety of Web-based
applications software to provide the services it offers. These currently include
Acuity Corporation (formerly iChat Inc.) for real-time chat, NetPerceptions Inc.
for collaborative filtering (although originally built on Firefly); Microsoft
Site Server 3.0 Useage Analyst for Web-traffic measurement, and Microsoft's SQL
7.0 for databases. Launch utilizes DoubleClick's DART technology to deliver its
advertisements.
Launch maintains all of its launch.com production servers at the Irvine,
California Data Center of Exodus Communications, Inc. ("Exodus"). Launch's
operations are dependent upon Exodus's ability to protect its systems against
damage from fire, hurricanes, power loss, telecommunications failure, break-ins
and other events. Exodus provides comprehensive facilities management services
including human and technical monitoring of all production servers 24 hours per
day, seven days per week. Exodus provides the means of connectivity for Launch's
servers to end-users via the Internet through multiple DS3 and OC12 connections.
These connections link to many different parts of the Internet via a combination
of public and private peering agreements. The facility is connected to two
independent power grids, has two independent uninterruptible power supplies
("UPS"), which are battery-powered, as well as two independent diesel generators
designed to provide power to the UPS systems within seconds of a power outage.
All of Launch's production data are copied to backup tapes each night and
stored at a third-party, off-site storage facility. Launch is in the process of
developing a comprehensive disaster recovery plan to respond to system failures.
Launch keeps all of its production servers behind firewalls for security
purposes and does not allow outside access, at the operating systems level,
except via special secure channels. Strict password management and physical
security measures are followed. Computer Security Response Team alerts are read,
and, where appropriate, recommended
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action is taken to address security risks and vulnerabilities. See "Risk
Factors -- Our Systems May Fail or Limit User Traffic."
Launch services its subscribers to the CD-ROM through Centrobe, a full
service fulfillment company located in Boulder, Colorado. Centrobe has been in
the fulfillment business for fifty years managing over 170 million subscribers.
As our fulfillment vendor, Centrobe is responsible for processing orders,
generating billings and renewals, processing payment, and providing effective
customer service. Centrobe manages the complete database of Launch on CD-ROM
subscribers. Centrobe generates detailed fulfillment, customer service, and
circulation reports that allow us to effectively analyze our direct marketing
efforts.
COMPETITION
Competition among media companies seeking to attract the active music
consumer is intense. Traditional media companies such as television
broadcasters, magazine publishers and radio stations are constantly refining
their content and strategies to increase their audiences and capture advertising
expenditures. Further, the number of web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:
- publishers and distributors of traditional media, such as television,
radio and print, including MTV, CMT, Rolling Stone and Spin, and their
Internet affiliates;
- online services or web sites targeted at music consumers, such as
SonicNet and UBL;
- Web retrieval and other Web "portal" companies, such as Excite, Inc.,
Infoseek Corporation, Lycos, Inc. and Yahoo! Inc.; and
- online music retailers, such as CDNow and Amazon.com.
Increased competition could result in advertising price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business. Because we compete for advertisers with traditional advertising media,
our business could suffer if advertisers do not view digital media as effective
for advertising. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services. Many
of these potential competitors are likely to enjoy substantial competitive
advantages, including the following:
- larger technical, production and editorial staffs;
- greater name recognition;
- better access to content;
- more established Internet presence;
- larger customer bases; and
- substantially greater financial, marketing, technical and other
resources.
If we fail to compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.
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GOVERNMENTAL REGULATION
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The United States Congress
has enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information. The laws governing
the Internet, however, remain largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet and Internet advertising. In addition, the growth
and development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business over the
Internet. Furthermore, the Federal Trade Commission has recently investigated
the disclosure of personal identifying information obtained from individuals by
Internet companies. In the event the Federal Trade Commission or other
governmental authorities adopt or modify laws or regulations relating to the
Internet, our business, results of operations and financial condition could be
adversely affected. See "Risk Factors-- Governmental Regulation of the Web May
Restrict Our Business."
Launch does not collect sales or other taxes in respect of goods sold to
users on launch.com. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies, such as Launch, which engage
in or facilitate online commerce. A number of proposals have been made at the
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect our opportunity to derive financial benefit from electronic commerce.
Moreover, if any state or foreign country were to successfully assert that
Launch should collect sales or other taxes on the exchange of merchandise on its
system, our results of operations could be adversely affected.
Legislation limiting the ability of states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. We cannot
assure you that this legislation will ultimately become law or that the tax
moratorium in the final version of this legislation will be ongoing. Failure to
enact or renew this legislation, once enacted, could allow various states to
impose taxes on Internet-based commerce, which could adversely affect our
business. See "Risk Factors -- Sales and Other Taxes."
INTELLECTUAL PROPERTY
The music and music videos featured in Launch are copyrighted works of
third parties, including record labels, artists and songwriters. Each piece of
music or music video content has multiple copyright owners, some with rights in
the sound recording (the particular performance) and others with rights in the
musical
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composition (the lyrics and music). Launch has different licensing arrangements
with these parties depending on how the song or music video is used by Launch
and the length of part of the song included. These arrangements range from
formal contracts to informal agreements based on the promotional nature of the
content. In some cases Launch pays a fee to the licensor for use of the music or
music video and in other cases the use is free. Launch also uses other content,
including images, that are copyrighted works of others. We rely on our positive
working relationships with copyright owners to obtain licenses on favorable
terms. Any changes in the nature or terms of these arrangements, including any
requirement for Launch to pay significant fees for the use of the content, could
have a negative impact on the availability of content or our business.
Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate. We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our proprietary information. We cannot assure you that the steps
we have taken will prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States. If third
parties were to use or otherwise misappropriate our copyrighted materials,
trademarks or other proprietary rights without our consent or approval, our
competitive position could be harmed, or we could become involved in litigation
to enforce our rights. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such changes of trademarks, alteration of content or payment of
financial damages will not adversely affect our business. See "Risk
Factors -- We Depend on the Music Industry for Our Content" and "-- We Depend
Upon Intellectual Property Rights and Licensed Material."
EMPLOYEES
As of December 31, 1998, Launch had 73 full-time employees. Our future
performance depends in significant part on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. From time to time, Launch also employs independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. None of Launch's employees is
represented by any collective bargaining unit, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.
FACILITIES
Our principal administrative, sales, marketing and production facilities
are located at our headquarters, which consists of approximately 21,375 square
feet of
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office and studio production space in Santa Monica, California. Our sublease for
the Santa Monica facility expires in June 2003. We have the option to renew the
sublease for one additional four year period. We also sublease approximately
2,300 square feet of office space in New York, New York for use as an East Coast
sales and marketing office. The New York sublease expires in December 2003. We
believe that our current facilities will be adequate to meet our needs for the
foreseeable future. We believe that suitable additional facilities will be
available in the future as needed on commercially reasonable terms.
LEGAL PROCEEDINGS
From time to time, Launch may be involved in litigation relating to claims
arising out of its operations. As of the date of this prospectus, we are not
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on our business, financial
condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of Launch as of February 12, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David B. Goldberg................... 31 Chairman of the Board of Directors
and Chief Executive Officer
Robert D. Roback.................... 31 President and Director
Jeffrey M. Mickeal.................. 38 Chief Financial Officer and
Secretary
James E. Hughes..................... 41 Senior Vice President, General
Manager, launch.com
Spencer A. McClung, Jr.............. 32 Senior Vice President, Broadband
Paige M. Arnof-Fenn................. 33 Senior Vice President, Marketing
Thomas C. Hoegh(1).................. 32 Director
Richard D. Snyder(1)(2)............. 40 Director
Sergio S. Zyman(2).................. 53 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
David B. Goldberg has served as Launch's Chairman of the Board and Chief
Executive Officer since he co-founded Launch in February 1994. Prior to that
time, from October 1991 to December 1993, Mr. Goldberg was Director of Marketing
Strategy and New Business Development at Capitol Records, a major record label
in Hollywood, California. Mr. Goldberg was a consultant at Bain & Co., a major
strategy consulting firm, from September 1989 to September 1991. Mr. Goldberg is
a member of the National Academy of Recording Arts and Sciences. Mr. Goldberg
holds an A.B. in history and government from Harvard University.
Robert D. Roback has served as Launch's President and a Director since he
co-founded Launch in February 1994. Prior to that time, from October 1992 to
February 1994, Mr. Roback was a securities attorney at Mayer, Brown & Platt, a
major international law firm in Chicago, Illinois. Mr. Roback holds a B.S. in
economics from The Wharton School of the University of Pennsylvania and is a
graduate of the University of Minnesota Law School.
Jeffrey M. Mickeal has served as Launch's Chief Financial Officer and
Secretary since April 1995. Prior to that time, from September 1982 to March
1995, Mr. Mickeal was a senior manager at Coopers & Lybrand L.L.P. in Los
Angeles, California in their Entreprenerial Advisory Services Group. Mr. Mickeal
holds a B.A. in business/economics from the University of California, Santa
Barbara and is a Certified Public Accountant.
James E. Hughes has served as Launch's Senior Vice President and General
Manager, launch.com since July 1998. From its creation in April 1996 until July
1998, Mr. Hughes was Vice President of Marketing and Creative Development of E!
Online, LLC, an Internet entertainment company. Mr. Hughes was one of the
founders of the CNET/E! Entertainment Television joint venture. From 1992 until
April 1996, Mr. Hughes was employed by E! Entertainment Television, first as a
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<PAGE> 62
writer/producer in the programming department, then as Manager, News Projects,
and finally as Director, Promotions, in the Marketing Department. From 1986
until 1991, Mr. Hughes served as Media Communications Consultant at Aetna Life &
Casualty in Hartford, Connecticut. Mr. Hughes holds a B.S. from Southern
Connecticut State University.
Spencer A. McClung, Jr. has served as Launch's Senior Vice President,
Broadband since July 1997. From July 1996 to June 1997, he served as Launch's
Senior Vice President, Marketing. From January 1996 to July 1996, Mr. McClung
served as Launch's Vice President, Marketing. From July 1995, when he joined
Launch, to January 1996, he served as Launch's Senior Director, Marketing. From
July 1991 to July 1993, he served as a Senior Financial Analyst at the Walt
Disney Company. From June 1989 to July 1991, he served as a Financial Analyst at
Trammell Crow Ventures, a real estate development company. Mr. McClung holds a
B.A. from Texas A&M University and an M.B.A. from Harvard Business School.
Paige M. Arnof-Fenn has served as Launch's Senior Vice President, Marketing
since December 1997. Prior to that time, from May 1997 to December 1997, Ms.
Arnof-Fenn was Special Assistant to the Chief Marketing Officer of The Coca-
Cola Company. From September 1994 to April 1997, Ms. Arnof-Fenn was Director of
the 1996 Olympic Commemorative Coin Program. From August 1991 to July 1994, Ms.
Arnof-Fenn was in Brand Management at The Procter & Gamble Company. Ms.
Arnof-Fenn holds an A.B. from Stanford University and an M.B.A. from Harvard
Business School.
Thomas C. Hoegh has been a member of Launch's Board of Directors since June
1998. He has been Managing Director of Arts Alliance, a venture capital firm in
London, England, since July 1997. From August 1995 to June 1997, Mr. Hoegh was a
student at Harvard Business School. From January 1992 to August 1995, Mr. Hoegh
was an independent artistic director.
Richard D. Snyder has been a member of Launch's Board of Directors since
February 1998. He has been President of Avalon Investments, Inc., a venture
capital management company in Ann Arbor, Michigan, since September 1997. From
January 1996 to August 1997, Mr. Snyder was President and Chief Operating
Officer of Gateway 2000, Inc., a computer manufacturer. He served as Executive
Vice President of Gateway 2000 from July 1991 until January 1996.
Sergio S. Zyman has been a member of Launch's Board of Directors since July
1998. He served as the Chief Marketing Officer of The Coca-Cola Company from
August 1993 to May 1998. Mr. Zyman serves as a director of The Gap, Coca-Cola
FEMSA and The HoneyBaked Ham Company.
BOARD COMMITTEES
We have established an Audit Committee and a Compensation Committee. The
Audit Committee, which currently consists of Mr. Hoegh and Mr. Snyder, reviews
the internal accounting procedures of Launch and consults with and reviews the
services provided by our independent auditors. The Compensation Committee, which
currently consists of Mr. Zyman and Mr. Snyder, reviews and recommends to the
Board of Directors the compensation and benefits of all officers of Launch and
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establishes and reviews general policies relating to compensation and benefits
of employees of Launch.
DIRECTOR COMPENSATION
Launch reimburses members of its Board of Directors for out-of-pocket
expenses incurred in the performance of their duties as directors of Launch. No
member of our Board of Directors currently receives any additional cash
compensation for his services as a director of Launch.
CHANGE OF CONTROL ARRANGEMENTS
Pursuant to the terms of an employment agreement between Mr. Mickeal and
Launch, if Mr. Mickeal's employment with Launch is terminated other than for
cause within six months of a change of control transaction, he will be entitled
to receive the following payments and benefits: (a) his accrued but unpaid base
salary for the period ending with the date his employment is terminated, (b) his
earned but unpaid bonuses, if any, for the period ending with the date his
employment is terminated, (c) payment for accrued but unpaid vacation days,
determined as of the date his employment is terminated in accordance with
Launch's policy as in effect from time to time, and (d) his base salary as in
effect on the date his employment is terminated for the period of time
commencing on his termination date and ending on the earlier of the date five
months after his date of termination, the date upon which Mr. Mickeal violates
various confidentiality or noncompetition provisions of the employment agreement
or the date of Mr. Mickeal's death.
Under the 1998 Stock Option Plan, in the event of a change of control
transaction in which (a) the option is not assumed or substituted for by the
acquiring corporation, or (b) the optionee's service is terminated other than
for cause within 12 months after the acquisition (or the optionee resigns for
good reason during such period) 50% of the unvested shares of stock subject to
the option will become fully exercisable as of the date of such event. See
"Stock Plans -- 1998 Stock Option Plan."
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<PAGE> 64
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by Launch to Launch's Chief Executive Officer (the "CEO") and each of its other
executive officers whose total compensation exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
SALARY($) COMPENSATION($) OPTIONS/SARS(#)
--------- --------------- ---------------
<S> <C> <C> <C>
David B. Goldberg.............. $110,000 $15,789(1) 40,000
Chief Executive Officer
Robert D. Roback............... 110,000 -- 40,000
President
Jeffrey M. Mickeal............. 112,500 -- 13,000
Chief Financial Officer and
Secretary
Spencer A. McClung, Jr......... 105,000 -- 41,000
Senior Vice President,
Broadband
Paige M. Arnof-Fenn............ 100,000 -- 10,000
Senior Vice President,
Marketing
</TABLE>
- -------------------------
(1) Represents a note payable to Launch that was forgiven in December 1998.
The following table provides information concerning grants of options to
purchase Launch's common stock made during the fiscal year ended December 31,
1998 to the CEO and the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL DEEMED ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS VALUE PER STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE SHARE FOR FOR OPTION TERM (5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION DATE ------------------------------
NAME GRANTED(1) FISCAL 1998(2) SHARE(3) DATE OF GRANT(4) 0% 5% 10%
---- ---------- -------------- --------- ---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David B. Goldberg....... 40,000 12.2% $2.00 5/7/08 $6.10 $164,000 $317,450 $552,873
Robert D. Roback........ 40,000 12.2 2.00 5/7/08 6.10 164,000 317,450 552,873
Jeffrey M. Mickeal...... 5,000 1.5 2.00 3/12/08 6.10 20,500 39,681 69,109
8,000 2.4 3.00 9/15/08 7.65 37,200 75,688 134,737
Spencer A. McClung,
Jr. .................. 33,000 10.1 2.00 3/12/08 6.10 135,300 261,896 456,120
8,000 2.4 3.00 9/15/08 7.65 37,200 75,688 134,737
Paige M. Arnof-Fenn..... 10,000 3.1 3.00 9/15/08 7.65 46,500 94,610 168,421
</TABLE>
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<PAGE> 65
- -------------------------
(1) All options granted to the CEO and the Named Executive Officers in 1998 were
granted under the 1998 Stock Option Plan. Each option vests and becomes
exercisable over a period of four years. See "Stock Plans."
(2) Based on an aggregate of 326,800 shares subject to options granted in fiscal
1998.
(3) All options were granted at an exercise price equal to the fair market value
of Launch's common stock as determined by the Board of Directors of Launch
on the date of grant. In determining the fair market value of Launch's
common stock, the Board of Directors considered various factors, including
Launch's financial condition and business prospects, its operating results,
the absence of a market for its common stock and the risks normally
associated with technology companies. Launch's common stock was not publicly
traded at the time of the option grants to the named officers.
(4) The deemed value for the date of grant was determined after the date of
grant solely for financial accounting purposes.
(5) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the options if exercised at the end of the option term. The
assumed 0%, 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the SEC and do not represent Launch's estimate or
projection of the future common stock price. The assumed rate of 0%
indicates the value at the effective date of the offering based on the
deemed value for financial accounting purposes less the exercise price.
OPTION EXERCISES AND HOLDINGS
No options were exercised during the fiscal year ended December 31, 1998 by
the CEO or any of the Named Executive Officers. The following table provides
information with respect to unexercised options held as of December 31, 1998 by
the CEO and each of the Named Executive Officers:
FISCAL YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, OPTIONS AT DECEMBER 31,
1998(1) 1998(2)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David B. Goldberg........ 13,833 38,166 $ 95,916 $251,084
Robert D. Roback......... 29,833 46,166 211,916 309,084
Jeffrey M. Mickeal....... 52,437 17,562 378,592 111,158
Spencer A. McClung,
Jr. ................... 22,874 45,125 160,325 293,925
Paige M. Arnof-Fenn...... 4,625 25,375 32,438 167,563
</TABLE>
- -------------------------
(1) All options were granted under Launch's 1994 and 1998 Stock Option Plans.
Launch intends to enter into agreements with the CEO and each of the Named
Executive Officers to amend the terms of options granted under the 1994
Stock Option Plan to conform their vesting and exercisability provisions to
those of the 1998 Stock Option Plan.
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<PAGE> 66
(2) Calculated on the basis of the deemed fair value of the underlying
securities on December 31, 1998 of $8.50 per share, determined for financial
accounting purposes, minus the exercise price.
STOCK PLANS
1994 Stock Option Plan. Launch's 1994 Stock Option Plan provides for the
grant of stock options to employees (including officers) and directors of
Launch. The 1994 Plan provides for the grant of incentive stock options, within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonstatutory stock options, although incentive stock options may be
granted only to employees. As of January 31, 1999, options to purchase an
aggregate of 205,814 shares of common stock at a weighted average price of $1.25
per share were outstanding under the 1994 Plan. Options granted under the 1994
Plan will remain outstanding in accordance with their terms, but the Board of
Directors has determined that no further options will be granted under the 1994
Plan.
1998 Stock Option Plan. Launch's 1998 Stock Option Plan (the "1998 Plan")
was approved by the Board of Directors and the stockholders in March 1998. The
1998 Plan provides for the grant of incentive stock options, within the meaning
of section 422 of the Code to employees, and for the grant of nonstatutory stock
options to employees (including officers), non-employee directors and
consultants. Because non-employee directors are eligible to receive grants under
the 1998 Plan, Launch has not adopted a separate plan which provides for the
formula grant of stock options to non-employee directors.
The 1998 Plan is administered by a committee of the Board of Directors (the
"Administrator"). Subject to the provisions of the 1998 Plan, the Administrator
has the authority to select the persons to whom options are granted and
determine the terms of each option, including (a) the number of shares of common
stock covered by the option, (b) when the option becomes exercisable, (c) the
per share option exercise price, which must be at least 100% of the fair market
value of a share of common stock as of the date of grant (or 110% of such fair
market value for incentive stock options granted to 10% stockholders), and (d)
the duration of the option (which may not exceed 10 years, or, with respect to
incentive stock options granted to 10% stockholders, five years). Generally,
options granted under the 1998 Plan become exercisable as the underlying shares
vest pursuant to a schedule established by the Administrator. Options granted
under the 1998 Plan are non-transferable other than by will or the laws of
descent and distribution.
In the event of a change in control of Launch, 50% of the unvested shares
subject to an option granted under the 1998 Plan will become vested if either
(a) the acquiring corporation does not assume or substitute for the option, or
(b) the optionee's service is terminated other than for cause within 12 months
after the acquisition or the optionee resigns for good reason during such
period.
The total number of shares reserved for issuance under the 1998 Plan is
874,657 shares, of which, as of January 31, 1999, 712 shares have been issued
upon the exercise of options. Options to purchase of a total of 320,486 shares
of common stock at a weighted average exercise price of $2.34 per share were
outstanding and 553,459 shares were available for future option grants. On
February 11, 1999, the
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<PAGE> 67
Board of Directors increased the total number of shares reserved for issuance
under the 1998 Plan to 2,000,000, subject to stockholder approval.
1999 Employee Stock Purchase Plan. A total of 300,000 shares of common
stock have been reserved for issuance under Launch's 1999 Employee Stock
Purchase Plan (the "Purchase Plan"), none of which have been issued as of the
effective date of this offering. The Purchase Plan, which is intended to qualify
under section 423 of the Code, is administered by the Board of Directors or by a
committee thereof. Employees (including officers and employee directors of
Launch) of Launch or any subsidiary designated by the Board of Directors for
participation in the Purchase Plan are eligible to participate in the Purchase
Plan if they are customarily employed for more than 20 hours per week and more
than five months per year. The Purchase Plan will be implemented by offerings,
the first of which will commence on the effective date of this offering and will
terminate on January 31, 2002 (the "Initial Offering") and will be divided into
four purchase periods. After the Initial Offering, offering periods under the
Purchase Plan will have a duration of six months and will generally begin on
February 1 and August 1 of each year. Shares will be purchased on the last day
of each purchase period during the Initial Offering and the last day of each
subsequent offering period (a "Purchase Date"). The Board of Directors may
change the dates or duration of one or more offerings, but no offering may
exceed 27 months. The Purchase Plan permits eligible employees to purchase
common stock through payroll deductions at a price no less than 85% of the lower
of the fair market value of the common stock on (a) the first day of the
offering, or (b) the Purchase Date. Participants generally may not purchase
stock having a value (measured at the beginning of the offering) greater than
$25,000 in any calendar year. In the event of certain changes in control of
Launch, the Board may accelerate the Purchase Date of the then current offering
period to a date prior to the change in control unless the acquiring corporation
assumes or replaces the purchase rights outstanding under the Purchase Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
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 (a) any breach of
their duty of loyalty to the corporation or its stockholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions or (d) any transaction from which the director
derived an improper personal benefit. Such 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.
Our Certificate of Incorporation and Bylaws provide that we will 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
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<PAGE> 68
his or her actions in such capacity, regardless of whether Delaware law would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in Launch's Bylaws. These
agreements, among other things, provide for indemnification of Launch's
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Launch,
arising out of such person's services as a director or executive officer of
Launch, any subsidiary of Launch or any other company or enterprise to which the
person provides services at the request of Launch. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
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<PAGE> 69
CERTAIN TRANSACTIONS
Since February 1, 1997 there has not been, nor is there currently, any
transaction or series of similar transactions to which Launch was or is a party
in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than five percent of Launch's capital stock
had or will have a direct or indirect material interest other than (a)
agreements which are described where required under the caption "Management" and
(b) the transactions described below.
In September 1997, Launch entered into a Financial Advisory Services Letter
Agreement with Allen & Company Incorporated, pursuant to which Allen & Company
Incorporated provides financial advisory services to Launch. Pursuant to this
letter agreement, Launch issued Allen & Company Incorporated warrants to
purchase 292,704 shares of common stock in September 1997 and 287,501 shares of
common stock in May 1998, each at an exercise price of $1.25 per share. Of
these, warrants to purchase 35,709 shares of common stock are not exerciseable
until the warrants held by NBC Multimedia, Inc. and General Electric Capital
Corporation become exerciseable. In connection with further services provided by
Allen & Company Incorporated in connection with Launch's sale of Series D Stock
in February 1998, Launch paid $315,000 to Allen & Company Incorporated. The
Financial Advisory Services Letter Agreement expires on September 8, 2000.
In February 1998, Launch entered into a strategic alliance agreement and a
content provider agreement with NBC Multimedia, Inc., a 17.2% stockholder.
Pursuant to the strategic alliance agreement, Launch agreed to supply music
content and information to NBC in connection with NBC's Web site, NBC.com. In
addition, Launch also agreed to issue a warrant to purchase 414,432 shares of
Series D Stock to NBC Multimedia, Inc. and a warrant to purchase 60,000 shares
of Series D Stock to General Electric Capital Corporation, an affiliate of NBC,
at a price equal to the lower of (i) $22.95 per share or (ii) the per share
proceeds to Launch for shares of common stock issued in connection with this
offering. Each warrant becomes exerciseable if (a) NBC offers to extend the term
of the strategic alliance agreement for an additional two years; (b)(i) Launch
completes an initial public offering, (ii) NBC has provided certain on-air,
music-related promotions for Launch on NBC.com and (iii) NBC agrees to extend
the term of the strategic alliance agreement for two years; or (c) if certain
other conditions are met. In accordance with the terms of the Second Amended and
Restated Investor Rights Agreement, if Launch elects to repurchase shares of its
capital stock, NBC has the right to purchase all such shares until it holds 10%
of Launch's outstanding capital stock.
In February 1998 and May 1998, Launch issued an aggregate of 3,345,997
shares of Series D Stock at $7.65 per share in a preferred stock financing
transaction. The Series D Stock will convert into Launch common stock on a
one-for-one basis upon the closing of this offering. The following table
summarizes the shares of Series D Stock purchased in the financing by executive
officers, directors and 5% stockholders
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of Launch and persons and entities associated with them. See "Principal
Stockholders."
<TABLE>
<CAPTION>
INVESTORS SERIES D PREFERRED STOCK
--------- ------------------------
<S> <C>
Arts Alliance(1).................................. 868,102
Intel Corporation................................. 581,699
Avalon Technology LLC............................. 588,235
The Phoenix Partners III and IV Limited
Partnerships(2)................................. 522,875
NBC Multimedia, Inc............................... 392,156
General Electric Capital Corporation.............. 392,156
</TABLE>
- ---------------
(1) Arts Alliance acts as investment adviser to Goran Enterprises and Digital
Ventures which together purchased an aggregate of 868,102 shares of Launch's
Series D Stock.
(2) Of the 522,875 shares of Series D Stock purchased by The Phoenix Partners
III and IV Limited Partnerships, 417,657 of such shares were purchased by
The Phoenix Partners III Limited Partnership and 105,218 of such shares were
purchased by the Phoenix Partners IV Limited Partnership.
In February 1998, Launch entered into a Software License and Development
Agreement with Intel Corporation, an 11.6% stockholder, pursuant to which Launch
and Intel agreed to work together to create a music application using broadband
broadcast distribution and in consideration of this agreement, Launch issued
Intel 65,359 shares of Series D Stock.
In October 1998, Launch made a loan to Mr. Goldberg, Launch's Chief
Executive Officer and Chairman of the Board of Directors, in the principal
amount of $100,000. The loan is secured by 50,000 shares of Launch common stock
held by Mr. Goldberg. The loan accrues interest at a rate of 8% per year. At
January 31, 1999, $102,007 of principal and accrued interest was outstanding
under the loan. Mr. Goldberg's loan will become due and payable upon 60 days
written notice from Launch.
In November 1998, Launch entered into an architectural development and
assistance agreement with Intel Corporation. Pursuant to the terms of these
agreements, Launch agreed to develop a product which is able to use the
capabilities of a processor developed by Intel. In connection with this
agreement, Intel has agreed to pay Launch certain amounts and to provide
technical assistance, and Launch has agreed to pay Intel a portion of revenues
derived from the jointly developed product.
On February 15, 1999, Launch entered into a note purchase agreement in
which it agreed to issue a convertible subordinated promissory note in the
amount of $1.0 million to Avalon Technology LLC, an 8.6% stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a 12.7% stockholder. The notes accrue interest at 8.5% per
annum from the issuance date and are due February 29, 2000. The notes
automatically convert into shares of Launch stock upon the earlier of (a)
Launch's consummation of an initial public offering with a sales price per share
of at least $10.00 and aggregate gross proceeds to Launch of at least $15.0
million, (b) an acquisition transaction in which the stockholders of Launch
prior to such transaction own less than 50% of the voting
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<PAGE> 71
securities of the surviving entity after such transaction or (c) February 29,
2000. If Launch consummates an initial public offering prior to August 31, 1999,
the notes and any accrued interest thereon automatically convert to common stock
at a per share price equal to 80% of the initial public offering price per
share. If Launch does not consummate an initial public offering by August 31,
1999, then, at the option of the holder which may be exercised at any time
between August 31, 1999 and February 29, 2000, , the notes and any accrued
interest thereon are convertible into Series D Stock at a per share price equal
to $7.65. If the conversion occurs in connection with an acquisition
transaction, the notes and any accrued interest thereon automatically convert
into Series D Stock at a per share price equal to $7.65.
During 1997 and 1998, Launch received advertising revenue from Intel
Corporation of $12,000 and $219,000, respectively, of which $102,550 is
currently included in accounts receivable of Launch at December 31, 1998.
Launch believes that all transactions with affiliates described above were
made on terms no less favorable to Launch than could have been obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Launch's common
stock as of December 31, 1998 and as adjusted to reflect the sale of the shares
of common stock offered hereby by:
- each person or entity who is known by Launch to beneficially own more
than 5% of Launch's outstanding common stock;
- the CEO, each of the Named Executive Officers and each of Launch's
directors; and
- all executive officers and directors as a group.
Unless otherwise indicated, the address for each of the named individuals
is c/o Launch Media, Inc., 2700 Pennsylvania Avenue, Santa Monica, California
90404. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them. The number of
shares in the table assumes no exercise of the underwriters' overallotment
option.
Applicable percentage ownership in the table is based on 6,852,563 shares
of common stock outstanding as of December 31, 1998 and shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of December 31, 1998 are
deemed outstanding for the purpose of computing the percentage ownership of the
person or entity holding such options, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or entity.
To the extent that any shares are issued upon exercise of options, warrants or
other rights to acquire Launch's capital stock that are presently outstanding or
granted in the future or reserved for future issuance under Launch's stock
plans, there will be further dilution to new public investors.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------
PRIOR TO OFFERING AFTER OFFERING
------------------- --------------
NUMBER PERCENT PERCENT
--------- ------- --------------
<S> <C> <C> <C>
THE CEO, NAMED EXECUTIVE OFFICERS AND DIRECTORS
David B. Goldberg(1)........................... 403,368 5.9%
Robert D. Roback(2)............................ 213,000 3.1
Jeffrey M. Mickeal(3).......................... 63,352 * *
Spencer A. McClung, Jr.(4)..................... 25,706 * *
Paige M. Arnof-Fenn(5)......................... 5,707 * *
Thomas C. Hoegh(6)............................. 868,102 12.7
Richard D. Snyder(7)........................... 588,235 8.6
Sergio Zyman (8)............................... 15,555 * *
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------
PRIOR TO OFFERING AFTER OFFERING
------------------- --------------
NUMBER PERCENT PERCENT
--------- ------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
The Phoenix Partners Limited Partnership(9).... 1,635,297 23.9
1000 Second Avenue, Suite 3600
Seattle, WA 98104
NBC Multimedia, Inc.(10)....................... 1,258,744 17.2
30 Rockefeller Plaza
Suite 1076E
New York, NY 10112
General Electric Capital Corporation(11)....... 1,258,744 17.2
120 Long Ridge Road
Stamford, CT 06927
Arts Alliance(12).............................. 868,102 12.7
Suite 2, Borough House,
Rue du Pre,
St. Peter Port,
Guernsey GY1 1EF
Channel Islands
Intel Corporation.............................. 792,225 11.6
Mail Stop SC-210
2200 Mission College Blvd.
Santa Clara, CA 95052
Lee Entertainment L.L.C........................ 631,579 9.2
500, 5-GA, Namdaemoon-No
Chung-Ku, Seoul 100-095, Korea
Avalon Technology LLC.......................... 588,235 8.6
201 S. Main Street
Ann Arbor, MI 48104
Allen & Company Incorporated(13)............... 580,205 7.8
711 Fifth Avenue
New York, NY 10022
SOFTBANK Ventures, Inc......................... 421,052 6.1
1-16-8 Nihonbashi-Kakigaracho
Chuo-ku, Tokyo 103-0014, Japan
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(9 persons)(14).............................. 2,183,025 31.2
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 8,500 shares subject to options issued under the 1994 Stock Option
Plan and 7,500 shares subject to options issued under the 1998 Stock Option
Plan, all of which are exercisable within 60 days of December 31, 1998.
(2) Includes 25,500 shares subject to options issued under the 1994 Stock
Option Plan and 7,500 shares subject to options issued under the 1998 Stock
Option Plan, all of which are exercisable within 60 days of December 31,
1998.
(3) Includes 53,374 shares subject to options issued under the 1994 Stock
Option Plan and 1,978 shares subject to options issued under the 1998 Stock
Option Plan, all of which are exercisable within 60 days of December 31,
1998.
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<PAGE> 74
(4) Represents 17,311 shares subject to options issued under the 1994 Stock
Option Plan and 8,395 shares subject to options issued under the 1998 Stock
Option Plan, all of which are exercisable within 60 days of December 31,
1998.
(5) Represents 4,666 shares subject to options issued under the 1994 Stock
Option Plan and 1,041 shares subject to options issued under the 1998 Stock
Option Plan, all of which are exercisable within 60 days of December 31,
1998.
(6) Represents an aggregate of 868,102 shares registered in the name of Goran
Enterprises Limited and Digital Ventures Limited, of which Arts Alliance is
an investment advisor. Does not include shares issuable upon conversion of
a $500,000 convertible subordinated promissory note to be issued by Launch
to Goran Enterprises Limited pursuant to a note purchase agreement dated
February 15, 1999. Mr. Hoegh, a managing director of Arts Alliance, has
certain investment and voting power over all of the 868,102 shares. Mr.
Hoegh disclaims all such beneficial ownership except to the extent of his
pecuniary interest therein.
(7) Represents 588,235 shares registered in the name of Avalon Technology LLC.
Does not include shares issuable upon conversion of a $1.0 million
convertible subordinated promissory note to be issued by Launch to Avalon
Technology LLC pursuant to a note purchase agreement dated February 15,
1999. Mr. Snyder, the President, of Avalon Technology LLC, has certain
investment and voting power over the 588,235 shares. Mr. Snyder disclaims
all such beneficial ownership except to the extent of his pecuniary
interest therein.
(8) Represents 15,555 shares subject to options issued under the 1998 Stock
Option Plan, all of which are exercisable within 60 days of December 31,
1998.
(9) Consists of 293,954 shares held by The Phoenix Partners II Liquidating
Trust ("PPII"), 502,367 shares held by The Phoenix Partners IIIB Limited
Partnership ("PPIIIB"), 627,957 shares held by The Phoenix Partners III
Liquidating Trust ("PPIII"), and 211,019 shares held by The Phoenix
Partners IV Limited Partnership ("PPIV"). Stuart C. Johnston is the Trustee
of PPII and PPIII, and is the Managing General Partner of Phoenix
Management Partners III, which is the General Partner of PPIIIB, and the
Managing Member of Phoenix Management IV, LLC, which is the General Partner
of PPIV. As such, Mr. Johnston has voting and investment power with respect
to the shares held by PPII, PPIII, PPIIIB, and PPIV and may be deemed to be
the beneficial owner of such shares. Mr. Johnston disclaims beneficial
ownership of shares held by PPII, PPIII, PPIIIB and PPIV, except to the
extent of his proportionate interest therein.
(10) Includes 414,432 shares subject to warrants exercisable within 60 days of
December 31, 1998. Also includes 392,156 shares held by General Electric
Capital Corporation and 60,000 shares subject to warrants held by General
Electric Capital Corporation and exercisable within 60 days of December 30,
1998. General Electric Capital Corporation and NBC Multimedia, Inc. are
under common control of entities affiliated with the General Electric
Company.
(11) Includes 60,000 shares subject to warrants exercisable within 60 days of
December 31, 1998. Also includes 392,156 shares held by NBC Multimedia,
Inc. and 414,432 shares subject to warrants held by NBC Multimedia, Inc.
and exercisable within 60 days of December 31, 1998. NBC Multimedia, Inc.
and
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<PAGE> 75
General Electric Capital Corporation are under common control of entities
affiliated with the General Electric Company.
(12) Represents 457,516 shares held by Goran Enterprises Limited and 410,586
shares held by Digital Ventures Limited.
(13) Represents 580,205 shares subject to warrants exercisable within 60 days of
December 31, 1998.
(14) Includes 109,351 shares subject to options issued under the 1994 Stock
Option Plan and 41,969 shares subject to options issued under the 1998
Stock Option Plan, all of which are exercisable within 60 days of December
31, 1998. Also includes an aggregate of 868,102 shares registered in the
name of Goran Enterprises Limited and Digital Ventures Limited and 588,235
shares registered in the name of Avalon Technology LLC.
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<PAGE> 76
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 20,000,000 shares of common stock and 2,000,000 shares of preferred stock.
The following summary of certain provisions of the common stock and the
preferred stock is subject to, and qualified in its entirety by Launch's
Certificate of Incorporation and Bylaws and by the provisions of applicable law.
COMMON STOCK
As of December 31, 1998, there were 934,333 shares of common stock
outstanding held of record by 26 stockholders. Subject to preferences that may
be applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the Board
from time to time may determine in its sole discretion. Holders of common stock
are entitled to one vote for each share held on all matters submitted to a vote
of stockholders. Cumulative voting for the election of directors is not
authorized by Launch's Certificate of Incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The common stock is not entitled to preemptive rights and
is not subject to conversion or redemption. Upon liquidation, dissolution or
winding-up of Launch, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation of any
preferred stock. Each outstanding share of common stock is, and all shares of
common stock to be outstanding upon completion of this offering will be, upon
payment therefor, duly and validly issued, fully paid and nonassessable.
PREFERRED STOCK
Upon completion of this offering, all outstanding shares of preferred stock
will be converted on a one-to-one one basis into 5,918,230 shares of common
stock. Thereafter, pursuant to Launch's Certificate of Incorporation, the Board
of Directors will have the authority, without further action by the
stockholders, to issue up to 2,000,000 shares of preferred stock in one or more
series. The Board can fix the rights, preferences and privileges of the shares
of each series and any qualifications, limitations or restrictions thereon.
The Board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, under certain circumstances, have the effect
of delaying, deferring or preventing a change in control of Launch. We have no
current plans to issue any shares of preferred stock.
WARRANTS
Pursuant to the Financial Advisory Services Letter Agreement and related
letter agreement between Launch and Allen & Company Incorporated, Launch issued
to Allen & Company warrants to purchase 292,704 shares of common stock in
September 1997 and 287,501 shares of common stock in May 1998. Of these,
warrants to purchase 35,709 shares of common stock are not exercisable until the
warrants held by NBC Multimedia, Inc. and General Electric Capital Corporation
become
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<PAGE> 77
exercisable. The warrants have an exercise price of $1.25 per share and expire
on September 8, 2002. All of these warrants remained outstanding on February 1,
1999.
On February 27, 1998, Launch issued warrants to purchase 414,432 shares of
Series D Stock to NBC Multimedia, Inc. and warrants to purchase 60,000 shares of
Series D Stock to General Electric Capital Corporation. These warrants have an
exercise price of the lower of (a) $22.95 or (b) the per share proceeds to
Launch for shares of common stock issued in connection with the initial public
offering per share and expire on the earlier of (a) February 27, 2003 or (b) an
initial public offering of Launch's common stock at a per share price of at
least $15.00 per share and aggregate receipts of $15.0 million.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Following the sale of the common stock offered hereby, the holders of
approximately (a) 5,368,549 shares of common stock, (b) 1,054,637 shares of
common stock issuable upon exercise of warrants and (c) that number of shares
issuable upon conversion of $1.5 million convertible subordinated promissory
notes will have certain rights to register those shares under the Securities Act
of 1933 pursuant to the Second Amended and Restated Investor Rights Agreement.
Subject to certain limitations in this Rights Agreement, (a) the holders of at
least 30% of such shares or (b) shares with an expected aggregate offering price
to the public of at least $5.0 million, may require, on three occasions, that
Launch use its best efforts to register such shares for public resale. If Launch
registers any of its common stock for its own account or for the account of
other security holders, the holders of such shares are entitled to include their
shares of common stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the offering. Any holder
or holders of such shares may also require Launch to register all or a portion
of their registrable securities on Form S-3 when Launch is eligible to use such
form, provided, among other limitations, that the proposed aggregate price to
the public is at least $1.0 million and that Launch shall not have effected two
such Forms S-3 in any 12-month period. Launch will bear all fees, costs and
expenses of such registration, other than underwriting discounts and
commissions.
DELAWARE LAW AND CERTAIN PROVISIONS OF LAUNCH'S CERTIFICATE OF INCORPORATION AND
BYLAWS
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could make more difficult the acquisition of Launch by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of Launch to first negotiate with us. We believe that the
benefits of increased protection of Launch's potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to acquire or restructure
Launch outweighs the disadvantages of discouraging such proposals, including
proposals that are priced above the then current market value of our common
stock, because, among other things, negotiation of such proposals could result
in an improvement of their terms.
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<PAGE> 78
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date such stockholder became an interested stockholder, unless:
- prior to such date the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (a) any merger or
consolidation involving the corporation and the interested stockholder; (b) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (c) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (d)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (e) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Our Bylaws require that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of the
stockholders or by a consent in writing. In addition, special meetings of our
stockholders may be called by the Chief Executive Officer or the President and
shall be called by the Secretary at the direction of a majority of the Board of
Directors, or at the request of stockholders owning a majority of the entire
capital stock of Launch issued and outstanding and entitled to vote delivered in
writing to the Chief Executive Officer, the President or the Secretary.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is
.
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<PAGE> 79
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for Launch's
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, Launch will have outstanding
shares of common stock, assuming the issuance of shares of common
stock offered hereby and no exercise of options after . Of these
shares, the shares sold in the offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act (whose sales would be subject to certain limitations
and restrictions described below).
The remaining 6,852,563 shares of common stock held by existing
stockholders were issued and sold by Launch in reliance on exemptions from the
registration requirements of the Securities Act. Of these shares, 6,385,061
shares will be subject to "lock-up" agreements described below on the effective
date of the offering. On the effective date of the offering, shares
not subject to the lock-up agreements described below will be eligible for sale.
Upon expiration of the lock-up agreements after the effective date of the
offering, all remaining shares will become eligible for sale in the public
market without restriction except in the case of affiliates. In addition,
holders of stock options may exercise such options and sell certain of the
shares issued upon exercise as described below.
As of January 31, 1999, there were a total of 205,814 shares of common
stock subject to outstanding options under our 1994 Stock Option Plan, 135,306
of which were vested and exercisable, and a total of 320,486 shares of common
stock subject to outstanding options under our 1998 Stock Option Plan, 48,096 of
which were vested and exercisable. All of these shares are subject to lock-up
agreements or otherwise subject to restrictions on transfer. Immediately after
the completion of the offering, Launch intends to file a registration statement
on Form S-8 under the Securities Act to register all of the shares of common
stock issued or reserved for future issuance under our 1994 and 1998 Stock
Option Plans and our 1999 Employee Stock Purchase Plan. On the date 180 days
after the effective date of the offering, a total of shares of common
stock subject to outstanding options will be vested and exercisable. After the
effective dates of the registration statement on Form S-8, shares purchased upon
exercise of options granted pursuant to the 1994 and 1998 Stock Option Plans and
the 1999 Employee Stock Purchase Plan generally would be available for resale in
the public market.
The officers, directors and stockholders of Launch have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of the offering. Hambrecht & Quist LLC, however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.
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<PAGE> 80
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
Allen & Company Incorporated and NationsBanc Montgomery Securities LLC, have
severally agreed to purchase from Launch the following respective numbers of
shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Allen & Company Incorporated................................
NationsBanc Montgomery Securities LLC.......................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in Launch's business and the receipt of certain
certificates, opinions and letters from Launch, its counsel and the independent
auditors. The nature of the underwriters' obligation is such that they are
committed to purchase all shares of common stock offered hereby if any of such
shares are purchased.
The following tables show the per share and total underwriting discounts
and commissions Launch will pay to be paid to the underwriters. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' over-
allotment option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY LAUNCH
<TABLE>
<CAPTION>
WITH WITHOUT
OVER-ALLOTMENT EXERCISE OVER-ALLOTMENT EXERCISE
----------------------- -----------------------
<S> <C> <C>
Per Share......................... $ $
Total............................. $ $
</TABLE>
Launch estimates that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the representatives of the underwriters. The
representatives have informed Launch that the underwriters do not intend to
confirm discretionary sales in excess of 5% of the shares of common stock
offered hereby.
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<PAGE> 81
Launch has granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to
additional shares of common stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of common stock to be purchased by it shown in the
above table bears to the total number of shares of common stock offered hereby.
Launch will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Launch has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect thereof.
Launch and certain other stockholders of Launch, including executive
officers and directors, who will own in the aggregate 6,385,601 shares of common
stock after this offering, have agreed that they will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
owned by them during the 180-day period following the date of this prospectus.
Launch has agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock during the 180-day
period following the date of this prospectus, except that Launch may issue
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under its stock option plans, provided that, without
the prior written consent of Hambrecht & Quist LLC, such additional options
shall not be exercisable during such period.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among Launch and the representatives of the several underwriters.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
Launch, market valuations of other companies engaged in activities similar to
Launch, estimates of the business potential and prospects of Launch, the present
state of Launch's business operations, Launch's management and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover of this preliminary prospectus is subject to change as a result of
market conditions or other factors.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock
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<PAGE> 82
at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These activities by the Underwriters may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. Such transactions may be effected on
the Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
In September 1997, Launch entered into a Financial Advisory Services Letter
Agreement with Allen & Company Incorporated, pursuant to which Allen & Company
Incorporated provides financial advisory services to Launch.
Pursuant to the Financial Advisory Services Letter Agreement, Launch issued
Allen & Company Incorporated warrants to purchase 292,704 shares of common stock
in September 1997 and 287,501 shares of common stock in May 1998, each at an
exercise price of $1.25 per share. Of these, warrants to purchase 35,709 shares
of common stock are not exerciseable until the warrants held by NBC Multimedia,
Inc. and General Electric Capital Corporation become exerciseable. In connection
with further services provided by Allen & Company Incorporated in connection
with Launch's sale of Series D Stock in February 1998, Launch paid $315,000 to
Allen & Company Incorporated. The Financial Advisory Services Letter Agreement
expires on September 8, 2000.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Cooley Godward LLP, San Francisco, California.
EXPERTS
The financial statements of Launch Media, Inc. as of December 31, 1997 and
1998 and for each of the years in the three-year period ended December 31, 1998,
included herein and in the registration statement are included in reliance upon
the reports of PricewaterhouseCoopers LLP, independent accountants, appearing
elsewhere herein, which reports are given upon the authority of said firm as
experts in accounting and auditing.
The financial statements of AreohveeOnline Partnership dba Musicvideos.com
as of December 31, 1997 and 1998 and for the period from inception (August 1,
1997) through December 31, 1997 and for the year ended December 31, 1998,
included
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<PAGE> 83
herein and in the registration statement are included in reliance on the reports
of Moss Adams LLP, independent accountants, appearing elsewhere herein, which
reports are given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedule filed therewith. For further information with respect to
Launch and the common stock, reference is made to the Registration Statement and
the exhibits and schedules filed therewith. With respect to statements contained
in this prospectus regarding the contents of any agreement or any other
document, in each instance, reference is made to the copy of such agreement or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
For further information with respect to Launch and the common stock,
reference is made to the registration statement and the exhibits and schedules
thereto. You may read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. Our SEC filings are also available to the public from the SEC's
Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the SEC's Web site, which is described above.
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<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LAUNCH MEDIA, INC.:
Report of Independent Accountants......................... F-2
Balance Sheets at December 31, 1997 and 1998.............. F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F-4
Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 31, 1996, 1997 and 1998........... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F-6
Notes to Financial Statements............................. F-7
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Overview.................................................. F-21
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1998................................ F-22
Pro Forma Combined Balance Sheet at December 31, 1998..... F-23
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-24
AREOHVEE ONLINE PARTNERSHIP DBA MUSICVIDEOS.COM:
Report of Independent Accountants......................... F-25
Balance Sheets at December 31, 1997 and 1998.............. F-26
Statements of Operations for the Period from Inception
(August 1, 1997) through December 31, 1997 and for the
Year Ended December 31, 1998........................... F-27
Statements of Changes in Partners' Deficiency for the
Period from Inception (August 1, 1997) through December
31, 1997 and for the Year Ended December 31, 1998...... F-28
Statements of Cash Flows for the Period from Inception
(August 1, 1997) through December 31, 1997 and for the
Year Ended December 31, 1998........................... F-29
Notes to Financial Statements............................. F-30
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
The following report is in the form that will be signed upon the completion
of the one for five reverse stock split as described in Note 2 of the Notes to
Financial Statements.
PricewaterhouseCoopers LLP
Woodland Hills, California
February 5, 1999
To the Board of Directors of
Launch Media, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficiency) and cash flows present fairly,
in all material respects, the financial position of Launch Media, Inc. (the
"Company") at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Woodland Hills, California
February 5, 1999
F-2
<PAGE> 86
LAUNCH MEDIA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998 1998
------------ ------------ ------------
(PRO FORMA)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 643,910 $ 1,734,864
Short-term investments............................ -- 4,992,721
Accounts receivable, net of allowances of $485,036
(1997) and $321,719(1998)...................... 32,132 568,590
Inventory......................................... 49,478 124,476
Prepaids and other current assets................. 384,485..... 590,139
------------ ------------
Total current assets...................... 1,110,005 8,010,790
Property and equipment, net......................... 655,848 2,587,212
Intangible and other assets......................... 24,210 2,566,000
------------ ------------
Total assets...................................... $1,790,063... $ 13,164,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable.................................. $ 1,159,861 $ 1,619,177
Accrued expenses.................................. 221,318 783,920
Deferred revenue.................................. 262,852 481,794
Notes payable and accrued interest................ 3,149,866 529,504
Capital lease obligations, current portion........ 40,600 230,150
------------ ------------
Total current liabilities......................... 4,834,497 3,644,545
Notes payable....................................... 47,783 200,846
Capital lease obligations, net of current portion... 28,756 438,362
------------ ------------
Total liabilities................................. 4,911,036 4,283,753
------------ ------------
Commitments and contingencies (Note 10)
Series A, B, C and D mandatory redeemable
convertible preferred stock, $.001 par value;
shares authorized 2,573,004 (1997) and 6,580,406
(1998); shares issued and outstanding 2,573,004
(1997) and 5,918,230 (1998); liquidation
preference of approximately $10,124,000 (1997) and
$35,715,000(1998)................................. 11,064,983 37,875,805 $ --
Stockholders' equity (deficiency):
Common stock, $.001 par value, authorized
9,000,000 shares; shares issued and
outstanding, 932,672 (1997), 934,333 (1998),
and 6,852,563 (1998) on a pro forma basis...... 933 935 6,853
Additional paid-in capital........................ -- -- 37,869,887
Unearned compensation............................. -- (1,207,862) (1,207,862)
Accumulated deficit............................... (14,186,889) (27,788,629) (27,788,629)
------------ ------------ ------------
Total stockholders' equity (deficiency)........... (14,185,956) (28,995,556) $ 8,880,249
------------ ------------ ============
Total liabilities and stockholders' equity
(deficiency)................................. $ 1,790,063 $ 13,164,002
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 87
LAUNCH MEDIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues:
Advertising........................ $ 837,337 $ 1,859,172 $ 3,038,163
Subscription....................... 64,842 798,026 1,463,017
Merchandise and other.............. 473,004 479,811 512,981
----------- ----------- ------------
1,375,183 3,137,009 5,014,161
Operating expenses:
Cost of goods sold and
distribution.................... 811,854 1,734,515 3,185,319
Sales and marketing................ 3,189,361 4,224,789 9,011,482
Content and product development.... 1,006,017 2,454,470 4,407,018
General and administrative......... 1,020,897 1,398,543 2,214,789
----------- ----------- ------------
Loss from operations................. (4,652,946) (6,675,308) (13,804,447)
Interest income (expense):
Interest income.................... 178,149 89,884 523,214
Interest expense................... (10,717) (103,944) (133,932)
----------- ----------- ------------
Loss before provision for
income taxes............ (4,485,514) (6,689,368) (13,415,165)
Provision for income taxes........... (2,776) (2,774) (3,596)
----------- ----------- ------------
Net loss................... (4,488,290) (6,692,142) (13,418,761)
Accretion of mandatory redeemable
convertible preferred stock........ (455,560) (607,404) (1,585,841)
----------- ----------- ------------
Net loss attributable to common
stockholders....................... $(4,943,850) $(7,299,546) $(15,004,602)
=========== =========== ============
Basic and diluted net loss per common
share.............................. $ (5.37) $ (7.89) $ (16.07)
Weighted average shares outstanding
used in per share calculation...... 920,453 924,788 933,502
Pro forma basic and diluted net loss
per common share................... $ (2.17)
Weighted average shares outstanding
used in pro forma per share
calculation........................ 6,179,816
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 88
LAUNCH MEDIA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL UNEARNED ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL COMPENSATION DEFICIT TOTAL
---------- -------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996.................. 924,000 $ 924 $ 294,076 $ -- $ (2,348,400) $ (2,053,400)
Stock options
exercised............. 5,537 6 6,915 -- -- 6,921
Repurchase of common
stock................. (12,631) (13) (15,777) -- -- (15,790)
Accretion of mandatory
redeemable convertible
preferred stock....... -- -- (285,214) -- (170,346) (455,560)
Net loss................ -- -- -- -- (4,488,290) (4,488,290)
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1996.................. 916,906 917 -- -- (7,007,036) (7,006,119)
Issuance of warrants to
purchase common
stock................. -- -- 100,000 -- -- 100,000
Stock options
exercised............. 15,766 16 19,693 -- -- 19,709
Accretion of mandatory
redeemable convertible
preferred stock....... -- -- (119,693) -- (487,711) (607,404)
Net loss................ -- -- -- -- (6,692,142) (6,692,142)
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1997.................. 932,672 933 -- -- (14,186,889) (14,185,956)
Stock options
exercised............. 1,661 2 2,152 -- -- 2,154
Unearned compensation
related to stock
options granted....... -- -- 1,400,710 (1,400,710) -- --
Compensation related to
stock options
vested................ -- -- -- 192,848 -- 192,848
Accretion of mandatory
redeemable convertible
preferred stock....... -- -- (1,402,862) -- (182,979) (1,585,841)
Net loss................ -- -- -- -- (13,418,761) (13,418,761)
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1998.................. 934,333 935 -- (1,207,862) (27,788,629) (28,995,556)
Assumed conversion of
mandatory redeemable
convertible preferred
stock................. 5,918,230 5,918 37,869,887 -- -- 37,875,805
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1998 pro forma........ 6,852,563 $ 6,853 $37,869,887 $(1,207,862) $(27,788,629) $ 8,880,249
========== ======== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 89
LAUNCH MEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,488,290) $(6,692,142) $(13,418,761)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 114,810 143,778 321,425
Non-cash charges for issuance of equity securities...... -- 100,000 1,653,846
Allowance for bad debts and sales returns............... 13,540 (307,576) (163,317)
Write-off of deferred costs............................. 440,507 -- --
Amortization of deferred compensation................... -- -- 192,848
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......... (196,403) 589,922 (373,141)
Decrease (increase) in inventory................... (69,533) 20,055 (74,998)
Increase in prepaids and other current assets...... (64,077) (237,895) (205,654)
Increase in accounts payable....................... 339,690 505,783 459,316
Increase in accrued expenses....................... 226,735 53,466 562,602
Increase in deferred revenue....................... 147,206 43,153 218,942
----------- ----------- ------------
Net cash used in operating activities.............. (3,535,815) (5,781,456) (10,826,892)
----------- ----------- ------------
Cash flows used from investing activities:
Decrease (increase) in short-term investments............. (2,974,160) 2,974,160 --
Purchases of property and equipment....................... (272,267) (335,936) (1,570,229)
Purchases of securities................................... -- -- (44,652,900)
Maturities of securities.................................. -- -- 39,660,179
Increase in intangible and other assets................... (9,370) -- (288,290)
----------- ----------- ------------
Net cash used in investing activities.............. (3,255,797) 2,638,224 (6,851,240)
----------- ----------- ------------
Cash flows from financing activities:
Payments under capital lease obligations.................. (67,677) (40,871) (83,404)
Payments under notes payable.............................. -- -- (119,042)
Proceeds from notes payable............................. 500,000 3,000,000 739,750
Proceeds from issuance of mandatory redeemable
convertible preferred stock.......................... 7,098,602 -- 18,229,628
Repurchase of common stock.............................. (15,790) -- --
Proceeds from exercise of stock options................. 6,921 19,709 2,154
----------- ----------- ------------
Net cash provided by financing activities.......... 7,522,056 2,978,838 18,769,086
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents... 730,444 (164,394) 1,090,954
Cash and cash equivalents, beginning of year............ 77,860 808,304 643,910
----------- ----------- ------------
Cash and cash equivalents, end of year.................. $ 808,304 $ 643,910 $ 1,734,864
=========== =========== ============
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 10,717 $ 6,420 $ 55,203
Taxes................................................... $ 1,170 $ 2,774 $ 3,596
Supplementary disclosure of noncash transactions:
Equipment under capital leases.......................... $ 105,566 $ 16,491 $ 682,560
Notes payable issued for assets acquired................ $ -- $ 108,354 $ 407,346
Issuance of Series C Stock through conversion of notes
payable.............................................. $ 505,111 $ -- $ --
Issuance of Series D Stock through conversion of notes
payable.............................................. $ -- $ -- $ 3,495,353
Issuance of Series D Stock under strategic alliances.... $ -- $ -- $ 3,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 90
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL:
Launch Media, Inc. ("the Company") was incorporated in Delaware in February
1994 and is a digital media company focused on creating the premier destination
for promoting and discovering new music. The Company creates music content
available in an interactive format that enables music buyers to explore new
music from new and established artists. The music content is delivered on the
Internet at www.launch.com and on Launch on CD-ROM. Both launch.com and Launch
on CD-ROM are advertiser supported and include original content that takes
advantage of the personal computer's interactive multimedia technology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET
In December 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission 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 IPO is consummated under
the terms presently anticipated, upon the closing of the proposed IPO all of the
then outstanding shares of the Company's Mandatory Redeemable Convertible
Preferred Stock will automatically convert into shares of common stock on a
one-for-one basis. The conversion of the Mandatory Redeemable Convertible
Preferred Stock has been reflected in the accompanying unaudited pro forma
balance sheet as if it had occurred on December 31, 1998.
In addition, in connection with the proposed IPO, the Company authorized a
one-for-five reverse stock split. All share and per share information in the
accompanying financial statements have been retroactively restated to reflect
the effect of this stock split.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Through 1998, the Company's revenues have been derived primarily from the
sale of advertising and sponsorships, annual subscriptions relating to Launch on
CD-ROM and single copy retail sales of Launch on CD-ROM. Revenues for
sponsorships across the Launch media properties are recognized ratably over the
sponsorship term which is typically one month. Revenues from advertisements for
Launch on CD-ROM are recognized upon the release date of the issue in which the
advertisement
F-7
<PAGE> 91
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
appears. With respect to launch.com, revenues from advertisements are recognized
ratably in the period in which the advertisement is displayed, provided that no
significant Launch obligations remain.
Advance payments for Launch on CD-ROM subscriptions are deferred and
recognized over the term of the related subscription, typically 12 months.
The Company recognizes revenue from retail and other merchandise sales upon
shipment. Estimated product return reserves are provided when shipments are made
to reflect the net estimated sell-through. As of December 31, 1997 and 1998, the
allowance for sales returns was approximately $485,000 and $322,000,
respectively.
Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for reciprocal
advertising space or traffic on other Web sites. Revenues from these barter
transactions are recorded as advertising revenues at the lower of estimated fair
value of the advertisements received or delivered and are recognized when the
advertisements are run on the Launch media properties. Barter expenses are
recognized when Launch's advertisements are run on the reciprocal Web sites or
other advertising medium, which is typically in the same period as when the
advertisements are run on the Launch media properties. Revenues recognized from
barter transactions were approximately $131,000, $903,000 and $1,345,000 in
1996, 1997 and 1998, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts in various financial institutions and, at times, these
deposits may be in excess of the federally insured limit.
SHORT-TERM INVESTMENTS
The Company invests excess cash in commercial banker acceptances. The
investments are stated at cost, as it is the intent of the Company to hold these
securities until maturity. The investments are recorded at their amortized cost
on the balance sheet which approximates fair value.
PREPAID PRODUCTION COSTS
The Company defers all production costs associated with a particular issue
of Launch on CD-ROM and reflects these costs as an expense upon the release of
the related issue. Prepaid production costs included in prepaids and other
current assets were approximately $90,000 and $118,000 at December 31, 1997 and
1998.
INVENTORY
Inventory consists primarily of merchandise and is recorded at the lower of
cost (first in, first out) or market.
F-8
<PAGE> 92
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being applied on
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and equipment under capital leases are amortized over the
shorter of the estimated useful life or the life of the lease. The estimated
useful lives are as follows:
<TABLE>
<S> <C>
Equipment............................................. 5 years
Furniture and fixtures................................ 5 years
Leasehold improvements................................ 5 years
Equipment under capital leases........................ 3 years
</TABLE>
Maintenance and repairs are charged to expense as incurred while renewals
and improvements are capitalized. Upon the sale or retirement of fixed assets,
the accounts are relieved of the cost and the related accumulated deprecation,
with any resulting gain or loss included in the statements of operations.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets whenever
events or changes in circumstances result in the carrying amount of the assets
exceeding the sum of the expected future undiscounted cash flows associated with
such assets. The measurement of the impairment losses to be recognized is to be
based on the difference between the fair values and the carrying amounts of the
assets. To date, no such impairment has been recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, capital lease obligations and notes
payable are carried at cost, which approximates their fair market value because
of the short-term maturity of these instruments.
CONTENT AND PRODUCT DEVELOPMENT
Content and product development costs include expenses incurred by the
Company to develop, enhance, manage, monitor and operate the Company's Web site.
Product development costs are expensed as incurred.
ADVERTISING
Advertising costs are expensed as incurred and were approximately $588,000,
$1,234,000 and $3,144,000 in 1996, 1997 and 1998, respectively.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Retail sales are made through distribution agreements, and sales under
these agreements are due from net 60 to 120 days, with certain agreements
providing
F-9
<PAGE> 93
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
advances to the Company based on historical sell-through. The Company sells
advertising to major advertising agencies representing their clients and
directly to large, well established, companies.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. Estimated credit losses and returns have
been provided for in the financial statements and, to date, have generally been
within management's expectations.
For the years ended December 31, 1996, 1997 and 1998 sales to any one
advertiser did not exceed 10% of revenues and as of December 31, 1998 amounts
due from one advertiser represented 18% of accounts receivable.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference, on the date of grant, between the fair value of
the Company's common stock and the grant price.
COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share", basic
earnings per share is computed using the weighted average number of shares
outstanding during the period and diluted earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the Mandatory
Redeemable Convertible Preferred Stock (using the if-converted method) and
shares issuable upon exercise of outstanding stock options and warrants, using
the treasury stock method. Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and
F-10
<PAGE> 94
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net loss per share as if they were outstanding
for all periods presented. To date, the Company has not had any issuances or
grants for nominal consideration.
Diluted net loss per share for 1996, 1997 and 1998, does not include the
effect of options and warrants to purchase 244,616, 536,404 and 1,112,555 shares
of common stock, respectively; 2,573,004, 2,573,004 and 5,918,230 shares of
Mandatory Redeemable Convertible Preferred Stock on an "as-if-converted" basis,
or for 1998, warrants to purchase 474,432 shares of Series D Stock respectively,
as the effect of their inclusion is anti-dilutive during each period.
Pro forma net loss per share for the year ended December 31, 1998 assumes
that the common stock issuable upon conversion of the outstanding Mandatory
Redeemable Convertible Preferred Stock had been outstanding during the year or
from date of issuance.
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use", which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Launch does not
anticipate that the adoption of SOP No. 98-1 will have a material impact on the
Company's financial statements.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP No. 98-5"). 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. As the
Company has expensed these costs historically, the adoption of this standard
will not have a significant impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to
F-11
<PAGE> 95
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company does
not expect the adoption of this statement to have a significant impact on the
Company's financial statements.
3. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
------- ----------
<S> <C> <C>
Deferred charge.................................. $ -- $1,846,154
Intangible asset................................. -- 557,346
Deposits......................................... 24,210 162,500
------- ----------
$24,210 $2,566,000
======= ==========
</TABLE>
The deferred charge represents the value of Series D Stock issued in
connection with a strategic alliance and content agreement and is being
amortized over the 26-month term of the agreement. Accumulated amortization at
December 31, 1998 was approximately $1,154,000.
The intangible asset represents the cost (net of discount on the related
note payable) of the domain name launch.com which the Company purchased from a
third party effective December 31, 1998 and which will be amortized over its
estimated useful life of two years.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
--------- ----------
<S> <C> <C>
Leasehold improvements......................... $ -- $ 929,965
Equipment, furniture and fixtures.............. 770,880 1,420,989
Equipment under capitalized leases............. 130,754 803,908
--------- ----------
901,634 3,154,862
Accumulated depreciation and amortization
(including $39,900 (1997) and $88,241 (1998)
for equipment under capital leases).......... (245,786) (567,650)
--------- ----------
$ 655,848 $2,587,212
========= ==========
</TABLE>
Depreciation expense was approximately $70,000, $144,000 and $321,000 in
1996, 1997 and 1998, respectively.
F-12
<PAGE> 96
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Vacation......................................... $ 66,219 $133,003
Royalties........................................ 121,833 130,723
Distribution..................................... -- 248,913
Other............................................ 33,266 271,281
-------- --------
$221,318 $783,920
======== ========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
Advertising revenues for 1996, 1997 and 1998 include approximately $62,000,
$12,000 and $219,000, respectively, in revenues received from a corporate
shareholder of the Company. At December 31, 1997 and 1998, approximately $0 and
$103,000, respectively, of those amounts are included in accounts receivable.
In November 1998, Launch entered into an architectural development and
assistance agreement with Intel Corporation. Pursuant to the terms of these
agreements, Launch agreed to develop a product which is able to use the
capabilities of a processor developed by Intel. In consideration, Intel has
agreed to pay Launch certain amounts and to provide technical assistance, and
Launch has agreed to pay Intel a portion of revenues derived from the developed
product. Through December 31, 1998 approximately $269,000 in development revenue
has been recognized using the percentage of completion method on a cost to cost
basis. The development revenue is included in merchandise and other revenues in
the 1998 statement of operations.
In October 1998, the Board of Directors approved a loan of $100,000 to an
officer/director of the Company, which is due upon demand, bears interest at 8%
per annum and is collateralized by shares of the Company's common stock held by
the officer/director. The note receivable and accrued interest thereon is
included in prepaids and other current assets at December 31, 1998.
In February 1998, in conjunction with its Series D Stock sale, the Company
entered into a strategic alliance and content provider agreement with a
corporate shareholder and a technical assistance agreement with another
corporate shareholder. Under the strategic alliance and content provider
agreement, the Company will share equally with its strategic partner all net
revenues, as defined in the agreements, generated through the alliance.
7. OBLIGATIONS UNDER CAPITAL LEASES:
The Company has a capital lease line of credit for $1.0 million, expiring
in November 1999. The Company has borrowed approximately $531,000 under this
line of credit as of December 31, 1998. This facility bears interest at the
bank's prime
F-13
<PAGE> 97
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
rate (7.75% at December 31, 1998). The leased assets collateralize any
borrowings under this line of credit.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Total obligations under capital leases.......... $ 69,356 $ 668,512
Current maturities.............................. (40,600) (230,150)
-------- ---------
Non-current portion of capital leases........... $ 28,756 $ 438,362
======== =========
</TABLE>
8. NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- ---------
<S> <C> <C>
Note payable, principal and interest of $5,000
due monthly, interest at 10% per annum due
October 1999................................ $ 100,126 $ 83,254
Note payable, principal and interest of $5,094
due monthly, interest at 10% per annum due
December 2003............................... -- 239,750
Note payable due and payable in full December
1999 (present value at imputed interest of
10%)........................................ -- 407,346
Convertible subordinated promissory notes
payable and accrued interest to preferred
stockholders, interest only at 8% per annum,
due March 31, 1998 (converted to Series D
Stock in 1998).............................. 1,517,633 --
Convertible subordinated promissory notes
payable and accrued interest to preferred
stockholder, interest only at 7% increasing
to 10% per annum, due March 31, 1998
(substantially all of the notes converted to
Series D Stock in 1998)..................... 1,579,890 --
----------- ---------
3,197,649 730,350
Less: current portion......................... (3,149,866) (529,504)
----------- ---------
Non-current portion of notes payable.......... $ 47,783 $ 200,846
=========== =========
</TABLE>
F-14
<PAGE> 98
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The provision for income taxes for 1996, 1997 and 1998 represents minimum
state franchise taxes.
The tax effected amounts of temporary differences as of December 31, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......... $ 5,140,000 $ 10,716,000
Allowances............................... 194,000 129,000
Accrued vacation......................... 26,000 53,000
----------- ------------
Total deferred tax assets........ 5,360,000 10,898,000
Valuation allowance........................ (5,303,000) (10,578,000)
----------- ------------
Net deferred tax assets.......... 57,000 320,000
Deferred tax liability:
Fixed assets............................. (57,000) (320,000)
----------- ------------
Net deferred taxes............... $ -- $ --
=========== ============
</TABLE>
The Company has net operating loss carryforwards as of December 31, 1998
available to offset future taxable income for federal and California state
income tax purposes of approximately $26.8 million, which begin to expire in
2009 and 1999, respectively. Utilization of the net operating loss carryforwards
may be subject to an annual limitation due to a change in ownership as defined
under Section 382 of the Internal Revenue Code. Due to the net operating losses
incurred to date, the Company has provided a full valuation allowance against
its net deferred tax assets.
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company is committed to minimum rental payments under capital leases
and noncancelable facility operating leases as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- ----------
<S> <C> <C>
1999........................................... $ 306,524 $ 458,000
2000........................................... 279,918 473,000
2001........................................... 218,303 489,000
2002........................................... -- 505,000
2003........................................... -- 296,000
--------- ----------
Total minimum lease payments................... 804,745 $2,221,000
==========
Less amount representing interest.............. (136,233)
---------
Present value of capital lease payments........ $ 668,512
=========
</TABLE>
F-15
<PAGE> 99
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has an option to renew its primary facility operating lease for
an additional four-year term. Rent expense was approximately $182,000, $343,000
and $512,000 for 1996, 1997 and 1998, respectively.
DEVELOPMENT CONTRACT
The Company had a Development Agreement dated October 3, 1994, as amended,
(the "Agreement") governing the initial design and production of Launch on
CD-ROM. The Company terminated the Agreement and for a one-time payment of
$25,000 received a complete release from any future obligations under the
Agreement. As a result, the Company wrote-off $440,507 in unamortized deferred
costs in 1996, which were previously paid under the terms of the Agreement and
which, prior to termination of the Agreement, were recoupable against future
royalties.
11. CAPITALIZATION:
The authorized capital stock of the Company consists of 9,000,000 shares of
common stock, $.001 par value, and 6,580,406 shares of preferred stock, $.001
par value, of which 380,160 shares have been designated Series A Stock, 612,820
shares have been designated Series B Stock, 1,580,023 shares have been
designated Series C Stock and 4,007,403 shares have been designated Series D
Stock.
As of December 31, 1998, the Company had four series of Mandatory
Redeemable Convertible Preferred Stock (collectively "Preferred Stock")
authorized and outstanding. The holders of the various series of Preferred Stock
generally have the same rights and privileges; significant difference are
discussed below.
The holders of the Preferred Stock are entitled to a discretionary,
noncumulative dividend and are entitled to the number of votes equal to the
number of shares of common stock that could be converted on the date of the
vote. Upon liquidation, the holders of Preferred Stock receive, prior and in
preference to the holders of the common stock, their liquidation preference plus
accrued dividends at the stated rate. Redemption, at the option of the holders
of Preferred Stock, may be elected beginning on February 27, 2003 at the stated
redemption preference, plus 6% per annum from February 27, 1998 through the
redemption date for Series A, B and D Stock and from March 29, 1996 through the
redemption date for Series C Stock. One-fifth of the redemption price is payable
on the redemption date and one-fifth of the redemption price, plus interest at
6% per annum, is payable on each of the four anniversaries following the
redemption date. At the option of the holders of Preferred Stock, each share of
Preferred Stock is convertible to common stock at the stated conversion price
per share, subject to adjustment as defined in the Certificate of Incorporation.
In October 1994, the Company issued 380,160 shares of Series A Stock for
$660,000. In August, 1995, the Company issued 552,839 shares of Series B Stock
for $1,766,754 and issued, for $2,999, Series B Preferred Stock Purchase
Warrants ("Series B Warrants") entitling the holder to purchase 59,981 shares of
Series B Stock at $3.20 per share. During the period March 1996 through July
1996, the Company issued 1,580,023 shares of Series C Stock for $7,505,111. In
March 1996,
F-16
<PAGE> 100
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Series B Warrants were exercised and 59,981 shares of Series B Stock were
issued for $191,689. In February and May 1998, the Company issued an aggregate
of 3,345,227 shares of Series D Stock for $25,590,983. In connection with the
Series D Stock offering, the Company issued warrants to purchase 580,205 shares
of common stock to an investment banker. Each warrant is exercisable at $1.25
per share and expires on September 8, 2002. Included in the Series D Stock
issuance above is $3,500,000 of Series D Stock issued as consideration for a
strategic alliance and content provider agreement. As additional consideration,
the Company issued Series D Preferred Stock Purchase Warrants to purchase an
aggregate of 474,432 shares of Series D Stock at the lower of $22.95 per share
or the per share proceeds to the Company for shares of common stock of the
Company that are issued in connection with an initial public offering. The
Warrants expire the earlier of the IPO date or February 27, 2003 and are only
exercisable if the strategic partner elects to extend the term of the underlying
agreement and other conditions of the agreement are satisfied.
Rights of Preferred Stock as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
DIVIDEND LIQUIDATION REDEMPTION
PREFERENCE PREFERENCE PREFERENCE
---------- ----------- ----------
<S> <C> <C> <C>
Series A Stock................... $0.170 $1.74 $1.74
Series B Stock................... $0.190 $3.20 $3.20
Series C Stock................... $0.285 $4.75 $4.75
Series D Stock................... $0.460 $7.65 $7.65
</TABLE>
Each share of Preferred Stock shall automatically be converted into shares
of common stock at the then effective conversion rate immediately upon the
closing of an underwritten public offering of common stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
with a sales price per share of common stock (as adjusted for combinations,
stock dividends, subdivisions or split-ups) of at least $15.00 and with
aggregate gross proceeds, at the public offering price, of at least $15,000,000.
No dividends on common or Preferred Stock have been declared as of December
31, 1998. The carrying amount of the Preferred Stock is being increased by
periodic accretions so that the amount reflected in the balance sheet will equal
the mandatory redemption amount at the redemption date. Such increases are
reflected in the calculation of net loss per common share in the same manner as
dividends on nonredeemable preferred stock.
At December 31, 1998, the Company has reserved 5,918,230 shares of common
stock for the future conversion of Series A through D Stock.
12. STOCK OPTIONS:
Under the Company's 1994 and 1998 Stock Option Plans (the "Plans"), the
Company has been authorized to grant options to purchase a maximum of 1,103,266
shares of common stock.
F-17
<PAGE> 101
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's Plans provide for the issuance of both non-statutory and
incentive stock options to employees, officers, directors and consultants of the
Company. Incentive stock options may be granted at no less than 100% of the fair
market value of the Company's common stock on the date of grant as determined by
the Board of Directors (110% if granted to an employee who owns 10% or more of
the common stock). Options granted under the 1994 Stock Option Plan vest ratably
over a five-year period and options granted under the 1998 Stock Option Plan
vest ratably over a four-year period, except that new employees shall vest 25%
of their shares after 12 months of employment. Options are exercisable for a
period no longer that 10 years from date of grant. In the event option holders
cease to be employed by the Company, all unvested options are forfeited.
The following table summarizes the stock option activity for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 244,616 $1.25 243,700 $1.25
Granted -- price equals fair
value............................. 23,000 $1.25 -- --
Granted -- price less than fair
value............................. -- -- 326,800 $2.35
Exercised........................... (15,766) $1.25 (1,661) $1.30
Cancelled........................... (8,150) $1.25 (36,489) $1.35
------- -------
Outstanding at year-end............. 243,700 $1.25 532,350 $1.90
======= =======
Options exercisable at year-end..... 183,596 $1.45
=======
Options available for future
grant............................. 557,347
=======
</TABLE>
At December 31, 1998 the Company had reserved a total of 1,089,697 shares
of common stock for issuance to its stock option holders.
In connection with its grants of options, the Company recorded unearned
deferred compensation of approximately $1,400,000 for the year ended December
31, 1998. The amount is being amortized over the vesting period of four years
from date of grant and approximately $193,000 was expensed during the year ended
December 31, 1998.
F-18
<PAGE> 102
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.25 210,467 7.24 $1.25 141,333 $1.25
$2.00 211,283 9.31 $2.00 36,902 $2.00
$3.00 110,600 9.71 $3.00 5,361 $3.00
------- -------
532,350 8.58 $1.90 183,596 $1.45
======= =======
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." If compensation expense for the stock options had been determined
using "fair value" at the grant date for awards in 1996, 1997 and 1998,
consistent with the provisions of Statement of Financial Accounting Standards
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C> <C>
Net loss................. As reported $4,488,290 $6,692,142 $ 13,418,761
Pro forma $4,497,341 $6,706,857 $ 13,474,805
Basic net loss per common
share.................. As reported $ 5.37 $ 7.89 $ 16.07
Pro forma $ 5.38 $ 7.91 $ 16.13
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the minimum value method with the following assumptions (i) risk-free
interest rate of 5.6% to 6.9%, (ii) expected option life of 5 years, (iii)
forfeiture rate of zero and (iv) no expected dividends. The insignificant impact
of applying SFAS No. 123 is not indicative of future amounts.
13. 401(k) SAVINGS PLAN:
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their pretax earnings up to the Internal Revenue Services annual
contribution limit. The Company is not required to contribute to the Savings
Plan and has made no contributions since inception of the Savings Plan.
F-19
<PAGE> 103
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (UNAUDITED):
On January 15, 1999, the Company entered into an exchange agreement to
acquire all the partnership interests of AreohveeOnline Partnership, dba
Musicvideos.com. Musicvideos.com is a provider of music videos over the
Internet. The acquisition is expected to close in February 1999 and will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date. The total purchase price of approximately $7.7 million is
comprised of 875,557 shares of the Company's common stock with an estimated fair
value of approximately $7.4 million, and a cash payment of approximately
$300,000.
On February 15, 1999, Launch entered into a note purchase agreement in
which it agreed to issue a convertible subordinated promissory note in the
amount of $1.0 million to Avalon Technology LLC, an 8.6% stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a 12.7% stockholder. The notes accrue interest at 8.5% per
annum from the issuance date and are due February 29, 2000. The notes
automatically convert into shares of Launch stock upon the earlier of (a)
Launch's consummation of an initial public offering with a sales price per share
of at least $10.00 and aggregate gross proceeds to Launch of at least $15.0
million, (b) an acquisition transaction in which the stockholders of Launch
prior to such transaction own less than 50% of the voting securities of the
surviving entity after such transaction or (c) February 29, 2000. If Launch
consummates an initial public offering prior to August 31, 1999, the notes and
any accrued interest thereon automatically convert to common stock at a per
share price equal to 80% of the initial public offering price per share. If
Launch does not consummate an initial public offering by August 31, 1999, then,
at the option of the holder which may be exercised at any time between August
31, 1999 and February 29, 2000, the notes and any accrued interest thereon are
convertible into Series D Stock at a per share price equal to $7.65. If the
conversion occurs in connection with an acquisition transaction, the notes and
any accrued interest thereon automatically convert into Series D Stock at a per
share price equal to $7.65.
In February 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 300,000 shares of common stock for
issuance under the Purchase Plan.
Also in February 1999, the Company increased the number of shares
authorized for issuance under its 1998 Stock Option Plan by approximately
910,000 shares, subject to stockholder approval.
F-20
<PAGE> 104
LAUNCH MEDIA, INC.
PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
On January 15, 1999, the Company entered into an exchange agreement to
acquire all of the partnership interests of Areohvee Online Partnership, dba
Musicvideos.com. Musicvideos.com is a provider of music videos over the
Internet. The acquisition is expected to close in February 1999 and will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date.
The total purchase price of approximately $7.7 million is comprised of
875,557 shares of the Company's common stock with an estimated fair value of
approximately $7.4 million, and a cash payment of approximately $300,000. For
purposes of this pro forma combined financial information, the excess purchase
price over net tangible assets acquired is estimated to be approximately $7.6
million and is assumed to be amortized over an estimated average useful life of
36 months.
The acquisition has been structured as a tax free exchange of stock;
therefore, the differences between the recognized fair values of acquired
assets, including intangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma combined statement of operations gives
effect to this acquisition as if it had occurred on January 1, 1998, by
combining the results of operations of Musicvideos.com with the results of
operations of Launch Media, Inc. for the year ended December 31, 1998. The
following unaudited pro forma combined balance sheet gives effect to this
acquisition as if it had occurred on December 31, 1998 by combining the balance
sheets of the two companies as of December 31, 1998.
The unaudited pro forma combined statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the period presented and
should not be construed as being representative of future operating results.
The historical financial statements of the Company and Musicvideos.com are
included elsewhere in this Prospectus and the unaudited pro forma combined
financial information presented herein should be read in conjunction with those
financial statements and related notes.
F-21
<PAGE> 105
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
LAUNCH MEDIA,
INC. MUSICVIDEOS.COM ADJUSTMENTS PRO FORMA
------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues...................... $ 5,014,161 $257,649 $ (20,000)(A) $ 5,251,810
Operating expenses:
Cost of goods sold and
distribution................. 3,185,319 -- 3,185,319
Sales and marketing............. 9,011,482 22,013 (20,000)(A) 9,013,495
Content and product
development.................. 4,407,018 126,756 4,533,774
General and administrative...... 2,214,789 99,076 285,000(B) 2,598,865
Amortization of excess purchase
price........................ -- -- 2,548,299(C) 2,548,299
------------ -------- ------------
Income (loss) from operations..... (13,804,447) 9,804 (16,627,942)
Interest income (expense), net.... 389,282 (3,432) 385,850
------------ -------- ------------
Loss before provision for income
taxes........................... (13,415,165) 6,372 (16,242,092)
Provision for income taxes........ (3,596) -- (3,596)
------------ -------- ------------
Net loss.......................... (13,418,761) 6,372 (16,245,688)
Accretion of mandatory redeemable
convertible preferred stock..... (1,585,841) -- (1,585,841)
------------ -------- ------------
Net loss attributable to common
stockholders.................... $(15,004,602) $ 6,372 $(17,831,529)
============ ======== ============
Basic and diluted net loss per
share........................... $ (16.07) $ (9.86)
============ ============
Weighted average shares
outstanding used in per share
calculation..................... 933,502 1,809,059
============ ============
Pro forma basic and diluted net
loss per share.................. $ (2.17) (D) $ (2.30)
============ ============
Weighted average shares
outstanding used in pro forma
per share calculation........... 6,179,816 (D) 7,055,373
============ ============
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information.
F-22
<PAGE> 106
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
LAUNCH MEDIA,
INC. MUSICVIDEOS.COM ADJUSTMENTS PRO FORMA
------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 1,734,864 $ 9,505 $ (301,944)(E) $ 1,442,425
Short-term investments......... 4,992,721 -- 4,992,721
Accounts receivable, net....... 568,590 118,283 686,873
Inventory...................... 124,476 -- 124,476
Prepaids and other current
assets...................... 590,139 -- 590,139
------------ --------- ------------
Total current assets... 8,010,790 127,788 7,836,634
Property and equipment, net...... 2,587,212 65,631 2,652,843
Excess purchase price............ -- -- 7,644,897(E) 7,644,897
Other assets..................... 2,566,000 1,600 2,567,600
------------ --------- ------------
Total assets........... $ 13,164,002 $ 195,019 $ 20,701,974
============ ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable............... $ 1,619,177 $ 21,142 $ 1,640,319
Accrued expenses............... 783,920 25,000 808,920
Deferred revenue............... 481,794 -- 481,794
Notes payable and accrued
interest.................... 529,504 -- 529,504
Capital lease obligations,
current portion............. 230,150 20,359 250,509
------------ --------- ------------
Total current
liabilities.......... 3,644,545 66,501 3,711,046
Related party payables........... -- 200,237 (200,237)(F) --
Notes payable.................... 200,846 -- 200,846
Capital lease obligations, net of
current portion................ 438,362 29,240 467,602
------------ --------- ------------
Total liabilities...... 4,283,753 295,978 4,379,494
------------ --------- ------------
Mandatory redeemable convertible
preferred stock................ 37,875,805 -- 37,875,805
Stockholders' equity
(deficiency):
Capital stock.................. 1,557 -- 7,442,231(E) 7,443,788
Partners' deficiency........... -- (100,959) 100,959(E) --
Unearned deferred
compensation................ (1,207,862) -- (1,207,862)
Accumulated deficit............ (27,789,251) -- (27,789,251)
------------ --------- ------------
Total stockholders'
deficiency........... (28,995,556) (100,959) (21,553,325)
------------ --------- ------------
Total liabilities and
stockholders'
equity............... $ 13,164,002 $ 195,019 $ 20,701,974
============ ========= ============
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information.
F-23
<PAGE> 107
LAUNCH MEDIA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The following adjustments were applied to the Company's historical
financial statements and those of Musicvideos.com to arrive at the pro forma
combined financial information.
(A) To eliminate intercompany sales.
(B) To record compensation for partners in Musicvideos.com who provided
services at no charge to Musicvideos.com and who will continue as employees of
the Company following the acquisition.
(C) To record amortization of the estimated excess purchase price of
$7,644,897 over the assumed estimated average useful life of 36 months.
(D) Pro forma basic net loss per share for the year ended December 31, 1998
is computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
Series A, Series B, Series C and Series D Mandatory Redeemable Convertible
Preferred Stock into shares of the Company's common stock effective upon the
closing of this offering as if such conversion occurred on January 1, 1998, or
at date of original issuance, if later.
(E) To record the purchase price totaling $7,744,175 (including $7,442,231
in stock and $301,944 in cash) and eliminate partners' deficiency.
(F) To eliminate amounts due to partners.
F-24
<PAGE> 108
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Areohvee Online Partnership
We have audited the accompanying balance sheets of Areohvee Online
Partnership dba Musicvideos.com as of December 31, 1997 and 1998, and the
related statements of operations, changes in partners' deficiency, and cash
flows for the period from inception (August 1, 1997) through December 31, 1997
and the year ended December 31, 1998. These financial statements are the
responsibility of the Partnership'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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Areohvee Online Partnership
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception (August 1, 1997) through December 31, 1997
and the year ended in December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Moss Adams LLP
Costa Mesa, California
January 18, 1999
F-25
<PAGE> 109
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
CURRENT ASSETS
Cash.................................................... $ 67 $ 9,505
Accounts receivable..................................... -- 118,283
------- --------
Total current assets............................ 67 127,788
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization........................... 21,229 65,631
DEPOSITS.................................................. 1,600 1,600
------- --------
$22,896 $195,019
======= ========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable........................................ $ -- $ 21,142
Accrued expenses........................................ -- 25,000
Amounts due to partners................................. 6,232 26,705
Current portion of capital lease obligations............ -- 20,359
------- --------
Total current liabilities....................... 6,232 93,206
NOTES PAYABLE TO PARTNERS................................. 60,400 173,532
CAPITAL LEASE OBLIGATIONS, net of current portion......... -- 29,240
COMMITMENTS (Note 5)
PARTNERS' DEFICIENCY...................................... (43,736) (100,959)
------- --------
$22,896 $195,019
======= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 110
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1997) THROUGH
DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
NET REVENUES............................................. $ 1,399 $257,649
-------- --------
OPERATING EXPENSES
Cost of revenues....................................... 4,430 126,756
Sales and marketing.................................... 4,445 22,013
General and administrative............................. 11,210 99,076
-------- --------
TOTAL OPERATING EXPENSES................................. 20,085 247,845
-------- --------
INCOME (LOSS) FROM OPERATIONS............................ (18,686) 9,804
INTEREST EXPENSE......................................... -- 3,432
-------- --------
NET INCOME (LOSS)........................................ $(18,686) $ 6,372
======== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 111
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
STATEMENTS OF CHANGES IN PARTNERS' DEFICIENCY
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1997) THROUGH
DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
BALANCE, Inception (August 1, 1997)......................... $ --
Distributions............................................... (25,050)
Net loss.................................................... (18,686)
---------
BALANCE, December 31, 1997.................................. (43,736)
Distributions............................................... (63,595)
Net income.................................................. 6,372
---------
BALANCE, December 31, 1998.................................. $(100,959)
=========
</TABLE>
See accompanying notes.
F-28
<PAGE> 112
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 1, 1997) THROUGH
DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $(18,686) $ 6,372
Noncash items included in net income (loss):
Depreciation and amortization....................... 1,797 17,507
Changes in:
Accounts receivable................................. -- (118,283)
Deposits............................................ (1,600) --
Accounts payable.................................... -- 21,142
Accrued expenses.................................... -- 25,000
-------- --------
Net cash used in operating activities.......... (18,489) (48,262)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for acquisition of property and equipment..... (23,026) --
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and amounts due
to partners......................................... 66,632 133,606
Distributions to partners.............................. (25,050) (63,595)
Payments on capital lease obligations.................. -- (12,311)
-------- --------
Net cash provided by financing activities...... 41,582 57,700
-------- --------
NET INCREASE IN CASH..................................... 67 9,438
CASH, beginning of period................................ -- 67
-------- --------
CASH, end of period...................................... $ 67 $ 9,505
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest................. $ -- $ 3,432
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred during the period..... $ -- $ 61,909
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 113
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND RISK FACTORS
Areohvee Online Partnership dba Musicvideos.com (the Company) is an
internet company that provides online music videos. The Company's web site
(musicvideos.com) enables consumers to view full length videos on their personal
computer over the internet. In addition the Company produces a local, Los
Angeles market, cable television show featuring music videos called AreOhVee.
The Company is a California general partnership that began operations in August
1997.
The Company has limited operating history and did not begin to generate
significant revenues until July 1998. Management's efforts to date have been
focused primarily on developing the Company's web site and establishing brand
recognition in the market place. As such, the Company is subject to the risks
and uncertainties associated with a new business. The success of the Company's
future operations is dependent, in part, upon the Company's ability to (i)
further establish brand recognition for its web site, (ii) strengthen strategic
alliances with other companies within the industry, and (iii) obtain additional
third-party financing.
In December 1998, the partners of the Company entered into a letter of
intent with Launch Media, Inc. (Launch) to sell their interests in the Company
in a cash and stock transaction (Note 7). The transaction, which is subject to
completion of certain contracted obligations, is expected to be completed by
February 28, 1999. In the event that this transaction is not completed, the
Company may need to seek alternative third-party financing to fund future
operations. There can be no assurances that such financing will be available
with terms acceptable to the Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION -- Substantially all of the Company's revenues to date
have been derived through the sale of online advertisement on the Company's web
site. Advertisement revenue is recognized in the period that the advertisement
is provided by the Company. The Company utilizes two outside service companies
to sell advertising. Such companies are paid a commission ranging from 30% to
45%. Commission expense totaled $79,211 for the year ended December 31, 1998 and
is included in cost of revenues in the accompanying financial statements.
The Company also receives revenue for referring customers from its web site
to other internet companies. Referral revenue is recorded in the period that the
referral is made.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization of property
and equipment is computed using straight-line methods over the estimated useful
lives of the assets of three to five years. Depreciation and amortization
expense for 1997 and 1998 amounted to $1,797 and $17,507, respectively.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject the Company to credit risk consist principally of accounts receivables
and cash. The
F-30
<PAGE> 114
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company utilizes outside service companies to sell its advertisement to
businesses across several industries. The Company does not require collateral.
During 1998, approximately 75% of the Company's revenue was derived from
advertisements sold by two outside service companies. These two companies also
provide billing and collections for the Company for any advertisement that they
sell. At December 31, 1998, the Company had $75,763 in accounts receivable from
these two companies.
INCOME TAXES -- As a partnership, the Company does not pay federal or state
income taxes. The Company's income or loss is allocated to the partners based on
the partners' ownership interests and is included on their respective personal
income tax returns.
ACCOUNTING ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted auditing principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 3 -- NOTES PAYABLE AND AMOUNTS DUE TO PARTNERS
At December 31, 1997 and 1998, the Company had notes payable to its
partners that totaled $60,400 and $173,532, respectively. These notes bear no
interest and are due and payable in full upon demand, but no earlier than
December 31, 2001.
At December 31, 1997 and 1998, the Company also had amounts due to partners
for the reimbursement of business expenses that totaled $6,232 and $26,705,
respectively. Such amounts are payable on demand.
NOTE 4 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Computer equipment under capital leases............ $ -- $61,909
Equipment, furniture and fixtures.................. 23,026 23,026
------- -------
23,026 84,935
Accumulated depreciation and amortization.......... (1,797) (19,304)
------- -------
$21,229 $65,631
======= =======
</TABLE>
NOTE 5 -- LEASE OBLIGATIONS
The Company leases certain computer equipment under capital leases which
expire in various periods through November 2001.
F-31
<PAGE> 115
AREOHVEE ONLINE PARTNERSHIP
DBA MUSICVIDEOS.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of minimum annual payments under all capital
leases:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................... $25,572
2000........................................... 22,655
2001........................................... 9,870
-------
Total minimum lease payments..................... 58,097
Less amount representing interest................ (8,498)
-------
Present value of minimum lease payments.......... 49,599
Current portion................................ (20,359)
-------
Long-term portion.............................. $29,240
=======
</TABLE>
The Company also rents its corporate office space under a month-to-month
lease arrangement for $809 per month. Rent expense totaled $3,245 and $8,833 for
1997 and 1998, respectively.
NOTE 6 -- PARTNERS' DEFICIENCY AND RELATED PARTY TRANSACTIONS
The majority of the Company's operating labor is provided by the partners
of Areohvee Online Partnership. These partners provide their services at no
charge to the Company. The Partnership Agreement allows such partners to take
cash distributions at the mutual consent of the other partners. The Company made
cash distributions to its partners totaling $25,050 and $63,595 during 1997 and
1998, respectively.
NOTE 7 -- SUBSEQUENT EVENT
On January 15, 1999, the partners of the Company entered into an exchange
agreement with Launch. The exchange agreement calls for the partners of the
Company to transfer all of their interests in the Company to Launch in exchange
for $301,944 in cash and an aggregate of 875,557 shares of Launch common stock.
During 1998, the Company generated revenue from Launch totaling approximately
$20,000.
F-32
<PAGE> 116
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LAUNCH MEDIA, INC. LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
ALLEN & COMPANY INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
-------------------------
, 1999
-------------------------
You should rely only on 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 this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999, all dealers that buy, sell or trade in our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This 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> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject to
certain limitations. Launch's Certificate of Incorporation and Bylaws provide
that Launch shall indemnify its directors, officers, employees and agents to the
full extent permitted by Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. In addition, Launch intends to enter into separate indemnification
agreements with its directors, officers and certain employees which would
require Launch, among other things, to indemnify them against certain
liabilities which may arise by reason of their status as directors, officers or
certain other employees. Launch also intends to maintain director and officer
liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between Launch and its officers and directors may be sufficiently
broad to permit indemnification of Launch's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Launch and its
officers and directors for certain liabilities arising under the Securities Act,
or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions to be paid by Launch, in connection with
this offering. All amounts shown are estimates except for the registration fee
and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,190
NASD filing fee............................................. 4,525
Nasdaq National Market listing fee.......................... 47,500
Blue Sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 250,000
Director and Officer Securities Act liability insurance..... 100,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 16,785
--------
Total............................................. $900,000
========
</TABLE>
II-1
<PAGE> 118
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since February 1, 1996, Launch has sold and issued the following
unregistered securities:
(1) On March 29, 1996, April 2, 1996 and July 12, 1996, Launch sold an
aggregate of 1,580,023 shares of its Series C Stock to accredited
investors including Lee Entertainment L.L.C., Intel Corporation,
SOFTBANK Ventures, Inc., Island Trading Co., Inc. and Phoenix Partners
III and IV Limited Partnerships, for an aggregate of $7,505,111.
(2) On May 23, 1997, Launch issued a convertible subordinated promissory
note in the amount of $1.5 million to an accredited investor, Digital
Ventures Limited, an affiliate of Arts Alliance.
(3) In September 1997, Launch entered into a Financial Advisory Services
Letter Agreement with Allen & Company Incorporated, pursuant to which
Allen & Company Incorporated provides financial advisory services to
Launch. Pursuant to this letter agreement, Launch issued Allen &
Company Incorporated warrants to purchase 292,704 shares of common
stock in September 1997 and 287,501 shares of common stock in May 1998,
each at an exercise price of $1.25 per share. Of these, warrants to
purchase 35,709 shares of common stock are not exerciseable until the
warrants held by NBC Multimedia, Inc. and General Electric Capital
Corporation become exerciseable. In connection with further services
provided by Allen & Company Incorporated in connection with Launch's
sale of Series D Stock in February 1998, Launch paid $315,000 to Allen
& Company Incorporated. The Financial Advisory Services Letter
Agreement expires on September 8, 2000.
(4) On November 7, 1997, November 12, 1997 and November 20, 1997, Launch
issued four convertible subordinated promissory notes in the aggregate
amount of $1.0 million to the following accredited investors: Phoenix
Partners III and IV Limited Partnerships, Island Trading Co., Inc. and
Middlefield Ventures, Inc., an affiliate of Intel Corporation.
(5) On February 27, 1998 and May 29, 1998, Launch sold an aggregate of
3,345,227 shares of its Series D Stock to the following accredited
investors: Phoenix Partners III and IV Limited Partnerships, Intel
Corporation, General Electric Capital Corporation, NBC Multimedia,
Inc., Avalon Technology LLC and two affiliates of Arts Alliance,
Digital Ventures Limited and Goran Enterprises Limited, for aggregate
consideration of $25,535,323 of which $18,501,168 was paid in cash,
$3,534,155 represented cancellation of indebtedness and $3,500,000
represented strategic alliance and licensing and development rights. In
addition, on February 27, 1998, Launch issued warrants to purchase
474,432 shares of its Series D Stock to two accredited
investors -- General Electric Capital Corporation and NBC Multimedia,
Inc.
(6) From inception to January 31, 1999, Launch issued (a) options to
purchase an aggregate of 342,899 shares of common stock under the 1994
Stock Option Plan, of which options to purchase 22,839 shares have been
exercised and (b) options to purchase an aggregate of 326,799 shares of
II-2
<PAGE> 119
common stock under the 1998 Stock Option Plan, of which options to
purchase 712 shares have been exercised.
(7) On February 15, 1999, Launch entered into a note purchase agreement in
which it agreed to issue convertible subordinated promissory notes to
Avalon Technology LLC, an 8.6% stockholder, and Goran Enterprises
Limited, a 12.7% stockholder, for an aggregate purchase price of $1.5
million. The notes accrue interest at 8.5% per annum from the issuance
date and are due February 29, 2000. The notes automatically convert
into shares of Launch stock upon the earlier of (a) Launch's
consummation of an initial public offering with a sales price per share
of at least $10.00 and aggregate gross proceeds to Launch of at least
$15.0 million, (b) an acquisition transaction in which the stockholders
of Launch prior to such transaction own less than 50% of the voting
securities of the surviving entity after such transaction or (c)
February 29, 2000. If Launch consummates an initial public offering
prior to August 31, 1999, the notes and any accrued interest thereon
automatically convert to common stock at a per share price equal to 80%
of the initial public offering price per share. If Launch does not
consummate an initial public offering by August 31, 1999, then, at the
option of the holder which may be exercised at any time between August
31, 1999 and February 29, 2000, the notes and any accrued interest
thereon are convertible into Series D Stock at a per share price equal
to $7.65. If the conversion occurs in connection with an acquisition
transaction, the notes and any accrued interest thereon automatically
convert to Series D Stock at a per share price equal to $7.65.
There were no underwriters employed in connection with any of the
transactions set forth in Item 26.
For additional information concerning these equity investment transactions,
please see the section entitled "Certain Transactions" in the prospectus.
The issuances described in Items 26(a)(1) through 26(a)(7) were deemed
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 26(a)(7) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention 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 were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Launch or had access, through
employment or other relationships, to such information.
II-3
<PAGE> 120
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
2.1 Exchange Agreement by and among Launch, New Launch Media and
various partners of AreohveeOnline Partnership dated January
15, 1999.
3.1+ Amended and Restated Certificate of Incorporation of Launch,
as amended to date.
3.2+ Restated Certificate of Incorporation of Launch, as proposed
to be filed.
3.3+ Bylaws of Launch.
4.1 Second Amended and Restated Investors Rights Agreement dated
February 27, 1998, as amended to date.
4.2 Second Amended and Restated Co-Sale Agreement dated February
27, 1998, as amended to date.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1994 Stock Option Plan.
10.2+ 1998 Stock Option Plan.
10.3+ 1999 Employee Stock Purchase Plan.
10.4 Form of Indemnity Agreement.
10.5++ Strategic Alliance Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.6++ NBC-IN Content Provider Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.7++ Architectural Development and Assistance Agreement between
Launch and Intel Corporation dated November 13, 1998.
10.8++ Software License and Development Agreement between Intel
Corporation and Launch dated as of February 27, 1998.
10.9++ Anchor Tenant Agreement by and between America Online, Inc.
and Launch dated as of February 1, 1998
10.10 Standard Industrial/Commercial Multi-Tenant
Lease -- Modified Net between Pennsylvania Group, Ltd. and
The Welk Group, Inc. dated August 1, 1997.
10.11 American Industrial Real Estate Association Standard
Sublease between The Welk Group, Inc. and Launch dated April
14, 1998.
10.12+ Standard Form of Office Lease between Cityspire Centre
L.L.C. and Intershoe, Inc. dated January 22, 1997.
10.13 Sublease Agreement between Intershoe, Inc. and Launch dated
October 1998.
10.14 Securities Purchase Agreement dated February 27, 1998, as
amended to date.
10.15 Warrant to Purchase Series D Preferred Stock issued to NBC
Multimedia dated February 27, 1998.
10.16 Warrant to Purchase Series D Preferred Stock issued to
General Electric Capital Corporation dated February 27,
1998.
10.17 Warrant Certificate issued to Allen & Company Incorporated
dated September 8, 1997, as adjusted May 29, 1998.
10.18 Note Purchase Agreement by and among Avalon Technology LLC,
Goran Enterprises Limited and Launch dated as of February
15, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
</TABLE>
II-4
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
23.2 Consent of Moss Adams LLP.
23.3+ Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
+ To be filed by amendment
++ Confidential Treatment has been requested for certain portions of this
agreement.
ITEM 28. UNDERTAKINGS
Launch 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.
Insofar as indemnification by Launch for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Launch pursuant to the provisions described in Item 14 above or otherwise,
Launch has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Launch of
expenses incurred or paid by a director, officer, or controlling person of
Launch 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, Launch 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 Securities Act and will be governed by
the final adjudication of such issue.
Launch hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Launch pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 122
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Launch
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of Santa
Monica, State of California, on the 16th day of February, 1999.
LAUNCH MEDIA, INC.
By: /s/ DAVID B. GOLDBERG
-----------------------------------
David B. Goldberg
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Robert D. Roback and Jeffrey M.
Mickeal, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID B. GOLDBERG Chief Executive Officer February 16, 1999
- ------------------------------------------------ and Director (Principal
David B. Goldberg Executive Officer)
/s/ ROBERT D. ROBACK President and Director February 16, 1999
- ------------------------------------------------
Robert D. Roback
</TABLE>
II-6
<PAGE> 123
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JEFFREY M. MICKEAL Chief Financial Officer February 16, 1999
- ------------------------------------------------ and Secretary (Principal
Jeffrey M. Mickeal Financial and Accounting
Officer)
/s/ THOMAS C. HOEGH Director February 16, 1999
- ------------------------------------------------
Thomas C. Hoegh
Director February , 1999
- ------------------------------------------------
Sergio S. Zyman
/s/ RICHARD D. SNYDER Director February 16, 1999
- ------------------------------------------------
Richard D. Snyder
</TABLE>
II-7
<PAGE> 124
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
2.1 Exchange Agreement by and among Launch, New Launch Media and
various partners of AreohveeOnline Partnership dated January
15, 1999.
3.1+ Amended and Restated Certificate of Incorporation of Launch,
as amended to date.
3.2+ Restated Certificate of Incorporation of Launch, as proposed
to be filed.
3.3+ Bylaws of Launch.
4.1 Second Amended and Restated Investors Rights Agreement dated
February 27, 1998, as amended to date.
4.2 Second Amended and Restated Co-Sale Agreement dated February
27, 1998, as amended to date.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1994 Stock Option Plan.
10.2+ 1998 Stock Option Plan.
10.3+ 1999 Employee Stock Purchase Plan.
10.4 Form of Indemnity Agreement.
10.5++ Strategic Alliance Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.6++ NBC-IN Content Provider Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.7++ Architectural Development and Assistance Agreement between
Launch and Intel Corporation dated November 13, 1998.
10.8++ Software License and Development Agreement between Intel
Corporation and Launch dated as of February 27, 1998.
10.9++ Anchor Tenant Agreement by and between America Online, Inc.
and Launch dated as of February 1, 1998
10.10 Standard Industrial/Commercial Multi-Tenant
Lease -- Modified Net between Pennsylvania Group, Ltd. and
The Welk Group, Inc. dated August 1, 1997.
10.11 American Industrial Real Estate Association Standard
Sublease between The Welk Group, Inc. and Launch dated April
14, 1998.
10.12+ Standard Form of Office Lease between Cityspire Centre
L.L.C. and Intershoe, Inc. dated January 22, 1997.
10.13 Sublease Agreement between Intershoe, Inc. and Launch dated
October 1998.
10.14 Securities Purchase Agreement dated February 27, 1998, as
amended to date.
10.15 Warrant to Purchase Series D Preferred Stock issued to NBC
Multimedia dated February 27, 1998.
10.16 Warrant to Purchase Series D Preferred Stock issued to
General Electric Capital Corporation dated February 27,
1998.
10.17 Warrant Certificate issued to Allen & Company Incorporated
dated September 8, 1997, as adjusted May 29, 1998.
10.18 Note Purchase Agreement by and among Avalon Technology LLC,
Goran Enterprises Limited and Launch dated as of February
15, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
</TABLE>
<PAGE> 125
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
23.2 Consent of Moss Adams LLP.
23.3+ Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
+ To be filed by amendment
++ Confidential Treatment has been requested for certain portions of this
agreement.
<PAGE> 1
EXHIBIT 2.1
NEW LAUNCH MEDIA, INC.
EXCHANGE AGREEMENT
This EXCHANGE AGREEMENT is made as of January 15, 1999, by and among New
Launch Media, Inc., a Delaware corporation (the "Company"), Launch Media, Inc.,
a Delaware corporation ("Launch") and the undersigned partners (each a "Partner"
and collectively the "Partners") of AreohveeOnline Partnership, a California
partnership ("AO").
R E C I T A L S
A. The current respective percentage interest of each Partner in AO (the
"Interests"), is set forth opposite such Partner's name on Exhibit A hereto.
B. The Company was formed with the object and purpose, and the nature of
business to be conducted and promoted by the Company is, to exchange along with
the outstanding shares of Launch, the Interests, all in a transaction intended
to qualify as tax free under Section 351 of the Internal Revenue Code of 1986,
as amended (the "Section 351 Transaction"). The Company is also expected to
operate the business currently operated by AO and Launch.
C. It is intended by the parties that, as of the date on which the
transactions contemplated hereby close (the "Closing Date"), the Partners of AO
will have agreed, according to the terms of their respective partnership
agreement, to enter into this Agreement as part of the Section 351 Transaction
in which the Interests of the Partners in AO will be transferred to the Company
in exchange for (i) an aggregate of 4,377,782 shares of Company Stock of the
Company ("collectively, the Company Stock"), and (ii) an aggregate of $301,994
in cash as more fully set forth on Exhibit A hereto.
D. The stockholders of Launch have agreed to enter into a similar
exchange agreement as part of the Section 351 Transaction in which their
respective shares of Launch common stock, Launch preferred stock and other
Launch securities will be exchanged for equal amounts of Common Stock and/or
Preferred Stock and/or other Launch securities of the Company (the "Shares").
The exchange of securities by the Launch securityholders will occur
simultaneously with the Exchange (as defined below) and is an express condition
to the closing of the Exchange (as defined below).
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A G R E E M E N T
The parties hereto hereby agree as follows:
1. Exchange.
1.1 Issuance of the Shares. Subject to the terms and conditions
hereof, the Company will, in the Section 351 Transaction, (i) issue to each of
the Partners that number of shares of Company Common Stock and (ii) a check
representing the amount of cash set forth opposite his or her name on Exhibit A
hereto in exchange for the transfer by the Partner of his or her Interest to the
Company (the "Exchange").
2. Closing Date; Delivery.
2.1 Closing Date.
(a) The closing of the Exchange shall be held at the
office of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto,
California, on the Closing Date, which shall be January 29, 1999, or at such
other time and place as the Company and a majority of the Partners may agree in
writing.
(b) The closing referred to in subsection (a) above is
hereinafter referred to as the "Closing."
(c) Subject to the terms of this Agreement, at the
Closing, the Company will deliver to each Partner (i) a certificate representing
the number of shares of Company Common Stock and (ii) a check representing the
amount of cash set forth opposite his or her name on Exhibit A hereto, against
delivery and exchange of documentation reasonably satisfactory to the Company
representing the transfer of such Partner's Interest to the Company.
(d) Despite anything in this Agreement to the contrary,
the rights and obligations of the parties to this Agreement under Section 2.1(c)
are conditional upon the occurrence of the Closing and satisfaction or waiver of
all conditions of Closing set forth in Section 7 of this Agreement and are and
will be of no force and effect until the occurrence of the Closing.
2.2 Escrow. At the Closing, the Company will deduct from the
number of shares of Company Common Stock deliverable to the Partners pursuant to
Section 2.1(c), and will deposit into escrow (the "Escrow") a certificate
representing twenty percent (20%) of the shares of Company Common Stock issuable
in the Exchange to such Partners rounded down to the nearest whole share (the
"Escrow Shares"). The Escrow Shares shall be held by Gray Gary Ware &
Freidenrich LLP (or such other institution as shall be agreed upon by the
Company and the Partner Representative (as defined in Section 9.7)) as escrow
agent (the "Escrow Agent"), in accordance with and subject to the provisions of
an Escrow Agreement substantially in the form of Annex 2.2 (the "Escrow
Agreement"). The Escrow Shares shall be held as collateral for the
indemnification obligations under Section 9 hereof.
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3. Representations and Warranties of AO. Except as set forth in the
disclosure schedule (which disclosure shall be organized into numbered sections
corresponding with the section numbers of this Agreement) delivered by AO to the
Company on or before the date of this Agreement and attached hereto as Annex 3
(the "AO Disclosure Schedule") AO and the Partners hereby represent and warrant
to the Company that:
3.1 Organization, Standing and Power; Qualification;
Subsidiaries. AO is a general partnership duly organized, validly existing and
in good standing under the laws of the State of California; has all requisite
power to own, lease and operate its properties and to carry on its business as
currently being conducted and as currently proposed to be conducted; is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would have a material adverse effect on the
business, assets (including intangible assets), properties, liabilities
(contingent or otherwise), financial condition, operations, or results of
operation (a "Material Adverse Effect") of AO; and AO does not directly or
indirectly own any equity or similar interest in, or any interest convertible or
exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity.
Notwithstanding the foregoing sentence, the cancellation or the restriction of
the right to use up to four hundred (400) of the music videos in AO's tape
library as of the Closing shall not be a Material Adverse Effect as defined
herein. AO has delivered true and correct copies of its partnership formation
and partnership rights related documentation to the Company (the "Partnership
Documentation"). The Partners are not in violation of any of the provisions of
such documentation.
3.2 AO Partnership Structure.
(a) All of the outstanding interests in AO are held by
those persons set forth in Section 3.2 of the AO Disclosure Schedule (which list
sets forth the interests held by each such person). All interests have been duly
authorized and validly issued, were issued in compliance with state and federal
securities laws, and are subject to no preemptive rights or rights of first
refusal created by statute, or any agreement to which AO or any Partner is a
party or by which it or they are bound.
(b) Except as set forth in Section 3.2(a) or Section 3.2
of the AO Disclosure Schedule there are no securities or interests in any type
of AO nor are there any outstanding subscriptions, options, puts, calls, rights,
or other commitments or agreements of any character to which AO or any Partner
is a party or by which it or they are obligating AO or any Partner to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any interest in AO or obligating AO or any Partner to
grant, extend, change the price of, or otherwise amend or enter into any such
option, call, right, commitment or agreement. There are no contracts,
commitments or agreements relating to voting, purchase or sale of the Interests
(i) between or among AO and any of its Partners or the holders of any interest
in AO, or (ii) between or among any Partner or the holders of any interest in
AO.
3.3 Authority; No Conflict; Required Filings and Consents.
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(a) The Partners have all requisite power and authority
to enter into this Agreement and the other documents required to be executed and
delivered by AO hereunder, (collectively, the "AO Transaction Documents"), and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the other AO Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary action on the part of the Partners. This Agreement
and the other AO Transaction Documents have been duly executed and delivered by
the Partners and constitute the valid and binding obligations of AO and the
Partners, enforceable against AO and the Partners in accordance with their
respective terms, except as such enforceability may be limited (i) by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to creditors' rights generally and (ii) general principles of equity, regardless
of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery by the Partners of this
Agreement and the other AO Transaction Documents do not, and the consummation of
the transactions contemplated hereby and thereby will not, (i) conflict with, or
result in any violation or breach of any provision of any partnership documents,
(ii) result in any violation or breach of, or constitute (with or without notice
or lapse of time, or both) a default under, or give rise to a right of
termination, cancellation or acceleration of any material obligation or loss of
any material benefit under, any note, bond, mortgage, indenture, lease, contract
or other agreement or obligation to which AO or the Partners are a party or by
which AO or any of its properties or assets may be bound, or (iii) conflict with
or violate any permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to AO or any of its
properties or assets, except in the case of (ii) and (iii) for any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which would not be reasonably likely to have a Material Adverse Effect on AO or
to interfere with the consummation by AO of its obligations under this Agreement
and the other AO Transaction Documents.
(c) The Interests are the only interests entitled to
vote with respect to the Exchange being required. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity (as defined in Section 10.2) is required by or with respect to AO in
connection with the execution and delivery of this Agreement or the other AO
Transaction Documents or the consummation of the transactions contemplated
hereby or thereby except for items described in Section 3.3 of the AO Disclosure
Schedule, and such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not be reasonably likely to
have a Material Adverse Effect on AO or materially and adversely affect the
ability of AO to consummate the transactions contemplated by this Agreement in
accordance with its terms.
3.4 Financial Statements. AO has delivered to the Company copies
unaudited financial statements as of, and for the partial year ended, December
31, 1997 and its interim financial statements as of, and for the year ended
December 31, 1998 (collectively the "AO Financial Statements"). The AO Financial
Statements present, and will present, fairly in all material respects the
financial position of AO as of the respective dates and the results of AO's
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operations and cash flows for the periods indicated, except that the AO
Financial Statements are subject to audit adjustments which will not be material
in amount.
3.5 Absence of Liabilities. AO does not have any liabilities,
either accrued or contingent (whether or not required to be reflected in
financial statements in accordance with GAAP), and whether due or to become due,
except for (i) liabilities reflected on AO's balance sheet as of December 31,
1998 ("the AO Balance Sheet"), (ii) liabilities incurred in the ordinary course
of business that either are not required to be set forth on the AO Balance Sheet
or were incurred thereafter, and (iii) other liabilities listed in Section 3.5
of the AO Disclosure Schedule.
3.6 Absence of Certain Changes or Events. Since December 31,
1998, AO has conducted its business in the ordinary course and in a manner
consistent with past practices, and has not:
(a) to its knowledge, suffered any event or occurrence
that has had or could reasonably be expected to have a Material Adverse Effect
on AO;
(b) suffered any damage, destruction or loss, whether
covered by insurance or not, adversely affecting its properties or business;
(c) granted any increase in the compensation payable or
to become payable by AO to its Partners or employees;
(d) made any distribution or distributions to its
Partners which in the aggregate exceed a total of $15,000 per month;
(e) issued any interest rights, or options for, or
entered into any commitment in AO;
(f) made any change in the accounting methods or
practices it follows, whether for general financial or tax purposes, or any
change in depreciation or amortization policies or rates;
(g) sold, leased, abandoned or otherwise disposed of any
real property or machinery, equipment or other operating property;
(h) sold, assigned, transferred, licensed or otherwise
disposed of any patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright), invention, work of
authorship, process, know-how, formula or trade secret or interest thereunder or
other material intangible asset, except for non-exclusive licenses which were
granted in the ordinary course of business and in a manner consistent with past
practices;
(i) other than this Agreement entered into any material
commitment or transaction (including without limitation any borrowing or capital
expenditure);
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(j) incurred any liability, except in the ordinary
course of business and consistent with past practice;
(k) permitted or allowed any of its property or assets
to be subjected to any mortgage, deed of trust, pledge, lien, security interest
or other encumbrance of any kind, except for liens for current taxes not yet due
and purchase money security interests incurred in the ordinary course of
business;
(l) made any capital expenditure or commitment for
additions to property, plant or equipment individually in excess of $10,000 or
in the aggregate in excess of $25,000;
(m) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets to, or entered into any agreement
or arrangement with any of its Partners or any affiliate of any of the Partners,
other than employee compensation and benefits and advances against or
reimbursement of employment related business expenses incurred in the ordinary
course of business; or
(n) agreed to take any action described in this Section
3.6 or which to its knowledge would constitute a breach of any of the
representations or warranties of AO contained in this Agreement.
3.7 Tangible Assets and Real Property.
(a) AO owns or leases all tangible assets and properties
which are reasonably necessary for the conduct of its business as currently
conducted or which are reflected on the AO Balance Sheet or acquired since the
date of the AO Balance Sheet ("the Material Tangible Assets"). The Material
Tangible Assets are in good operating condition and repair ordinary wear and
tear excepted.
(b) AO has good and marketable title to all Material
Tangible Assets that it owns, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except for liens for current
taxes not yet due and payable and purchase money security interests.
(c) Assuming the due execution and delivery thereof by
the other parties thereto, all leases of Material Tangible Assets to which AO is
a party are in full force and effect and are valid, binding and enforceable in
accordance with their respective terms, except as such enforceability may be
limited by (i) bankruptcy laws and other similar laws affecting creditors'
rights generally and (ii) general principles of equity, regardless of whether
asserted in a proceeding in equity or at law. True and correct copies of all
such leases have been provided to the Company.
(d) AO owns no real property. The AO Disclosure Schedule
sets forth a true and complete list of all real property leased by AO.
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3.8 Intellectual Property.
(a) AO owns, or is licensed or otherwise possesses
legally enforceable rights to use, only the intellectual property described in
Section 3.8(a) of the AO Disclosure Schedule (all of which are referred to as
the "AO Intellectual Property Rights").
(b) Section 3.8 of the AO Disclosure Schedule contains
an accurate and complete description of (i) all registered trademarks, trade
names, service marks and copyrights included in the AO Intellectual Property
Rights, including the jurisdictions in which each such AO Intellectual Property
Right has been issued or registered or in which any such application for such
issuance and registration has been filed, (ii) all licenses, sublicenses,
distribution agreements and other agreements to which AO is a party and pursuant
to which any person is granted rights with respect to any AO Intellectual
Property Rights or has the right to manufacture, reproduce, market or exploit
any product of AO (an "AO Product") or any adaptation, translation or derivative
work based on any AO Product or any portion thereof, (iii) all licenses,
sublicenses and other agreements to which AO is a party and pursuant to which AO
is authorized to use any third party technology, trade secret, know-how,
process, patent, trademark or copyright, including software ("Licensed
Intellectual Property"), except for freely transferable "shrink wrap" software
for which no royalties are currently owed or in the future may be owed, and (iv)
all joint development agreements to which AO is a party.
(c) AO is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any license, sublicense or other agreement
relating to the AO Intellectual Property Rights or Licensed Intellectual
Property.
(d) AO (i) has not received notice that it has been sued
in any suit, action or proceeding which involves a claim of infringement of any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party; (ii) has not received any communications alleging that
the Company has violated, or by conducting its business as proposed, would
violate any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party; (iii) has no reason to believe that the
manufacturing, marketing, licensing or sale of any AO Product or the provision
of services in the course of AO's business infringes any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party; and (iv) has no knowledge of any claim challenging or questioning the
validity or effectiveness of any license or agreement relating to any AO
Intellectual Property Rights or Licensed Intellectual Property.
(e) All designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any AO Product at any stage of its development or created in the
course of providing services to customers of AO (the "AO Components") were
written, developed and created solely and exclusively by Partners or employees
of AO without the assistance of any third party or were created by third parties
who assigned ownership of their rights with respect thereto to AO by
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means of valid and enforceable agreements, copies of which have been provided to
the Company.
3.9 Bank Accounts. Section 3.9 of the AO Disclosure Schedule
sets forth the names and locations of all banks and other financial institutions
at which AO presently maintains accounts of any nature, the type of accounts
maintained at each such institution and the names of all persons authorized to
draw thereon or make withdrawals therefrom.
3.10 Contracts.
(a) Except as set forth in Section 3.10 of the AO
Disclosure Schedule, AO is not a party or subject to any agreement, obligation
or commitment, written or oral:
(i) that calls for any fixed and/or contingent
payment or expenditure or any related series of fixed and/or contingent payments
or expenditures by or to AO totaling more than $25,000 in any calendar year;
(ii) with agents, advisors, salesmen, sales
representatives, independent contractors or consultants that are not cancelable
by it on no more than thirty (30) days' notice and without liability, penalty or
premium;
(iii) that restricts AO from carrying on anywhere
in the world its business or any portion thereof as currently conducted;
(iv) to provide funds to or to make any investment
in any other person or entity (in the form of a loan, capital contribution or
otherwise);
(v) with respect to obligations as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any other person or entity;
(vi) for any line of credit, standby financing,
revolving credit or other similar financing arrangement;
(vii) with any distributor, original equipment
manufacturer, value added remarketer or other person for the distribution of any
of the AO Products; or
(viii) that is otherwise material to the business
or financial results of operations of AO.
(b) To AO's knowledge, no party to any contract,
agreement or instrument described in Section 3.7((c)), 3.7((d)) or 3.10((a)) has
expressed its intention to cancel, withdraw, modify or amend such contract,
agreement or instrument.
(c) AO is not in material default under or in material
breach or violation of, nor is there any valid basis for any claim of material
default by AO under, or material breach or violation by AO of, any contract,
commitment or restriction to which AO is a
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party or by which AO or any of its properties or assets is bound or affected. To
AO's knowledge, no other party is in material default under or in material
breach or violation of, nor, to AO's knowledge, is there any valid basis for any
claim of material default by any other party under, or any material breach or
violation by any other party of, any contract, commitment, or restriction to
which AO is a party or by which AO or any of its properties or assets is bound
or affected.
3.11 Employee Benefit Plans. AO has no employee benefit plans,
bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance or other similar employee benefit plans.
3.12 Compliance with Laws. AO has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any statute, law or regulation applicable to the
ownership or operation of its business, including, without limitation, United
States statutes, laws and regulations governing the license and delivery of
technology and products abroad by persons subject to the jurisdiction of the
United States.
3.13 Employees and Consultants. Section 3.13 of the AO
Disclosure Schedule contains a list of the names of all present employees and
consultants of AO, their salaries or wages, other compensation and dates of
employment and positions.
3.14 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal, or to
AO's knowledge, threatened, against AO or any of its properties or Partners.
There is no judgment, decree or order against AO or, to AO's knowledge, any of
its Partners that could prevent, enjoin or materially alter or delay any of the
transactions contemplated by this Agreement, or that could reasonably be
expected to have a Material Adverse Effect on AO.
3.15 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon AO which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current business practice of AO, any acquisition of property by AO, or the
conduct of business by AO as currently conducted or as currently proposed to be
conducted.
3.16 Governmental Authorization. AO has obtained each
governmental consent, license, permit, grant or other authorization of a
Governmental Entity that is required for the operation of the business of AO as
currently conducted (collectively, the "AO Authorizations"), and all such AO
Authorizations are in full force and effect.
3.17 Insurance. Section 3.17 of the AO Disclosure Schedule
contains a list and description of all insurance policies of AO. There is no
material claim pending under any of such policies as to which coverage has been
questioned, denied or disputed by the underwriters of such policies. All
premiums due and payable under all such policies have been paid, and AO is
otherwise in compliance with the terms of such policies. AO has no knowledge of
any threatened termination of, or material premium increase with respect to, any
of such policies.
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3.18 Indemnification Claims. Section 3.17 of the AO Disclosure
Schedule sets forth a list of all persons who are parties to Partner and/or AO
employee indemnification agreements with AO (the "Indemnification Agreements").
Except as set forth in Section 3.17 of the AO Disclosure Schedule, there are no
outstanding claims under any of the Indemnification Agreements or under any
indemnification rights granted pursuant to any partnership related documentation
of AO (as currently in effect); and to AO's knowledge, there are no facts or
circumstances that either now, or with the passage of time, could reasonably be
expected to provide a basis for a claim under any such Indemnification Agreement
or under any indemnification rights granted pursuant to any partnership related
documentation of AO.
3.19 No Brokers. Except as set forth in Section 3.19 of the AO
Disclosure Schedule, AO is not obligated for the payment of fees or expenses of
any broker, finder or other person in connection with the origination,
negotiation or execution of this Agreement or the other AO Transaction Documents
or any transaction contemplated hereby or thereby. AO agrees to indemnify and
hold the Company and its affiliates harmless from and against any and all
claims, liabilities or obligations with respect to any such fees, commissions or
expenses.
3.20 Payments Resulting from Exchanges. Neither the consummation
nor announcement of any transaction contemplated by this Agreement will (either
alone or upon the occurrence of any additional or further acts or events) result
in any material payment (whether of severance pay or otherwise) becoming due
from AO to any Partner, employee or former employee thereof under (i) any
management, employment, deferred compensation, severance (including any payment,
right or benefit resulting from a change in control), bonus or other contract
for personal services with any Partner or employee or any plan, agreement or
understanding similar to any of the foregoing, or any "rabbi trust" or similar
arrangement, or (ii) a material benefit under any AO Employee Plan being
established or becoming accelerated, vested or payable.
3.21 Interested Party Transactions. To the knowledge of AO, no
Partner or employee of AO has any interest in (i) any material equipment or
other property or asset, real or personal, tangible or intangible, including,
without limitation, any of the AO Intellectual Property Rights, used in
connection with or pertaining to the business of AO, (ii) any creditor,
supplier, customer, manufacturer, agent, representative, or distributor of any
of the AO Products, (iii) any entity that competes with AO, or with which AO is
affiliated or has a business relationship, or (iv) any agreement, obligation or
commitment, written or oral, to which AO is a party; provided, however, that no
such person shall be deemed to have any interest described in clauses (i)
through (iv) of this Section 3.21 solely by virtue of such person's ownership of
less than five percent (5%) of the outstanding stock or debt securities of any
publicly held company, the stock or debt securities of which are traded on a
recognized stock exchange or on any of the Nasdaq Stock Markets.
3.22 No Existing Discussions. As of the date hereof, AO is not
engaged, directly or indirectly, in any existing discussions or negotiations
with any other party with respect to an Acquisition Proposal (as defined in
Section 6.1).
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3.23 No Misrepresentation. No representation or warranty by AO
in this Agreement, and no statement, certificate or schedule furnished or to be
furnished by or on behalf of AO pursuant to this Agreement, when taken together,
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make such
statements, in light of the circumstances under which they were made, not
misleading.
4. Representations And Warranties Of the Company and Launch.
Except as set forth in the disclosure schedule delivered by the Company
to AO on or before the date of the Closing and attached hereto as Annex 4 (the
"The Company Disclosure Schedule"), the Company and Launch jointly and severally
represents and warrants to AO and each of its Partners as follows:
4.1 Organization. The Company is a Delaware corporation duly
organized, validly existing and in good standing under the laws of Delaware, has
all requisite corporate power to own, lease and operate its property and to
carry on its business as now being conducted and as proposed to be conducted,
and is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a Material Adverse Effect on the Company.
4.2 The Company Capital Structure.
(a) The entire duly authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, $0.001 par value, and
32,902,029 shares of Preferred Stock, $0.001 par value, of which 1,900,800
shares have been designated Series A Stock, 3,064,102 shares have been
designated Series B Stock, 7,900,117 shares have been designated Series C Stock
and 20,037,010 shares have been designated Series D Stock.
(b) As of the Closing, 4,671,663 shares of Common Stock,
1,900,800 shares of Series A Stock, 3,064,102 shares of Series B Stock,
7,900,117 shares of Series C Stock and 16,726,133 shares of Series D Stock will
be issued and outstanding.
(c) Except for (i) the conversion privileges of the
Series A, Series B, Series C and Series D stock (ii) 5,401,512 shares of Common
Stock reserved for issuance pursuant to the Company's 1994 and 1998 Stock Option
Plans, as amended (the "Incentive Plans"), of which 2,647,500 shares are subject
to outstanding options and 2,754,012 shares are available for future grant,
(iii) options to purchase 47,000 shares of Common Stock of the company issued
separately from the Incentive Plans, (iv) warrants to purchase 2,901,028 shares
of Common Stock issued pursuant to an Agreement with Allen & Company,
Incorporated (the "Allen & Co. Warrants"), (v) warrants to purchase 2,072,163
shares of Series D Stock to NBC and warrants to purchase 300,000 shares of
Series D Stock to GE Capital, respectively and (vi) the rights provided in the
Investors Rights Agreement, there are not other outstanding shares of capital
stock, options, warrants or rights or outstanding rights of first refusal,
preemptive rights or other rights, options, warrants, conversion rights, or
other agreements either directly or indirectly of the purchase or acquisition
from the Company of any shares of its capital stock. The rights, privileges and
preferences of the Series A, Series B, Series C and Series D Stock will
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be as set forth in the Company's Certificate of Incorporation. Assuming all of
the interests described in 4.2(b) and 4.3(c)(i)-(vi) inclusive are converted to
Common Stock, the total number of shares of the Company's issued and outstanding
Common Stock is 44,984,518. To the knowledge of the Company, there are no voting
trusts, proxies or other agreements or understanding with respect to the shares
of capital stock of the Company.
(d) The shares of the Company Common Stock to be issued
pursuant to the Exchange, when issued, will be duly authorized, validly issued,
fully paid, and nonassessable, and free of and not subject to any preemptive
rights or rights of first refusal and (subject to the accuracy of
representations and warranties to be obtained from AO shareholders) will be
issued in compliance with all state and federal securities laws.
4.3 Authority; No Conflict; Required Filings and Consents.
(a) The Company has all requisite corporate power and
authority to enter into this Agreement and the other documents required to be
executed and delivered by the Company hereunder (collectively, the "The Company
Transaction Documents") and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other Company
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of the Company. This Agreement and the Company Transaction Documents
to which they are parties have been duly executed and delivered by the Company
and constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, except as such enforceability may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally and
(ii) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law.
(b) The execution and delivery by the Company of this
Agreement and the other the Company Transaction Documents do not, and the
consummation of the transactions contemplated hereby or thereby will not, (i)
conflict with, or result in any violation or breach of any provision of the
Certificate of Incorporation or Bylaws of the Company , (ii) result in any
violation or breach of, or constitute (with or without notice or lapse of time,
or both) a default, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any material benefit under, any note,
bond, mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which the Company is a party or by which either of them or any of
their properties or assets may be bound, or (iii) conflict with or violate any
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its or their
properties or assets, except in the case of (ii) and (iii) for any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which would not be reasonably likely to have a Material Adverse Effect on the
Company, taken as a whole, and that would not interfere with the consummation by
the Company of its obligations under this Agreement and the other the Company
Transaction Documents.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to the
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Company or any of its subsidiaries in connection with the execution and delivery
of this Agreement or the other the Company Transaction Documents or the
consummation of the transactions contemplated hereby or thereby, except for such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal and state securities laws
and the laws of any foreign country, and such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
be reasonably likely to have a Material Adverse Effect on the Company.
4.4 Financial Statements.
The Company and Launch have delivered to each Purchaser balance sheets
and statement of stockholder's equity of Launch at December 31, 1996 and at
December 31, 1997, audited statements of operations and cash flows of Launch for
the years ended December 31, 1996 and December 31, 1997, an unaudited balance
sheet and statement of stockholder's equity of Launch at October 31, 1998 and
unaudited statements of operations and cash flows of Launch for the ten-month
period ended October 31, 1998 (collectively, the "Launch Financial Statements").
The Launch Financial Statements are set forth as Attachment 4.4 to the Company
Disclosure Schedule. The Launch Financial Statements are complete and correct in
all material respects, have been prepared from, and are consistent with, the
books and records of Launch, fairly present the financial condition of Launch on
such dates and the results of operations for the periods designated therein and
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated. The Launch
Financial Statements accurately set out and describe the financial conditions
and operating results of Launch as of the dates, and during the periods,
indicated therein (subject, in the case of unaudited financial statements, to
normal non-material year-end audit adjustments and the omission of footnotes).
Since October 31, 1998, there has been no material adverse change in the
business, financial condition or results of operations of Launch.
4.5 Absence of Undisclosed Liabilities. Except as disclosed in
writing to AO or as otherwise disclosed in the Launch Financial Statements,
Launch and its Subsidiaries do not have any liabilities, either accrued or
contingent (whether or not required to be reflected in financial statements in
accordance with GAAP), and whether due or to become due, which individually or
in the aggregate would be reasonably likely to have a Material Adverse Effect on
Launch other than (i) liabilities reflected in the Launch Balance Sheet, (ii)
liabilities specifically described in this Agreement, and (iii) normal or
recurring liabilities incurred since October 31, 1998, in the ordinary course of
business consistent with past practices.
4.6 Absence of Certain Changes or Events. Since October 31,
1998, Launch has conducted its business only in the ordinary course and in a
manner consistent with past practice and, since such date, there has not been:
(i) any event or occurrence that has had a Material Adverse Effect on Launch;
(ii) any damage, destruction or loss (whether or not covered by insurance) with
respect to Launch having a Material Adverse Effect on Launch; (iii) any material
change by Launch in its accounting methods, principles or practices to which AO
has not previously consented in writing; or (iv) any revaluation by Launch of
any of its assets having a Material Adverse Effect on Launch.
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4.7 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending, or to the knowledge of Launch, threatened,
against Launch which is reasonably likely to have a Material Adverse Effect on
Launch, or which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay any of the transactions contemplated by this Agreement.
4.8 Organization, Standing and Power; Qualification;
Subsidiaries. Launch is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware; has all requisite power
to own, lease and operate its properties and to carry on its business as
currently being conducted and as currently proposed to be conducted; is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect on Launch
(other than New York); and Launch does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for any equity or similar interest in, any corporation, partnership,
joint venture or other business association or entity. Launch has delivered true
and correct copies of its corporate formation and stockholder rights related
documentation to AO (the "Stockholder Documentation"). Launch is not in
violation of any of the provisions of such documentation.
4.9 Authority; No Conflict; Required Filings and Consents.
(a) Launch has all requisite power and authority to
enter into this Agreement and the other documents required to be executed and
delivered by Launch hereunder, (collectively, the "Launch Transaction
Documents"), and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the other Launch Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary action on the part of Launch.
This Agreement and the other Launch Transaction Documents have been duly
executed and delivered by Launch and constitute the valid and binding
obligations of Launch, enforceable against Launch in accordance with their
respective terms, except as such enforceability may be limited (i) by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to creditors' rights generally and (ii) general principles of equity, regardless
of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery by Launch of this
Agreement and the other Launch Transaction Documents do not, and the
consummation of the transactions contemplated hereby and thereby will not, (i)
conflict with, or result in any violation or breach of any provision of any
Launch Transaction Documents, (ii) result in any violation or breach of, or
constitute (with or without notice or lapse of time, or both) a default under,
or give rise to a right of termination, cancellation or acceleration of any
material obligation or loss of any material benefit under, any note, bond,
mortgage, indenture, lease, contract or other agreement or obligation to which
Launch is a party or by which Launch or any of its properties or assets may be
bound, or (iii) conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Launch or any of its properties or assets, except in the case of
(ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which would not be reasonably likely to have a
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Material Adverse Effect on Launch or to interfere with the consummation by
Launch of its obligations under this Agreement and the other Launch Transaction
Documents.
(c) The Launch securityholders are the only
securityholders entitled to vote with respect to the Exchange being required. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity (as defined in Section 10.2) is required by
or with respect to Launch in connection with the execution and delivery of this
Agreement or the other Launch Transaction Documents or the consummation of the
transactions contemplated hereby or thereby except for items described in
Section 4.9 of the Launch Disclosure Schedule, and such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not be reasonably likely to have a Material Adverse Effect on Launch
or materially and adversely affect the ability of Launch to consummate the
transactions contemplated by this Agreement in accordance with its terms.
4.10 Compliance with Laws. Launch has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any statute, law or regulation applicable to the
ownership or operation of its business, including, without limitation, United
States statutes, laws and regulations governing the license and delivery of
technology and products abroad by persons subject to the jurisdiction of the
United States.
4.11 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Launch which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current business practice of Launch, any acquisition of property by Launch,
or the conduct of business by Launch as currently conducted or as currently
proposed to be conducted.
4.12 No Brokers. Neither the Company nor Launch is obligated for
the payment of fees or expenses of any broker, finder or other person in
connection with the origination, negotiation or execution of this Agreement or
the other Launch Transaction Documents or any transaction contemplated hereby or
thereby. The Company agrees to indemnify and hold Launch harmless from and
against any and all claims, liabilities or obligations with respect to any such
fees, commissions or expenses.
4.13 No Misrepresentation. No misrepresentation or warranty by
Launch in this Agreement, and no statement, certificate or schedule furnished or
to be furnished by or on behalf of the Company or Launch pursuant to this
Agreement, when taken together, contains any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary in
order to make such statements, in light of the circumstances under which they
were made, not misleading.
4.14 Registration Rights. No current holders of Common Stock
have registration rights for such Common Stock.
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5. Conduct of Business.
5.1 Covenants of AO by AO. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Closing, AO agrees (except to the extent that the Company shall
otherwise consent or request, in each case in writing) to carry on its business
in the usual, regular and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due, subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations when
due, and, to the extent consistent with such business, to use all reasonable
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
Partners and employees; provided, however, that with the prior written consent
of the Company, which shall not be unreasonably withheld, AO may reduce its
workforce, so long as AO does not terminate any of the Partners listed on Annex
7.2(e) hereto, which Partners the Company desires to retain after the Closing
Date, and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it.
AO shall promptly notify the Company of any event or occurrence not in the
ordinary course of business of AO where such event or occurrence would result in
a breach of any covenant of AO set forth in this Agreement or cause any
representation or warranty of AO set forth in this Agreement to be untrue as of
the date of, or giving effect to, such event or occurrence. Except as expressly
contemplated by this Agreement, AO shall not, without the prior written consent
of the Company:
(a) transfer or license to any person or entity or
otherwise extend, amend or modify any rights to the AO Intellectual Property
Rights other than in the ordinary course of business consistent with past
practices;
(b) make any distributions which in the aggregate exceed
$15,000 per month (whether in cash, property or otherwise), or issue any
additional partnership interests;
(c) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership or other business organization or division, or
otherwise acquire or agree to acquire any assets other than acquisitions
involving aggregate consideration of not more than $10,000 and inventory
purchased in the ordinary course of business consistent with past practices;
(d) sell, lease, license or otherwise dispose of any of
its properties or assets except for transactions entered into in the ordinary
course of business consistent with past practice;
(e) revalue any of its assets, including writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;
(f) incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt
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securities or guarantee any debt securities of others, other than indebtedness
incurred under outstanding lines of credit in the ordinary course of business
consistent with past practice;
(g) amend or propose to amend its partnership related
documentation;
(h) incur or commit to incur any individual capital
expenditure other than the existing commitments set forth in the AO Disclosure
Schedule;
(i) enter into or amend any agreements pursuant to which
any third party is granted exclusive marketing or manufacturing rights with
respect to any AO Product;
(j) amend or terminate any material contract, agreement
or license to which it is a party except in the ordinary course of business;
(k) waive or release any material right or claim, except
in the ordinary course of business;
(l) initiate any litigation or arbitration proceeding;
(m) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or penalties in
connection therewith), extend the statute of limitations with any tax authority
or file any pleading in court in any tax litigation or any appeal from an
asserted deficiency;
(n) change any of AO's accounting policies and
practices, except such changes as may be required in the reasonable opinion of
AO's management to respond to economic or market conditions or as may be
required by the rules of the Institute of Certified Public Accountants or
Financial Accounting Standards Board or by applicable governmental authorities;
(o) change its personnel policies;
(p) grant any person a power of attorney or similar
authority; or
(q) agree in writing or otherwise to take, any of the
actions described in subsections (a) through (q) above, or any action which is
reasonably likely to make any of its representations or warranties contained in
this Agreement untrue or incorrect in any material respect on the date made (to
the extent so limited) or as of the Closing.
5.2 Covenants of Launch. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Closing, Launch agrees (except to the extent that AO shall otherwise
consent or request, in each case in writing) to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, and, to the extent consistent with such business, to use
all reasonable efforts consistent with past practices and policies to (i)
preserve intact its present business organization and (ii) keep available the
services of its present offices and employees. Launch shall promptly notify the
Company of any event or occurrence not in the ordinary course of
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business of Launch where such event or occurrence would result in a material
breach of any covenant of Launch as set forth in this Agreement or cause any
representation or warranty of Launch set forth in this Agreement to be untrue as
of the date of, or giving effect to, such event or occurrence. Except as
expressly contemplated by this Agreement, Launch shall not, without the prior
written consent of AO:
(a) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership or other business organization or division in which
the total consideration paid by Launch in such transaction is greater than ten
percent (10%) of Launch's then fully diluted shares;
(b) sell, lease, license or otherwise dispose of any of
its properties or assets except for transactions entered into in the ordinary
course of business consistent with past practice;
(c) amend or terminate any material contract, agreement
or license to which it is a party except in the ordinary course of business; or
(d) agree in writing or otherwise to take, any of the
actions described in subsections (a) through (c) above, or any action which is
reasonably likely to make any of its representations or warranties contained in
this Agreement untrue or incorrect in any material respect on the date made (to
the extent so limited) or as of the Closing.
5.3 Cooperation. Subject to compliance with applicable law, from
the date hereof until the Closing, each of the Company and the Partners shall
confer on a regular and frequent basis with one or more representatives of the
other party to report operational matters of materiality and the general status
of ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity
whether or not in connection with this Agreement, the Exchange and the other
transactions contemplated hereby.
6. Additional Covenants and Agreements.
6.1 No Solicitation.
(a) From and after the date of this Agreement until the
earlier of the termination of this Agreement or the Closing, AO shall not,
directly or indirectly through any Partner or employee, representative or agent
of AO or otherwise, (i) solicit, initiate, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, exchange, business combination,
sale of all or substantially all assets, sale of Interests (including without
limitation by way of a tender offer) or similar transactions involving AO other
than the transactions contemplated by this Agreement (any of the foregoing
inquiries or proposals being referred to in this Agreement as an "Acquisition
Proposal"), (ii) engage or participate in negotiations or discussions
concerning, or provide any non-public information to any person or entity
relating to, any Acquisition Proposal, or (iii)
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agree to, enter into, accept, approve or recommend any Acquisition Proposal.
6.2 Consents. Each of the Company and AO shall use all
reasonable efforts to obtain all necessary consents, waivers and approvals under
its respective material agreements, contracts, licenses and leases as may be
necessary or advisable to consummate the Exchange and the other transactions
contemplated by this Agreement.
6.3 Access to Information. Upon reasonable notice, AO shall
afford to the officers, employees, accountants, counsel and other
representatives of the Company, reasonable access, during normal business hours
during the period prior to the earlier of the termination of this Agreement or
the Closing, to all its properties, books, contracts, commitments and records
and, during such period, AO shall furnish promptly to the Company (i) a copy of
each report, schedule, registration statement and other document filed by it
with or received by it from any Governmental Entity and (ii) all other
information concerning its business, properties and personnel as the Company may
reasonably request. No information or knowledge obtained in any investigation
pursuant to this Section 6.3 shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the Exchange.
6.4 Legal Conditions to Exchange. Each of the Company and AO
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Exchange (which
actions shall include, without limitation, furnishing all information in
connection with approvals of or filings with any Governmental Entity) and will
promptly cooperate with and furnish information to each other in connection with
any such requirements imposed upon either of them in connection with the
Exchange. Each of the Company and AO will take all reasonable actions necessary
to obtain (and will cooperate with each other in obtaining) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity or other third party, required to be obtained or made by AO or the
Company in connection with the Exchange or the taking of any action contemplated
thereby or by this Agreement.
6.5 Public Disclosure. Except with the prior written consent of
the other party, which consent shall not be unreasonably withheld or delayed,
neither AO nor the Company shall issue any press release or other public
statement with respect to the Exchange or this Agreement. Prior to the Effective
Time, neither the Company nor AO shall make, or cause to be made, any press
release or public announcement in respect of this Agreement or the transaction
contemplated hereby without prior consultation with and the prior written
consent of the other party, which consent shall not be unreasonably withheld or
delayed.
6.6 Additional Agreements; Reasonable Efforts. Subject to the
terms and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including cooperating fully with the other party, including by
provision of information. In case at any time after the Closing any further
action is
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necessary or desirable to carry out the purposes of this Agreement or to vest
the Company with full title to all properties, assets, rights, approvals,
immunities and franchises of either Launch or AO, the proper officers and
directors of Launch or Partners of AO shall take all such necessary action.
6.7 Expenses. Whether or not the Exchange is completed, the
parties shall each pay their own legal, accounting and financial advisory fees
and other out-of-pocket expenses related to the negotiation, preparation and
carrying out of this Agreement and the transactions herein contemplated.
Notwithstanding the foregoing sentence, however, the Company will pay the
reasonable legal, accounting and financial advisory fees and other out-of-pocket
expenses of AO related to the carrying out of this Agreement and the
transactions herein contemplated if and only if (i) the Exchange fails to close
due to a failure to occur of any of the conditions set forth in Section 7.3
(other than subsection (g)) or (ii) this Agreement is rightfully terminated by
AO pursuant to Section 8.1(d) hereof.
6.8 Notification of Certain Matters. AO shall give prompt notice
to the Company, and the Company shall give prompt notice to AO, of the
occurrence, or failure to occur, of any event, which occurrence or failure to
occur, if uncured, would be likely to cause the failure of any of the conditions
set forth in Section 7 of this Agreement.
7. Conditions To Exchange.
7.1 Conditions to Each Party's Obligation to Effect the
Exchange. The respective obligations of each party to this Agreement to effect
the Exchange shall be subject to the satisfaction prior to the Closing Date of
the following conditions:
(a) Partner Approval. This Agreement and the Exchange
shall have been approved and adopted by the requisite vote of the Partners of AO
as required by AO's Partnership Documentation and the partnership law of the
State of California.
(b) Governmental Approvals. All authorizations,
consents, orders or approvals of, or declarations or filings with, or
expirations of waiting periods imposed by, any Governmental Entity shall have
been obtained or filed, or shall have occurred as the case may be.
(c) No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Exchange or limiting
or restricting the Company's conduct or operation of the business of the Company
or AO after the Exchange shall have been issued, nor shall any proceeding
brought by a domestic administrative agency or commission or other domestic
Governmental Entity, seeking any of the foregoing be pending; nor shall there be
any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Exchange which makes the consummation of
the Exchange illegal or prevents or prohibits the Exchange.
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7.2 Additional Conditions to Obligations of the Company. The
obligations of the Company to effect the Exchange are subject to the
satisfaction of each of the following additional conditions, any of which may be
waived in writing exclusively by the Company:
(a) Representations and Warranties. The representations
and warranties of AO set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except for changes
contemplated by this Agreement, and the Company shall have received a
certificate signed on behalf of the Partners to such effect.
(b) Performance Obligations. AO and the Partners shall
have performed in all material respects all obligations required to be performed
by it and them under this Agreement at or prior to the Closing Date, and the
Company shall have received a certificate signed on behalf of AO by the Partners
to such effect.
(c) Confidentiality and Inventions Agreements. The
Company shall have received Proprietary Information and Nonsolicitation
Agreements signed by each of the AO Partners that will be accepting employment
with the Company in substantially the form of Annex 7.2((c)), and each such
agreement shall be in full force and effect.
(d) Non-Competition Agreements. The Company shall have
received from each Partner other than D. Scott Kosch and Tiffany Faircloth, a
Non-Competition Agreement in substantially the form of Annex 7.2((d))(i) and
from Tiffany Faircloth, a Non-Competition Agreement in substantially the form of
Annex 7.2(d)(ii).
(e) AO Employees. The Company shall have received from
each of Gregory Morrow, Peter Gorla and G. Scott Barrett an Employment Agreement
in substantially the form attached hereto as Annex 7.2((e)).
(f) Legal Opinion. The Company shall have received a
legal opinion from McDermott, Will & Emery, counsel to AO, substantially in the
form of Annex 7.2((f)).
(g) No Material Adverse Effect. Since October 31, 1998,
there shall have been no event or occurrence that had or could reasonably be
expected to have a Material Adverse Effect on AO.
(h) Third-Party Consents and Waivers. AO shall have
provided all notices to third parties, and shall have received all third-party
consents or waivers required in connection with the consummation of the
transactions contemplated by this Agreement under any contract set forth (or
required to be set forth) in Section 3.4 of the AO Disclosure Schedule or
required to be obtained pursuant to Section 6.2.
(i) Voting Agreement. The Company shall have received
from each Partner a Voting Agreement in the form attached hereto as Annex
7.2(i).
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(j) Amendment of Agreements. The AO partnership related
Agreements shall be amended as necessary to permit the Exchange and the
transactions contemplated hereunder.
(k) Fairness Hearing. The issuance of the Company's
Common Stock and Preferred Stock pursuant to this Agreement and to the
stockholders of Launch shall have been the subject of a fairness hearing by, and
shall have been approved by, the California Department of Corporations.
(l) Audited Financials. AO shall have delivered to the
Company copies of its audited financial statements for the period from inception
through December 31, 1997 and for the year ended December 31, 1998.
7.3 Additional Conditions to Obligations of AO. The obligation
of AO to effect the Exchange is subject to the satisfaction of each of the
following additional conditions, any of which may be waived, in writing,
exclusively by AO:
(a) Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except for changes
contemplated by this Agreement, and AO shall have received a certificate signed
on behalf of the Company by an executive officer of the Company to such effect.
(b) Performance Obligations. The Company and Sub shall
have performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and AO shall have
received a certificate signed on behalf of the Company by an executive officer
of the Company to such effect.
(c) Legal Opinion. AO shall have received a legal
opinion from Gray Cary Ware & Freidenrich LLP, counsel to the Company,
substantially in the form of Annex 7.3((c)).
(d) Assumption of Liabilities. AO shall be satisfied in
its reasonable discretion that the Company has either assumed or paid off in
their entirety all of AO's liabilities (other than those relating to taxes in
connection with the Exchange and those liabilities incurred in connection with
Section 6.7 hereto).
(e) Launch Exchange. The Launch Exchange contemplated by
the Launch Exchange Agreement attached hereto as Annex 7.3(e) shall have been
closed per the terms of such agreement.
(f) Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement as to Launch
and as of the Closing Date as to the Company as though made on and as of the
Closing Date, except for changes contemplated by
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this Agreement, and the Company shall have received a certificate signed on
behalf of the Company to such effect.
(g) AO Employees. Each of Gregory Morrow, Peter Gorla
and G. Scott Barrett shall have received from the Company an Employment
Agreement in substantially the form attached hereto as Annex 7.2(e),
(h) No Material Adverse Effect. Since October 31, 1998,
there shall have been no event or occurrence that had or could reasonably be
expected to have a Material Adverse Effect on Launch.
(i) Third-Party Consents and Waivers. Launch shall have
provided all notices to third parties, and shall have received all third-party
consents or waivers required in connection with the consummation of the
transactions contemplated by this Agreement or required to be obtained pursuant
to Section 6.2.
(j) Fairness Hearing. The issuance of the Company's
Common Stock and Preferred Stock pursuant to this Agreement and to the
stockholders of Launch shall have been the subject of a fairness hearing by, and
shall have been approved by, the California Department of Corporations.
(k) Letter Agreement. The Company shall have provided
the Partners or their legal counsel with an executed 351 Transaction Side
Letter.
8. Termination and Amendment.
8.1 Termination. This Agreement may be terminated at any time
prior to the Closing (with respect to Sections 8.1((b)) through 8.1((f)), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Exchange by the
Partners of AO:
(a) by mutual written consent duly authorized by the
Board of Directors of the Company and a majority of the Partners of AO;
(b) by either the Company or AO if the Exchange shall
not have been consummated by February 28, 1999 (provided that the right to
terminate this Agreement under this Section 8.1((b)) shall not be available to
any party whose failure to fulfill any material obligation under this Agreement
has been the cause of or resulted in the failure of the Exchange to occur on or
before such date);
(c) by either the Company or AO, if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Exchange, except, if the party relying on such order, decree or ruling or other
action has not materially complied with its obligations under Section 6 of this
Agreement;
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(d) by AO, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the Company,
which breach shall not have been cured within ten (10) business days following
receipt by the breaching party of written notice of such breach from AO;
(e) by the Company, if there has been a material breach
of any representation, warranty, covenant or agreement on the part of AO or any
of its Partners, which breach shall not have been cured within ten (10) business
days following receipt by the breaching party of written notice of such breach
from the Company; or
(f) by the Company, if for any reason the Partners fail
to approve this Agreement and the transactions contemplated hereby by February
28, 1999.
8.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.1, there shall be no liability or obligation
on the part of the Company or its officers, directors, shareholders or
Affiliates or AO or its Partners, except to the extent that such termination
results from the intentional breach by a party of any of its representations,
warranties or covenants set forth in this Agreement; provided that, the
provisions of Section 6.7 shall remain in full force and effect and survive any
termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their Boards of Directors (in the case
of the Company) or Partners (in the case of AO), at any time before or after
approval of the matters presented in connection with the Exchange by the
Partners of AO, but, after any such approval, no amendment shall be made which
by law requires further approval by such Partners without such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Closing, the
parties hereto, by action taken or authorized by their Boards of Directors (in
the case of the Company) or Partners (in the case of AO), may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party.
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<PAGE> 25
9. Escrow and Indemnification
9.1 Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements of AO and
the Company contained in this Agreement or any instrument delivered pursuant to
this Agreement shall survive the Closing Date and shall continue in full force
and effect until the earlier of (i) first anniversary of the Closing Date or
(ii) the Company's sale of all or substantially all its assets, the merger or
consolidation of the Company into or with any other corporation or if the
holders of the outstanding shares of the Company prior to such merger or
consolidation do not retain a majority of the voting power of the surviving
corporation (the "Termination Date").
9.2 Indemnification by AO Partners.
(a) Subject to the terms and conditions contained in
this Section 9, the Partners outstanding immediately prior to the Closing Date
(the "Indemnifying Partners") shall, jointly and severally, indemnify, defend
and hold harmless the Company, its shareholders, officers, directors, employees
and attorneys, all Subsidiaries and affiliates of the Company, and the
respective officers, directors, employees and attorneys of such entities (all
such persons and entities being collectively referred to as the "Company Group")
from, against, for and in respect of any and all claims, losses, liabilities,
damages, costs and expenses (including reasonable legal fees and expenses and
expenses of investigation and defense) which any member of the Company Group may
sustain or incur (collectively, "Company Losses") which are caused by or arise
out of any inaccuracy in or breach of any of the representations, warranties,
covenants or agreements made by AO or the Partners in this Agreement, the AO
Disclosure Schedule or any certificate delivered pursuant to Section 7.2.
(b) The maximum aggregate liability of any Indemnifying
Partner pursuant to Section 9.2((a)) shall be limited to the value of the Escrow
Shares held by the Escrow Agent in the Escrow on behalf of such Indemnifying
Partner pursuant to the terms of the Escrow Agreement. Anything in this
Agreement to the contrary notwithstanding, the Indemnifying Partners shall not
be liable for indemnification under this Section 9.2 until the aggregate of all
the Company Losses for which indemnity is claimed exceeds $45,000, in which case
the Company shall be entitled to indemnification for the full amount of the
indemnification including the first $45,000.
(c) The obligation of the Indemnifying Partners to
indemnify members of the Company Group for a Company Loss under this Section 9
is subject to the condition that the Indemnifying Partners or the Partner
Representative (as defined in Section 9.7) shall have received an
Indemnification Claim (as defined in Section 9.3((b))) for such Company Loss on
or before the Termination Date.
(d) The provisions of Sections 9.2((b)) and ((c)) and
Section 9.6 shall not limit, in any manner, any remedy at law or in equity to
which any member of the Company Group shall be entitled against AO or Partner or
former Partner of AO as a result of active fraud or intentional
misrepresentation by AO, any AO Partner or former Partner or any of their
respective representatives or agents.
25
<PAGE> 26
9.3 Procedures for Indemnification.
(a) As used in this Section 9, the term "Indemnitor"
means the Indemnifying Partner or Partners against whom indemnification
hereunder is sought (and, in the case of claims made against the Escrow, shall
refer to the Partner Representative), and the term "Indemnitee" means the member
or members of the Company Group seeking indemnification hereunder.
(b) A claim for indemnification hereunder (an
"Indemnification Claim") shall be made by the Indemnitee by delivery of a
written notice. In the case of claims made against the Escrow, such notice shall
be delivered to the Partner Representative with a copy to the Escrow Agent; in
the case of other claims such notice shall be delivered to the Indemnitor. The
Indemnification Claim shall specify the basis on which indemnification is sought
in reasonable detail (and shall include relevant documentation related to the
Indemnification Claim), the amount of the asserted Company Losses and, in the
case of a Third Party Claim (as defined in Section 9.4), shall contain (by
attachment or otherwise) such other information as Indemnitee shall have
concerning such Third Party Claim.
(c) If the Indemnification Claim involves a Third Party
Claim, the procedures set forth in Section 9.4 shall be observed by Indemnitee
and Indemnitor.
9.4 Defense of Third Party Claims. Should any claim be made or
any suit or proceeding instituted by a third party against an Indemnitee which,
if prosecuted successfully, would be a matter for which such Indemnitee would be
entitled to indemnification under this Section 9 (a "Third Party Claim"), the
obligations and liabilities of the parties hereunder with respect to such Third
Party Claim shall be subject to the following terms and conditions:
(a) Indemnitee shall give Indemnitor written notice of
any such claim promptly after receipt by Indemnitee of notice thereof, and
Indemnitor may undertake control of the defense thereof by counsel of its own
choosing reasonably acceptable to Indemnitee. Indemnitee may participate in the
defense through its own counsel at its own expense. The assumption of the
defense of any Third Party Claim by Indemnitor shall be an acknowledgment by
Indemnitor that such Third Party Claim is subject to indemnification under the
provisions of this Section 9 and that such provisions are binding on Indemnitor.
If, however, Indemnitor fails or refuses to undertake the defense of such Third
Party Claim within ten (10) days after written notice of such claim has been
delivered to Indemnitor by Indemnitee, Indemnitee shall have the right to
undertake the defense, compromise and, subject to Section 9.5, settlement of
such Third Party Claim with counsel of its own choosing. Failure of Indemnitee
to furnish written notice to Indemnitor of a Third Party Claim shall not release
Indemnitor from Indemnitor's obligations hereunder, except to the extent
Indemnitor is prejudiced by such failure.
(b) Indemnitee and Indemnitor shall cooperate with each
other in all reasonable respects in connection with the defense of any Third
Party Claim, including making available records relating to such claim and
furnishing employees of Indemnitee as may be reasonably necessary for the
preparation of the defense of any such Third Party Claim or for testimony as
witness in any proceeding relating to such claim.
26
<PAGE> 27
9.5 Settlement of Third Party Claims. Unless Indemnitor has
failed to fulfill its obligations under Section 9.4, no settlement by Indemnitee
of a Third Party Claim shall be made without the prior written consent by or on
behalf of Indemnitor, which consent shall not be unreasonably withheld or
delayed. If Indemnitor has assumed the defense of a Third Party Claim as
contemplated by Section 9.4((a)), no settlement of such Third Party Claim may be
made by Indemnitor without the prior written consent by or on behalf of
Indemnitee, unless such settlement includes a complete release of all claims
against Indemnitee.
9.6 Resolution of Indemnification Claims.1 Any Indemnification
Claim received by Indemnitor pursuant to Section 9.3 above will be resolved as
follows:
(a) To provide a fund against which members of the
Company Group may assert Indemnification Claims under this Section 9, the Escrow
Shares shall be withheld and deposited into the Escrow in accordance with the
provisions of Section 2.2. The Escrow Shares so deposited shall be held and
distributed in accordance with the Escrow Agreement. (b) Subject to the
provisions of Section 9.2((d)), all Indemnification Claims shall be made in
accordance with the Escrow Agreement against the Escrow Shares until the earlier
of (i) the termination of the Escrow Agreement or (ii) such time as pending
Indemnification Claims exceed the value of the Escrow Shares then remaining in
the Escrow.
(b) Subject to the provisions of Section 9.2(d), all
Indemnification Claims shall be made in accordance with the Escrow Agreement
against the Escrow Shares until the earlier of (i) the termination of the
Escrow Agreement or (ii) such time as pending Indemnification Claims exceed the
value of the Escrow Shares then remaining in the Escrow.
(c) In the event that Indemnitor gives written notice
contesting all, or a portion of, an Indemnification Claim to Indemnitee (a
"Contested Claim") within thirty (30) days after receipt of such Indemnification
Claim, the matter will be settled by binding arbitration pursuant to Section
9.6((d)), unless otherwise agreed by Indemnitor and Indemnitee. The final
decision of the arbitrator shall be furnished to Indemnitor and Indemnitee in
writing and will constitute a conclusive determination of the issue in question,
binding upon the Indemnitor and Indemnitee and shall not be contested or
appealed by any of them.
(d) Any Contested Claim shall be settled by arbitration
at a mutually agreeable location in Santa Monica, California and, except as
herein specifically stated, in accordance with the commercial arbitration rules
of the American Arbitration Association (the "AAA Rules") then in effect.
However, in all events, these arbitration provisions shall govern over any
conflicting rules which may now or hereafter be contained in the AAA Rules. Any
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction over the subject matter thereof. The arbitrator shall have
the authority to grant any equitable and legal remedies that would be available
in any judicial proceeding instituted to resolve a Contested Claim.
9.7 Partner Representative.
(a) Authority. For the purposes of this Agreement the
Partners, without any further action on the part of any Partner, shall be deemed
to have consented to the appointment of Gregory Morrow as the representative of
such Partners (the "Partner Representative"), as the attorney-in-fact for and on
behalf of each such Partner, and the taking by the Partner Representative of any
and all actions and the making of any decisions required or
27
<PAGE> 28
permitted to be taken by them under this Agreement or the Escrow Agreement,
including, without limitation, the exercise of the power to (i) receive or give
any notice on behalf of the Indemnifying Partners pursuant to this Agreement or
the Escrow Agreement, (ii) authorize delivery to the Company of the Escrow
Shares, or any portion thereof, in satisfaction of Indemnification Claims, (iii)
agree to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to, such Indemnification Claims, and (iv) take all other actions
necessary in the judgment of the Partner Representative for the accomplishment
of the foregoing and all of the other terms, conditions and limitations of this
Agreement and the Escrow Agreement. Accordingly, the Partner Representative has
unlimited authority and power to act on behalf of each Partner and each
Indemnifying Partner with respect to this Agreement and the Escrow Agreement and
the disposition, settlement or other handling of all claims, rights or
obligations arising from and taken pursuant to this Agreement or the Escrow
Agreement. Such Partners will be bound by all actions taken by the Partner
Representatives in connection with this Agreement and the Escrow Agreement, and
the Company shall be entitled to rely on any action or decision of the Partner
Representative as the action or decision of each Partner and each Indemnifying
Partner.
(b) Standard of Conduct. Neither the Partner
Representative nor any of his agents shall be liable to any Partner or any
Indemnifying Partner for any error of judgment, act done or omitted by him, or
mistake of fact or law in connection with his services pursuant to Section 9.7,
unless caused by his own gross negligence or willful misconduct. In taking any
action or refraining from taking any action whatsoever the Partner
Representative shall be protected in relying upon any notice, paper or other
document reasonably believed by him to be genuine, or upon any evidence
reasonably deemed by him to be sufficient. The Partner Representative shall not
be required to take any action which is contrary to this Agreement, the Escrow
Agreement or applicable law. The Partner Representative may consult with counsel
in connection with his duties and shall be fully protected in any act taken,
suffered or permitted by him in good faith in accordance with the advice of
counsel. In connection with his services under Section 9.7, the Partner
Representative shall not be responsible for determining or verifying the
authority of any person acting or purporting to act on behalf of any party to
this Agreement.
(c) Indemnification. Each Indemnifying Partner shall
indemnify the Partner Representative, ratably in accordance with the value of
the shares of the Company Stock received by such Partner in the Exchange, for
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may at any time be imposed on, incurred by or asserted against
the Partner Representative in any way relating to or arising out of this
Agreement or any documents contemplated by or referred to herein or therein or
the transactions contemplated hereby or thereby or the enforcement of any of the
terms hereof or thereof or of any such other documents; provided, however, that
no such Partner shall be liable for any of the foregoing to the extent they
arise from the Partner Representative's gross negligence or willful misconduct.
The Partner Representative shall be fully justified in refusing to take or to
continue to take any action hereunder unless it shall first be indemnified to
its reasonable satisfaction by such Partner against any and all liability and
expense which may be incurred by it by reason of taking or continuing to
28
<PAGE> 29
take any such action.
(d) Resignation or Removal of the Partner
Representative. Subject to the appointment and acceptance of a successor Partner
Representative as provided below, the Partner Representative may resign at any
time thirty (30) days subsequent to giving notice thereof to all Indemnifying
Partners, the Company and the Escrow Agent, and the Partner Representative may
be removed at any time with or without cause by action of the Indemnifying
Partners who represent a majority of the Interests of all Indemnifying Partners.
Upon any such resignation or removal, Indemnifying Partners representing a
majority of the shares of the Indemnifying Partners shall have the right to
appoint a successor Partner Representative, which Partner Representative shall
be reasonably acceptable to the Company. If no successor Partner Representative
shall have been appointed by Indemnifying Partners and accepted such appointment
within twenty (20) days after the retiring Partner Representative gives notice
of resignation or the Partner Representative's removal, then the retiring or
removed Partner Representative may appoint a successor which shall be reasonably
acceptable to the Company. Upon the acceptance of any appointment as Partner
Representative hereunder, such successor Partner Representative shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring or removed Partner Representative, and the retiring or removed
Partner Representative shall be discharged from its duties and obligations
hereunder. After any retiring Partners Representative's resignation or removal
hereunder as the Partner Representative, the provisions of this Section 9.7
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while he was acting as the Partner Representative.
(e) Agent in its Individual Capacity. The Partner
Representative, to the extent he is an Indemnifying Partner, shall have the same
rights and powers under this Agreement as any other Indemnifying Partner and may
exercise the same as though he were not the Partner Representative, and the term
"Indemnitor," as used in this Section 9, shall refer to the Partner
Representative in his capacity as such.
9.8 Indemnification by the Company and Launch.
(a) Subject to the terms and conditions contained in
this Section 9.8 the Company and Launch shall indemnify, defend and hold
harmless AO and its Partners, employees, attorneys, agents and affiliates (the
"Partner Group") from, against, for and in respect of any and all claims,
losses, liabilities, damages, costs and expenses (including reasonable legal
fees and expenses and expenses of investigation and defense) which the Partner
Group may sustain or incur (collectively, "AO Losses") which are caused by or
arise out of any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Company or Launch in this
Agreement, the Company Disclosure Schedule or any certificate delivered pursuant
to Section 7.3.
(b) The maximum aggregate liability of the Company
pursuant to Section 9.8(a) shall be limited to the greater of (i) $1,400,000 or
(ii) the fair market value of the Escrow Shares. Anything in this Agreement to
the contrary notwithstanding, the Company
29
<PAGE> 30
shall not be liable for indemnification under this Section 9.8 until the
aggregate of all the AO Losses for which indemnity is claimed exceeds $45,000 in
which case AO shall be entitled to indemnification for the full amount of the
indemnification including the first $45,000.
(c) The obligation of the Company to indemnify AO and
its Partners for an AO Loss under this Section 9.8 is subject to the condition
that the Company shall have received a written claim for indemnification
specifying the basis on which indemnification is sought in reasonable detail
(including relevant documentation relating to such claim) and the amount of
losses asserted for such AO Loss on or before the Termination Date.
(d) The provisions of Sections 9.8(b) and (c) and shall
not limit, in any manner, any remedy at law or in equity to which any Partner
shall be entitled against the Company as a result of fraud or intentional
misrepresentation by the Company or any of its respective representatives or
agents.
10. General Provisions.
10.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
commercial overnight delivery service, or mailed by registered or certified mail
(return receipt requested) or sent via facsimile (with confirmation of receipt)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to the Company, to:
New Launch Media, Inc.
2700 Pennsylvania Avenue
Santa Monica, CA 90404
Attention: Robert Roback
Fax: (310) 526-4433
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Ave.
Palo Alto, CA 94301
Attention: James M. Koshland, Esq.
Fax: (650) 327-3699
(b) if to AO, to
AreohveeOnline Partnership
885 Production Place
Newport Beach, CA 92663
30
<PAGE> 31
Attention: Greg Morrow
Fax: (949) 515-8068
with a copy to:
McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, CA 92660
Attention: John B. Miles, Esq.
Fax: (714) 851-9348
(c) If to the Partner Representative, to:
Gregory Morrow
AreohveeOnline Partnership
885 Production Place
Newport Beach, CA 92663
Fax: (949) 515-8068
with a copy to:
McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, CA 92660
Attention: John B. Miles, Esq.
Fax: (714) 851-9348
10.2 Interpretation. When a reference is made in this Agreement
to an Article or Section, such reference shall be to an Article or Section of
this Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The phrases "the date of this Agreement," "the date
hereof," and terms of similar import, unless the context otherwise requires,
shall be deemed to refer to the first date written above. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. In
determining whether a Material Adverse Effect exists with respect to a party,
materiality shall be determined on the basis of the applicable party and all of
its Subsidiaries, if any, taken together as a whole, and not on the basis of the
party or any single Subsidiary alone. Reference to a party's "knowledge" mean
actual knowledge after reasonable inquiry of such party's directors, officers,
Partners and other management-level employees who could reasonably be expected
to have knowledge of such matters. As used in this Agreement, the term
"Governmental Entity" means any (i) nation, state, commonwealth, province,
territory, county, municipality, district or other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign or other government; or (iii)
governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, official, organization,
and any court or other tribunal), and the term "Subsidiary" means, with respect
to any party, any corporation, at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
31
<PAGE> 32
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries.
10.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
10.4 Severability. In the event that any provision of this
Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
10.5 Entire Agreement. This Agreement (including the documents
and the instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof.
10.6 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California without regard
to any applicable conflicts of law.
10.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
10.8 Third Party Beneficiary. Nothing contained in this
Agreement is intended to confer upon any person other than the parties hereto
and their respective successors and permitted assigns, any rights, remedies or
obligations under, or by reason of this Agreement.
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<PAGE> 33
Agreed to and accepted as of the
first date written above:
NEW LAUNCH MEDIA, INC. AREOHVEEONLINE LIMITED PARTNERSHIP
a Delaware corporation a California Partnership
By: /s/ Robert D. Roback By: /s/ Gregory Morrow
--------------------------------- --------------------------------------
Gregory Morrow
Title: President
---------------------------
LAUNCH MEDIA, INC. By: /s/ Peter Gorla
a Delaware corporation --------------------------------------
Peter Gorla
By: /s/ Robert D. Roback By: /s/ G. Scott Barrett
--------------------------------- --------------------------------------
G. Scott Barrett
Title: President
---------------------------
By: /s/ Anthony Alfaro
--------------------------------------
Anthony Alfaro
By: /s/ D. Scott Kosch
--------------------------------------
D. Scott Kosch
By: /s/ Tiffany Faircloth
--------------------------------------
Tiffany Faircloth
33
<PAGE> 34
EXHIBIT A
<TABLE>
<CAPTION>
Number of Shares of
Name of Partner Company Common Stock Cash
--------------- -------------------- -----
<S> <C> <C>
Gregory Morrow 1,028,779 $ 37,573.76
Peter Gorla 1,028,779 $ 29,940.50
G. Scott Barrett 1,028,779 $ 38,846.54
Anthony Alfaro 1,028,779 $188,267.02
D. Scott Kosch 175,111 $ 2,377.45
Tiffany Faircloth 87,555 $ 4,988.73
========= ===========
TOTALS: 4,377,782 $301,994.00
</TABLE>
<PAGE> 35
ANNEX 2.2
ESCROW AGREEMENT
<PAGE> 36
ANNEX 3
AO DISCLOSURE SCHEDULE
<PAGE> 37
ANNEX 4
BUYER DISCLOSURE SCHEDULE
<PAGE> 38
ANNEX 7.2(c)
FORM OF CONFIDENTIALITY AND INVENTIONS AGREEMENT
<PAGE> 39
ANNEX 7.2(d)(i)
FORM OF NONCOMPETITION AGREEMENT
(ALL PARTNERS EXCEPT D. SCOTT KOSCH AND TIFFANY FAIRCLOTH)
<PAGE> 40
ANNEX 7.2(d)(ii)
FORM OF NONCOMPETITION AGREEMENT
(TIFFANY FAIRCLOTH)
<PAGE> 41
ANNEX 7.2(e)
FORM OF EMPLOYMENT AGREEMENT
<PAGE> 42
ANNEX 7.2(f)
FORM OF LEGAL OPINION
<PAGE> 43
ANNEX 7.2(i)
VOTING AGREEMENT
<PAGE> 44
ANNEX 7.3(c)
FORM OF GCW&F LEGAL OPINION
<PAGE> 45
ANNEX 7.3(e)
LAUNCH EXCHANGE AGREEMENT
<PAGE> 1
EXHIBIT 4.1
SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT ("Agreement")
is entered into as of February 27, 1998, by and among 2Way Media, Inc., a
Delaware corporation (the "Company"), the holders of Series A, Series B and
Series C Stock of the Company (the "Prior Investors"), the undersigned
purchasers of Series D Stock and additional signatories to this Agreement, if
any, who purchase Series D Stock pursuant to the Series D Securities Purchase
Agreement subsequent to the date hereof (the "New Investors," or, collectively
with the "Prior Purchasers, the "Investors").
RECITALS
A. Concurrently herewith, the New Investors and the Company are entering
into a Series D Securities Purchase Agreement (the "Series D Agreement")
pursuant to which the New Investors are purchasing from the Company up to
17,614,379 shares of Series D Stock of the Company and warrants to purchase up
to 2,242,187 shares of Series D Stock of the Company (to be adjusted for any
additional closing).
B. The Company and the Prior Investors have entered into that certain
Investors Rights Agreement dated August 29, 1995, as amended on July 12, 1996
and September 30, 1997 (collectively the "Prior Agreement"), granting certain
registration and other rights to the New Investors.
C. To permit the Company to grant the New Investors the same rights as
have been granted to the Prior Investors under the Prior Agreement, the parties
hereto desire to amend and restate the Prior Agreement as set forth herein.
D. The Board of Directors of the Company has determined that it is in the
best interests of the Company to amend and restate the Prior Agreement to make
the New Investors parties thereto in accordance herewith.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree that, effective as of
the Closing (as defined in the Series D Agreement), the Prior Agreement is
hereby amended and restated to read in its entirety as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean common stock, $0.001 par value per share, of the
Company.
1
<PAGE> 2
"Conversion Stock" shall mean the shares of Common Stock issued or
issuable upon conversion of the Series A Stock issued pursuant to the Series A
Agreement, upon conversion of the Series B Stock issued pursuant to the Series B
Agreement, upon conversion of the Series C stock issued pursuant to the Series C
Agreement, upon conversion of the Series D Stock issued pursuant to the Series D
Agreement, the shares of Common Stock issuable upon exercise of a warrant to
purchase Common Stock issued to Allen & Company Incorporated pursuant to a
Warrant Agreement by and between the Company and Allen & Company Incorporated
dated September 8, 1997, the shares of Common Stock issuable upon exercise of
such Series D stock as issuable upon exercise of any NBC Warrant and the shares
of Common Stock issuable upon exercise of such Series D Stock as issuable upon
exercise of the GE Capital Warrant.
"GE Capital" shall mean General Electric Capital Corporation, a New
York corporation.
"GE Capital Warrant" shall mean the warrant to purchase 300,000 shares of
Series D Stock (as adjusted pursuant to the terms of such warrant) issued to GE
Capital, pursuant to the Series D Agreement.
"Holder" shall mean the holders of Registrable Securities, securities
convertible into Registrable Securities or warrants to acquire Registrable
Securities or securities convertible into Registrable Securities and any person
holding such securities to whom the rights under this Agreement have been
transferred in accordance with this Agreement.
"Initiating Holders" shall mean any Holder or Holders who in the aggregate
hold or have the power to acquire (through conversion or exercise of other
securities) at least 30% of the Registrable Securities.
"NBC" shall mean NBC Multimedia, Inc., a Delaware corporation.
"NBC Warrant" shall mean the warrant to purchase 1,942,187 shares of
Series D Stock (as adjusted pursuant to the terms of such warrant) issued to
NBC, pursuant to the Series D Agreement or any other warrants issued to NBC
pursuant to Section 2.1 of the Series D Agreement (collectively the "NBC
Warrants").
"Registrable Securities" means (i) the Conversion Stock and (ii) any
Common Stock of the Company issued or issuable with respect to, or in exchange
for or in replacement of the securities referred to in clause (i) above or other
securities convertible into or exercisable for such securities upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event,
provided, however, that shares of Common Stock or other securities convertible
into or exercisable for such securities shall only be treated as Registrable
Securities for the purposes of Sections 2.5, 2.6 or 2.7 hereof if and so long as
they have not been sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
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"Registration Expenses" shall mean all expenses, except as otherwise
stated below, incurred by the Company in complying with Sections 2.5, 2.6 and
2.7 hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company and special counsel to the Selling Holders, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company).
"Restricted Securities" shall mean the securities of the Company required
to bear the legend set forth in Section 2.2 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the Registrable Securities
registered by or for the accounts of the Holders.
"Selling Holders" shall mean all Holders seeking to sell or selling Shares
pursuant to this Agreement.
"Series A Agreement" shall mean that certain Securities Purchase Agreement
dated October ___, 1994, pursuant to which the Company issued the Series A
Stock.
"Series B Agreement" shall mean that certain Securities Purchase Agreement
dated August 29, 1995, pursuant to which the Company issued the Series B Stock.
"Series B, Series C and Series D Investor" shall mean a purchaser of
Series B, Series C, or Series D Stock or an NBC Warrant or the GE Capital
Warrant pursuant to the Series B, Series C or Series D Agreement.
"Series C Agreement" shall mean that certain Securities Purchase Agreement
dated March 29, 1996, pursuant to which the Company issued the Series C Stock.
"Series A Stock" shall mean Preferred Stock, $0.001 par value per share,
of the Company and designated as Series A Stock.
"Series B Stock" shall mean Preferred Stock, $0.001 par value per share,
of the Company and designated as Series B Stock.
"Series C Stock" shall mean Preferred Stock, $0.001 par value per share,
of the Company and designated as Series C Stock.
"Series D Stock" shall mean Preferred Stock, $0.001 par value per share,
of the Company and designated as Series D Stock.
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"Shares" shall mean the shares of the Company's (i) Series A Stock
currently outstanding, (ii) Series B Stock currently outstanding, (iii) Series C
Stock issued pursuant to the Series C Agreement, (iv) Series D Stock, (v) the
Series D Stock issuable upon exercise of the NBC Warrant and (vi) the Series D
Stock issuable upon exercise of the GE Capital Warrant.
2. Transfer Restrictions and Registration Rights.
2.1 Restrictions on Transferability. The Shares and the Conversion
Stock shall not be sold, assigned, transferred or pledged except upon the
conditions specified in this Section 2, which conditions are intended to ensure
compliance with the provisions of the Securities Act. The Investors will cause
any proposed purchaser, assignee, transferee, or pledgee of the Shares or the
Conversion Stock held by the Investors to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Section 2.
2.2 Restrictive Legend. Each certificate representing (i) the
Shares, (ii) the Conversion Stock and (iii) any other securities issued in
respect of the Shares or the Conversion Stock upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 2.3 or 2.4 below) be
stamped or otherwise imprinted with a legend in the following form (in addition
to any legend required under applicable state corporate or securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE TRANSFER IS IN ACCORDANCE WITH RULE 144 OR SIMILAR
RULE OR UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN ADDITIONAL
RESTRICTIONS ON TRANSFER AS SET FORTH IN A SECURITIES PURCHASE AGREEMENT
AMONG THE CORPORATION, THE HOLDER OF RECORD OF THE SHARES EVIDENCED HEREBY
AND CERTAIN OTHER STOCKHOLDERS OF THE CORPORATION AND A CERTAIN SECOND
AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT DATED AS OF FEBRUARY 27,
1998 BY AND AMONG THE CORPORATION AND CERTAIN SHAREHOLDERS OF THE
CORPORATION. COPIES OF THESE AGREEMENTS COVERING THE PURCHASE OF THESE
SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION.
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The Investors and Holders consent to the Company making a notation on its
records and giving instructions to any transfer agent of the Shares or the
Conversion Stock in order to implement the restrictions on transfer established
in this Section 2.
2.3 Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 2.3. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than (i) a
transfer not involving a change in beneficial ownership, or (ii) a transfer of
Restricted Securities by any Holder to any of its partners, or retired partners,
limited liability company members, affiliates or to the estate of any of its
partners or retired partners, or (iii) transfers in compliance with Rule 144, so
long as the Company is furnished with reasonably satisfactory evidence of
compliance with such Rule), unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, the holder thereof
shall give written notice to the Company of such holder's intention to effect
such transfer, sale, assignment or pledge. Each such notice shall describe the
manner and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied, at such holder's expense, by either
(i) a written opinion of legal counsel who shall, and whose legal opinion shall
be, reasonably satisfactory to the Company addressed to the Company, to the
effect that the proposed transfer of the Restricted Securities may be effected
without registration under the Securities Act, or (ii) a "no action" letter from
the Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by the holder to the
Company. In addition, prior to any sale, assignment, transfer or pledge of the
Company's Restricted Securities, any buyer, assignee, transferee or pledgee of
the Company's Restricted Securities shall agree in writing to be bound by the
restrictions set forth in this Agreement. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 2.2 above, except that such certificate shall not bear such
restrictive legend if in the opinion of counsel for such holder and in the
reasonable opinion of the Company such legend is not required in order to
establish compliance with any provision of the Securities Act.
2.4 Removal of Restrictions on Transfer of Securities. Any legend
referred to in Section 2.2 hereof stamped on a certificate evidencing (i) the
Shares, (ii) the Conversion Stock or (iii) any other securities issued in
respect of the Shares or the Conversion Stock upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event and the stock
transfer instructions and record notations with respect to such security shall
be removed and the Company shall issue a certificate without such legend to the
holder of such security if such security is registered under the Securities Act,
or if such holder provides the Company with an opinion of counsel (which may be
counsel for the Company) reasonably acceptable to the Company to the effect that
a public sale or transfer of such security may be made without registration
under the Securities Act or such holder provides the Company with reasonable
assurances, which may, at the option of the Company, include an opinion of
counsel reasonably satisfactory to the Company, that such security can be sold
pursuant to Section (k) of Rule 144
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under the Securities Act. The Company will cause legend removal to be authorized
or provide a written response as to why legends may not be removed within 10
days of receipt of any such request.
2.5 Requested Registration.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to (i) shares
representing 30% or more of the Registrable Securities or (ii) shares of
Registrable Securities with an expected aggregate offering price to the public
of at least $5,000,000, the Company will:
(i) within ten days of the receipt by the Company of
such notice, give written notice of the proposed registration, qualification or
compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within 20 days after such written
notice is given by the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 2.5:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) Prior to the earlier of (i) August 31,
1999 or (ii) the expiration of four months following completion of the Company's
first registered public offering of its stock;
(C) During the period starting with the date
ninety (90) days prior to the Company's estimated date of filing of, and ending
on the date six (6) months immediately following the effective date of, any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction, with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;
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(D) After the Company has effected three such
registrations pursuant to this Section 2.5(a) covering all shares requested to
be registered by the Holders initiating or joining such request, and such
registrations have been declared or ordered effective, and, if the method of
disposition specified by such initiating or requesting Holders shall have been a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto;
(E) If the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to the Company or its shareholders for a registration statement to be filed in
the near future, then the Company's obligation to use its best efforts to
register, qualify or comply under this Section 2.5 shall be deferred for a
period not to exceed 90 days from the date of receipt of written request from
the Initiating Holders; provided, however, that the Company shall not exercise
such right more than once in any twelve-month period.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration requested
pursuant to Section 2.5 is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part of the notice
given pursuant to Section 2.5(a)(i). In such event, the right of any Holder to
registration pursuant to Section 2.5 shall be conditioned upon such Holder's
participation in the underwriting arrangements required by this Section 2.5, and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter of recognized national standing
selected for such underwriting by the Company and reasonably acceptable to a
majority of the Holders proposing to distribute their securities through such
underwriting. Notwithstanding any other provision of this Section 2.5, if the
managing underwriter in its good faith judgment advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Company shall so advise all holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities requested by such Holders to be included in
such registration statement or in such other manner as shall be agreed to by the
Company and Holders of a majority of the Registrable Securities proposed to be
included in such registration. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares.
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If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to 90 days after the effective date
of such registration, or such other shorter period of time as the underwriters
may require.
2.6 Company Registration.
(a) Notice of Registration. If at any time or from time to
time the Company shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, (ii) a registration
relating solely to a Commission Rule 145 transaction, or (iii) a registration
pursuant to Section 2.5 hereof, the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) subject to Section 2.6(b), include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 20 days after
such written notice is given by the Company, by any Holder.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.6(a)(i). In such event the right of any Holder to
registration pursuant to Section 2.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 2, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter in its good faith
judgment may limit the Registrable Securities and other securities to be
distributed through such underwriting. The Company shall so advise all Holders
distributing their securities through such underwriting of such limitation and
the number of shares of Registrable Securities that may be included in the
registration (and underwriting if any) shall be allocated among all Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities requested by such Holders to be included in such Registration
Statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
or holder to the nearest 100 shares. If any Holder or holder disapproves of the
terms of any such underwriting, such Holder or holder may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall not be transferred in a public
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distribution prior to 90 days after the effective date of the registration
statement relating thereto, or such other shorter period of time as the
underwriters may require.
(c) Right to Terminate Registration. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2.6 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.8 hereof.
2.7 Registration on Form S-3.
(a) If any Holder or Holders request that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3), or any
similar short-form registration statement, for a public offering of Registrable
Securities, the reasonably anticipated aggregate price to the public of which,
net of underwriting discounts and commissions (if any), would exceed $1,000,000
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered on such form for
the offering and to cause such Registrable Securities to be qualified in such
jurisdictions as the Holder or Holders may reasonably request; provided,
however, that the Company shall not be required to effect more than two
registrations pursuant to this Section 2.7 in any twelve (12) month period.
After the Company's first public offering of its securities, the Company will
use its best efforts to make all filings necessary to qualify for Form S-3
registration or a similar short-form registration. The provisions of Section
2.6(b) shall be applicable to each registration initiated under this Section
2.7.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 2.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) if the Company, within
ten (10) days of the receipt of the request of the initiating Holders, gives
notice of its bona fide intention to effect the filing of a registration
statement with the Commission within ninety (90) days of receipt of such request
(other than with respect to a registration statement relating to a Rule 145
transaction, or an offering solely to employees); (iii) during the period
starting with the date sixty (60) days prior to the Company's estimated date of
filing of, and ending on the date three (3) months immediately following, the
effective date of any registration statement pertaining to securities of the
Company (other than a registration of securities in a Rule 145 transaction or
with respect to an employee benefit plan), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (iv) if the Company shall furnish to such
Holder a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to the Company or its shareholders for registration statements to be filed in
the near future, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed 90 days from
the receipt of the request to
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file such registration by such Holder; provided, however, that the Company shall
not exercise such right more than once in any twelve-month period.
2.8 Expenses of Registration. All Registration Expenses incurred in
connection with registrations pursuant to Sections 2.5, 2.6 and 2.7 shall be
borne by the Company. All Selling Expenses relating to securities registered on
behalf of the Holders shall be borne by the holders of securities included in
such registration pro rata with the Company and among each other on the basis of
the number of shares so registered.
2.9 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 2,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (180) days or until such earlier date as the distribution described in
the Registration Statement has been completed;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities.
(d) Furnish, at the request of any Holder requesting
registration of Registrable Securities, at the time such securities are
delivered to the underwriters (if any) for sale in connection with a
registration pursuant to this Section 2.9, (i) an opinion, dated such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter dated the
date of commencement of the offering and a "bring-down" letter dated as of the
closing date of such offering, from the independent accountants of the Company,
in form and substance as is customarily given by independent accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in such states or jurisdictions.
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(f) Notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
2.10 Indemnification.
(a) The Company will indemnify each Holder, each of its
officers, directors, partners, shareholders and legal counsel, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
and each underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of the Securities Act or any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers, directors, partners,
shareholders and legal counsel and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Company and signed by such Holder, controlling person or
underwriter and intended to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, and legal counsel, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other Holder, each of its officers, directors, partners
and legal counsel and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not
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misleading, and will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company and signed by such
Holder and intended to be specifically for use therein. Notwithstanding the
foregoing, the liability of each Holder under this subsection (b) shall be
limited to the proportion of any such loss, claim. damage, liability or expense
which is equal to the proportion that the public offering price of the shares
sold by such Holder under such registration statement bears to the total public
offering price of all securities sold thereunder, but not to exceed the proceeds
received by such Holder from the sale of Registrable Securities covered by such
registration statement after deducting all underwriting discounts, selling
commissions and stock transfer taxes paid for incurred in connection with the
issuance and sale of such Registrable Securities. A Holder will not be required
to enter into any agreement or undertaking in connection with any registration
under this Section 2 providing for any indemnification or contribution on the
part of such Holder greater than the Holder's obligations under this Section
2.10(b).
(c) Each party entitled to indemnification under this Section
2.10 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 2 unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate and different defenses but shall bear the expense of such defense
nevertheless. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for paragraphs (a) through
(c) of this Section 2.10 is unavailable or insufficient to hold harmless an
indemnified party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in respect thereof referred to therein, then
each indemnifying party shall in lieu of indemnifying such indemnified party
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the Holder of such
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Registrable Securities, on the other, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or actions
as well as any other relevant equitable considerations, including the failure to
give any notice under paragraph (c). The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact relates to information supplied by the Company, on the one
hand, or the underwriters or the Holders of such Registrable Securities, on the
other, and to the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each of the Holders agrees that it would not be just and equitable if
contributions pursuant to this paragraph were determined by pro rata allocation
(even if all of the Holders of such Registrable Securities were treated as one
entity for such purpose) or by any other method of allocation which did not take
account of the equitable considerations referred to above in this paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages, liabilities or action in respect thereof, referred to above in
this paragraph, 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
paragraph, no Holder shall be required to contribute any amount in excess of the
lesser of (i) the proportion that the public offering price of shares sold by
such Holder under such registration statement bears to the total public offering
price of all securities sold thereunder, but not to exceed the proceeds received
by such Holder for the sale of Registrable Securities covered by such
registration statement after deducting all underwriting discounts, selling
commissions and stock transfer taxes paid or incurred in connection with the
issuance and sale of such Registrable Securities or (ii) the amount of any
damages which such Holder would have otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission. No person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
Securities Act), shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation.
2.11 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as shall be
requested by the Company and which is necessary for legal compliance purposes in
connection with any registration, qualification or compliance referred to in
this Section 2.
2.12 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended.
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(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of 1934, as amended (at any time
after it has become subject to such reporting requirements).
(c) So long as an Investor owns any Restricted Securities to
furnish to the Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Securities Exchange Act of 1934 (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.
2.13 Transfer of Registration Rights. The rights to cause the
Company to register securities granted Holders under Sections 2.5, 2.6 and 2.7
may be assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Holder of not less than 50,000 shares
of Registrable Securities, or to any transferee or assignee who is a general or
limited partner or affiliate of such Holder or a limited partnership, limited
liability company member or investment fund under common management and control
with such Holder, is a constituent partner of a Holder or the estate of such
constituent partner, provided that such transfer may otherwise be effected in
accordance with applicable securities laws and that any such transferee agrees
to execute and deliver to the Company an undertaking to be bound by the
provisions of this Agreement.
2.14 Rule 144A Information. Whenever the Company receives a request
for the following information from Initiating Holders, then the Company shall
within 60 days after the date of such request provide the information required
in Rule 144A(d)(4) under the Securities Act to such Initiating Holders and any
person or persons designated by the Initiating Holders as a prospective buyer in
a transaction pursuant to Rule 144A. The Company's obligations pursuant to this
Section 2.14 shall extend to any person who acquires shares of the Company's
Series A, Series B, Series C, Series D Stock, any NBC Warrant, the GE Capital
Warrant and/or Conversion Stock as a result of a transaction pursuant to Rule
144A.
2.15 Limitations on Subsequent Registration Rights. From and after
the date of this Agreement, the Company will not grant additional registration
rights except pursuant to an amendment to this Agreement signed by the Company
and the holders of two thirds (2/3) of the Registrable Securities.
2.16 Termination of Registration Rights. The rights granted under
this Section 2 shall terminate as to any Holder upon the later of (i) the fifth
anniversary of the consummation of the initial underwritten public offering of
the Company's securities pursuant to a registration statement filed under the
Securities Act (the "IPO Closing Date") or (ii) at such
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time as such Holder is able to sell publicly without registration all
Registrable Securities then held by such Holder, if any, within a ninety day
period pursuant to Rule 144 of the Securities Act.
2.17 Termination of Restrictions on Registrable Securities. All
restrictions on Shares, Registrable Securities and Conversion Stock shall, to
the fullest extent possible in compliance with applicable federal securities
laws, terminate on the IPO Closing Date.
3. Series B, Series C and Series D Investors' Right of First Refusal.
3.1 Right of First Refusal Upon Issuances of Securities by the
Company.
(a) Subject to the preferential rights provided to NBC
Multimedia, Inc. pursuant to Section 5 hereof, the Company hereby grants, on the
terms set forth in this Section 3.1, to each Series B, Series C and Series D
Investor the right of first refusal to purchase all or any part of such Series
B, Series C and Series D Investor's pro rata share, respectively, of the New
Securities (as defined in Section 3.1(b)) which the Company may, from time to
time, propose to sell and issue. The Series B, Series C and Series D Investors
may purchase said New Securities on the same terms and at the same price at
which the Company proposes to sell the New Securities. The pro rata share of
each Series B, Series C or Series D Investor, respectively, for purposes of this
right of first refusal, is the ratio of the total number of shares of Common
Stock held by such Series B, Series C or Series D Investor, respectively,
including any shares of Common Stock into which shares of Series B, Series C or
Series D Stock held by such Series B, Series C or Series D Investor are
convertible, to the total number of shares of Common Stock outstanding
immediately prior to the issuance of the New Securities (including any shares of
Common Stock into which outstanding shares of Series B, Series C or Series D
Stock are convertible); provided, however, in the event the Company proposes to
enter into any transaction for the sale of New Securities that would result in a
change of control in 50% or more of the voting securities of the Company, the
pro rata share of each Series B, Series C or Series D Investor shall be the
ratio of the total number of shares of Series B, Series C or Series D Stock held
by such Series B, Series C or Series D Investor, respectively, including any
shares of Common Stock into which shares of Series B, Series C or Series D Stock
held by such Series B, Series C or Series D Investor have been converted, to the
total number of shares of Series B, Series C and Series D Stock outstanding
immediately prior to the issuance of the New Securities (including any shares of
Common stock into which outstanding shares of Series B, Series C or Series D
Stock have been converted.)
(b) "New Securities" shall mean any capital stock of the
Company, whether now authorized or not, and any rights, options or warrants to
purchase said capital stock, and securities of any type whatsoever that are, or
may become, convertible into said capital stock; provided that "New Securities"
does not include (i) the Series D Stock issued pursuant to the Series D
Agreement, (ii) any NBC Warrant, (iii) the GE Capital Warrant, (iv) the Series D
Stock issuable upon exercise of any NBC Warrant, (v) the Series D Stock issuable
upon exercise of the GE Capital Warrant, (vi) the Conversion Stock, (vii)
securities offered pursuant to a
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registration statement filed under the Securities Act, as hereinafter defined,
(viii) securities issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the assets or other
reorganization, (ix) all shares of Common Stock or other securities hereafter
issued or issuable to officers, directors, employees, scientific advisors or
consultants of the Company pursuant to any employee or consultant stock
offering, plan or arrangement unanimously approved by the board of directors of
the Company, (x) all shares of Common Stock or other securities hereafter issued
in connection with or as consideration for acquisition or licensing of
technology, which issuances are approved by the board of directors of the
Company (xi) all shares of Common Stock or other securities hereafter issued
pursuant to warrants, rights or options, provided that (A) the rights of first
refusal established hereby applied to the initial sale or grant by the Company
of such warrants, rights or options or (B) such warrants, options or rights were
issued before the date hereof, and (xii) up to an aggregate of 250,000 shares of
Common Stock or other securities issued in connection with equipment leasing or
equipment financing arrangements approved by the Board of Directors of the
Company.
(c) In the event the Company proposes to undertake an issuance
of New Securities, it shall give to the Series B, Series C and Series D
Investors written notice (the "Notice") of its intention, describing the type of
New Securities, the price, the terms upon which the Company proposes to issue
the same. The Series B, Series C and Series D Investors shall have until the
date of closing of the issuance of the New Securities (the "New Securities
Closing Date"), which date shall not be less than thirty (30) days from the date
of the Notice, to purchase their pro rata share (as described above) of the New
Securities for the price and upon the terms specified in the Notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased and forwarding payment for such New Securities to the Company on
the New Securities Closing Date. Each Series B, Series C and Series D Investor
that agrees to purchase more than its pro rata share may purchase that number of
securities for which the Series B, Series C and Series D Investors are entitled
to subscribe but for which such Series B, Series C and Series D Investors have
not subscribed ("Available Securities"), up to such oversubscribing Series B,
Series C and Series D Investor's pro rata share of such Available Securities,
determined by allocating among such oversubscribing Series B, Series C and
Series D Investors in proportion to their relative holdings of equity interests
in the Company (as determined in calculating pro rata shares) provided that no
such Series B, Series C and Series D Investor shall be allocated more than the
number of securities which such Series B, Series C and Series D Investor agreed
to purchase.
(d) The right of first refusal granted under this Section 3.1
shall expire upon:
(i) The IPO Closing Date.
(ii) For each Series B, Series C and Series D
Investor, the date on which such Series B, Series C and Series D Investor no
longer holds a minimum of 250,000 of the Shares or of the Conversion Stock
issued upon conversion thereof or the number of Shares of Common Stock and
Series B, Series C and Series D Stock originally purchased by such Series B,
Series C and Series D Investor, whichever is less.
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3.2 Assignment of Rights. The right of first refusal granted under
this Section is assignable by any Series B Investor, Series C Investor or Series
D Investor to any transferee of a minimum of 50,000 Shares or 50,000 shares of
Conversion Stock or to any transferee who is a general or limited partner or
limited liability company member or affiliate of such Series B Investor, Series
C Investor or Series D Investor, or a limited partnership or investment fund
under common management and control with such Series B Investor, Series C
Investor or Series D Investor.
4. Right of First Refusal.
4.1 Proposed Voluntary Transfer of Securities.
(a) Subject to the provisions of this Agreement, whenever any
Investor has received an offer from a third party (other than in connection with
transfers in compliance with clauses (i) and (ii) of the first parenthetical of
Section 2.3 of this Agreement whether with or without consideration or in
connection with an initial public offering, merger or acquisition involving the
Company) (the "Third Party Offeror") to buy for cash (a "Third Party Offer") all
or any portion of its Shares (the "Offered Securities") and such investor
desires to accept the Third Party Offer, such Investor (the "Selling Investor")
shall make an offer (the "Right of First Refusal") to sell the Offered
Securities to the other Investors in accordance with the provisions and
procedures set forth below. Such Right of First Refusal shall be effected upon
the same terms and conditions as the Third Party Offer.
(b) The Selling Investor shall send written notice of the
Right of First Refusal (the "Notice") to the other Investors and the Company,
which shall state the number of shares constituting the Offered Securities and
the proposed purchase price per share thereof (the "Third Party Offer Price").
The Notice shall also state the material terms and conditions of the Third Party
Offer.
(c) The Investors (other than the Selling Investor) shall have
the right;
(i) to purchase all (but not less than all) of the
Offered Securities at a purchase price equal to the Third Party Offer Price and
upon the terms and conditions of the Third Party Offer; or
(ii) to elect not to exercise the Right of First
Refusal.
(d) The Right of First Refusal shall be exercisable by written
notice to the Selling Investor with a copy to the Company given within fifteen
(15) days after receipt of the Notice described in subsection (b) above the
("Notice Period"). A failure to give such notice within the Notice Period shall
be regarded as a rejection of the Right of First Refusal.
(e) Notwithstanding anything to the contrary in this Section
4.1 hereto, Intel Corporation agrees that whenever it receives a Third Party
Offer from a Third Party Offeror to purchase all or any portion of its Series C
Stock or Series D Stock, Intel will first negotiate in good faith to sell its
Series C Stock or Series D Stock to the Company for a period of not less
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than 30 days before selling its Series C Stock or Series D Stock to any Third
Party Offeror. Upon completion of such 30 day period, Intel shall be free to
sell its shares without any contractual right of first refusal whatsoever and
free of any Right of First Refusal as set forth in this Section 4.1 for a period
of no longer than 180 days. This Section 4.1(e) shall apply to Intel's Right of
First Refusal and with respect to Intel shall supersede Section 4.1(a)-(d)
above.
(f) Notwithstanding anything to the contrary in this Section
4.1 hereto, SOFTBANK Ventures, Inc. ("Softbank") and its assignees shall have
the right to assign (by sale or otherwise) any and all shares of Series C or
Series D Stock to any affiliated entity, including any affiliated corporation,
partnership, limited liability company or investment fund.
(g) Notwithstanding anything to the contrary in this Section
4.1 hereto, each Series D Investor and its assignees shall have the right to
assign (by sale or otherwise) any and all shares of Series D Stock held by such
Series D Investor or assignee to any affiliated entity, including any affiliated
corporation, partnership, limited liability company or investment fund.
4.2 Sale to Other Investors. The closing of the purchase of Offered
Securities subscribed to by any Investors under subsection (4.1) above shall be
held at the principal office of the Company at 11:00 a.m. local time on the 30th
day after the date on which the Notice Period shall have expired or at such
other time and places as the parties to the transaction may agree. At such
closing, the Selling Investor shall deliver certificates representing the
Offered Securities, duly endorsed, and such Offered Securities shall be free and
clear of any liens, claims, options, charges, encumbrances or rights (other than
those arising hereunder) and the Selling Investor shall so represent and
warrant, and shall further represent and warrant that is the beneficial and
record owner of such Offered Securities. An Investor purchasing Offered
Securities shall deliver at the closing payment in full in immediately available
funds for the Offered Securities purchased by it. At such closing, all of the
parties to the transaction shall execute such additional documents as are
otherwise necessary or appropriate.
4.3 Sale to Third Party Offeror. Unless the other Investors elect to
purchase all of the Offered Securities under subsection (4.1), the Selling
Investor may sell the Offered Securities to the Third Party Offeror on the terms
and conditions of the Third Party Offer; provided, however, that such sale is
bona fide and the closing occurs within ninety (90) days of the expiration of
the Notice Period. If such sale is not consummated within such 90-day period,
the restrictions provided for herein shall again become effective, and no
transfer of such Offered Securities may be made thereafter without again
offering the same to the other Investors in accordance with this Agreement.
4.4 Termination. The right of First Refusal set forth in this
Section 4 shall terminate automatically at the IPO Closing Date.
5. NBC Preferential Right.
(a) In any private or public financing or transaction in which
the Company repurchases its equity held by third party shareholders after the
date hereof, NBC
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Multimedia, Inc. ("NBC") shall have the right to purchase, at market rates
established in the relevant financing or at the relevant purchase price
established in such transaction, preferred or common equity of the Company that
is involved in such transaction until such time as NBC has actually purchased a
number equal to 10% of the aggregate shares of capital stock the Company on a
fully diluted basis as of the completion of the Series D financing shares of the
Company, which shares shall be over and above (i) the shares of Series D Stock
issued and sold to NBC on the date hereof and (ii) the shares of Series D Stock
and/or Conversion Stock issuable to NBC upon exercise and/or conversion of the
NBC Warrants. The Company will provide the exact number of shares specified in
this Section 5(a) within ninety (90) days after the Closing Date.
(b) The rights granted under this Section 5 shall rank in
priority to the right of first refusal provided to certain other parties
pursuant to Section 3.1 hereof, and the rights of such other parties thereto may
be exercised (i) with respect to any New Securities, only after NBC has declined
to purchase such New Securities under this Section 5 or (ii) following
termination of the rights granted under this Section 5.
(c) The rights granted under this Section 5 shall expire upon
the date upon which NBC has actually purchased that number of shares of the
Company specified in Section 5(a) above over and above (i) the shares of Series
D Stock issued and sold to NBC on the date hereof and (ii) the shares of Series
D Stock and/or Conversion Stock issuable to NBC upon exercise and/or conversion
of the NBC Warrants.
(d) The rights granted under this Section 5 are assignable by
NBC to any transferee of a minimum of 250,000 Shares or 250,000 shares of
Conversion Stock or to any affiliated entity, including any affiliated
corporation, partnership, limited liability company or investment fund.
6. Further Agreements. The parties hereto hereby agree as follows:
(a) The rights and obligations of the Compensation Committee
and Finance Committee of the Company's Board of Directors and the Chairman of
each such committee shall be transferred to the full Board of Directors.
(b) Any increase or change in the compensation at any employee
or officer of the Company who is also a director of the Company shall be
unanimously approved by members of the Board of Directors who are not also
employees or officers of the Company.
(c) All parties agree to take any and all legal actions,
including voting their shares in such a manner as to give effect to the
provisions of this Agreement.
7. Board and Voting Agreements.
7.1 Board of Directors Nominee. Until such time as the IPO Closing
Date, as long as:
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(a) Lee Entertainment L.L.C. or any of its affiliates ("Lee")
own at least twenty-five percent (25%) of the originally purchased shares of
Series C Stock or Common Stock, each investor who holds Series C Stock agrees to
vote all shares of Series C Stock held by such Investor by written consent or a
duly held meeting of stockholders in favor of the representative of Lee to serve
as a nominee of the Series C Stock to the Company's Board of Directors.
(b) As long as Intel Corporation ("Intel") owns at least
seventy-five percent (75%) of the originally purchased shares of Series C Stock
or Series D Stock or Common Stock, each investor who holds Series C Stock agrees
to vote all shares of Series C Stock held by such Investor by written consent or
a duly held meeting of stockholders in favor of the representative of Intel to
serve as a nominee of the Series C Stock to the Company's Board of Directors. As
an alternative to Section 6.1(b), Intel shall, solely at its option, have the
right to appoint a person to attend all board meetings as an observer on Intel's
behalf. In the event that Intel elects to appoint an observer rather than a
director there shall remain a vacancy on the Board to be filled only by Intel at
such time as it chooses to appoint a director.
(c) As long as SOFTBANK owns at least seventy-five percent
(75%) of the originally purchased shares of Series C Stock or Common Stock,
SOFTBANK shall have the right to appoint a person to attend all board meetings
as an observer on its behalf.
(d) As long as Island or an affiliate of Island (collectively,
"Island Entities") owns at least seventy-five percent (75%) of the shares of
Series C Stock originally purchased by Island, or has the power to vote or
dispose of, or to direct the vote or disposition of such shares, each Investor
who or which holds Series C Stock agrees to vote all shares of Series C Stock
held by such Investor by written consent or a duly held meeting of stockholders
in favor of the representative of Island Entities to serve as a director of the
Company elected by the holders of the Series C Stock. The director
representative of the Island Entities shall be Lawrence Mestel, Christopher
Blackwell or such other nominee of the Island Entities who is approved by the
Board of Directors of the Company, which approval shall not be unreasonably
withheld.
(e) As long as GE Capital owns, has the power to vote or
dispose of, or has the power to direct the vote or disposition of, at least
seventy-five percent (75%) of the shares of Series D Stock originally purchased
by GE Capital, (i) GE Capital shall have the right to appoint a person to attend
all board meetings as an observer on its behalf and (ii) upon distribution to
the members of the board of directors, the Company shall deliver to GE Capital a
copy of all written materials and information so distributed in advance of, or
at, each board meeting.
(f) As long as Avalon Technology LLC or an affiliate of Avalon
Technology LLC owns at least seventy-five percent (75%) of the shares of Series
D Stock originally purchased by Avalon Technology LLC, or has the power to vote
or dispose of or to direct the vote or disposition of such shares, each Investor
who or which holds Series D Stock agrees to vote all shares of Series D Stock
held by such Investor by written consent or a duly held meeting of stockholders
in favor of the representative of Avalon Technology LLC to serve
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as a director of the Company elected by the holders of the Series D Stock. The
director representative of Avalon Technology LLC shall be Richard D. Snyder or
such other nominee who is approved by the Board of Director of the Company,
which approval shall not be unreasonably withheld.
(g) Upon (i) the exercise by GE Capital of the GE Capital
Warrant, (ii) the exercise by NBC of the NBC Warrant and (iii) if on the date of
such exercise GE Capital or an affiliate of GE Capital owns at least
seventy-five percent (75%) of the shares of Series D Stock originally purchased
by GE Capital, each Investor who or which holds Series B, Series C and/or Series
D Stock agrees to vote all shares of Series B, Series C and Series D Stock held
by such Investor by written consent or a duly held meeting of stockholders in
favor of (i) the removal of any director elected by the holders of the Series B,
Series C and Series D Stock, voting as a separate class, pursuant to the
Company's Second Amended and Restated Certificate of Incorporation, who has not
been nominated by GE Capital and (ii) the election of the nominee of GE Capital
to serve as a director of the Company elected by the holders of Series B, Series
C and Series D Stock. The director representative of GE Capital shall be
approved by the Board of Directors of the Company, which approval shall not be
unreasonably withheld.
7.2 Series B, Series C and Series D Board Seat. With respect to
Section 4(b) in the Company's Second Amended and Restated Certificate of
Incorporation, regarding the director elected to the Company's Board of
Directors by mutual agreement between a majority of the holders of the
outstanding shares of Series B Stock, a majority of the holders of the
outstanding shares of Series C Stock and a majority of the holders of the
outstanding shares of Series D Stock, each voting as a separate class except as
set forth in Section 7.1(g) above, should the majority of the holders of such
Series B, Series C and Series D Stock be unable to mutually agree upon such a
director, such Board membership shall remain vacant until such time as a
majority of the holders of the outstanding shares of Series B, Series C and
Series D Stock each voting as a separate class shall mutually agree upon such a
director. Such Board member shall be elected annually and shall serve a one-year
term expiring upon the occurrence of the next annual shareholder meeting of the
Company.
7.3 Series B and Series C Investors Voting Arrangement. Lee and The
Phoenix Partners II Limited Partnership, The Phoenix Partners III Limited
Partnership and The Phoenix Partners IV Limited Partnership (collectively
"Phoenix") hereby agree as follows:
(a) Not to vote any shares of Series A, Series B or Series C
Stock held by such parties in order to (i) block a liquidation of the Company in
which proceeds from such transaction equal or exceed $2.85 per share or (ii) to
block any merger, sale, acquisition or otherwise of the Company in which
proceeds from such transaction equal or exceed $2.85 per share of the Company's
Series C Stock (adjusted for stock splits, recapitalizations and the like).
(b) Lee and Phoenix also agree not to vote any shares of
Series A, Series B or Series C Stock held by such parties in order to block any
financing for the Company in pari passu preferred or senior preferred stock
(which preference will be limited to the dollar amount of investment) up to an
amount of $2 million.
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(c) Lee and Phoenix acknowledge thereby that by the voting
arrangements set forth in this Section 6, each has waived, in the circumstances
set forth in this Section, their respective protective rights to block certain
transactions as granted to holders of the Series B and Series C Stock as set
forth in the Company's Second Amended and Restated Certificate of Incorporation.
7.4 Side Letter. The signatories hereto are aware of the terms,
conditions and existence of the three Side Letter Agreements dated March 5,
1996, February 27, 1998 and February 27, 1998, respectively by and between Intel
and the Company and of the Side Letter Agreement dated July 12, 1996 by and
between Island Trading Co., Inc. and the Company.
8. Miscellaneous.
8.1 Waivers and Amendments. The obligations of the Company and the
rights of the Investors and holders of Shares and Conversion Stock under this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely) only with the written consent of the Company and the Investors
holding more than eighty percent (80%) of the Shares and Conversion Stock, and
with the same consent the Company, when authorized by resolution of its Board of
Directors, may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement; provided, however, that no such waiver or supplemental
agreement shall reduce the aforesaid percentage of Shares and Conversion Stock,
the Investors holding which are required to consent to any waiver or
supplemental agreement without the consent of the record holders of all of the
Shares and Conversion Stock and no such waiver or supplemental agreement shall
adversely affect any Series of Series A, Series B, Series C or Series D Stock in
a manner different than any other Series of such stock without the approval of
eight percent (80%) of the holders of the outstanding voting shares of such
series provided, further, that no such waiver or supplemental agreement shall
adversely affect the rights of any NBC Warrant, the GE Capital Warrant, the
Series D Stock issuable upon exercise of any NBC Warrant, the Series D Stock
issuable upon exercise of the GE Capital Warrant or any shares of Series D Stock
issued pursuant to the Series D Agreement in a manner different from any other
holder of Series D Stock without the prior written consent of the holder of such
NBC Warrant, GE Capital Warrant or Series D Stock. Notwithstanding the
foregoing, no such supplemental agreement, amendment, waiver or other instrument
effected in accordance with this Section 8.1 shall increase the obligations of
any Investor or holder of Shares or Conversion Stock unless such Investor or
holder shall have consented thereto in writing. Upon the effectuation of each
such waiver, consent, agreement, amendment or modification the Company shall
promptly give written notice thereof to the record holders of the Shares and
Conversion Stock who have not previously consented thereto in writing. Neither
this Agreement nor any provisions hereof may be changed, waived, discharged or
terminated orally, but only by a signed statement in writing. In addition,
notwithstanding this Section 8.1, there shall be no change to any provision of
this Agreement which grants rights or benefits to a particular Investor without
the prior written consent of such Investor.
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8.2 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
8.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
8.4 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
8.5 Notices. All notices and other communications required or
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, overnight delivery service or U.S.
mail, in which event it may be mailed by first-class, certified or registered,
postage prepaid, addressed (a) if to an Investor or Holder, at such address as
such Investor or Holder shall have furnished the Company in writing or (b) if to
the Company, at such address as the Company shall have furnished to the
Investors and Holders in writing. Notwithstanding the foregoing, all notices and
communications to addresses outside the United States shall be given by
telecopier and confirmed in writing sent by overnight or two-day courier
service.
8.6 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
8.8 Nominees. Securities registered in the name of a nominee for an
Investor or Holder shall, for purposes of this Agreement, be treated as being
owned by such Investor or Holder.
Remainder of Page Intentionally Left Blank
23
<PAGE> 24
The foregoing Second Amended and Restated Investors Rights Agreement is
hereby executed as of the date first above written.
COMPANY:
2WAY MEDIA, INC.
By: /s/ Robert D. Roback
-----------------------------------
Title: President
-----------------------------------
PRIOR INVESTORS:
THE PHOENIX PARTNERS II
LIMITED PARTNERSHIP
By the Phoenix Management
Partners II, its General Partner
By: /s/ David B. Johnston
-----------------------------------
David B. Johnston,
General Partner
THE PHOENIX PARTNERS III
LIMITED PARTNERSHIP
By the Phoenix Management
Partners III, its General Partner
By: /s/ David B. Johnston
-----------------------------------
David B. Johnston,
General Partner
<PAGE> 25
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
INVESTORS RIGHTS AGREEMENT
DATED FEBRUARY 27, 1998
THE PHOENIX PARTNERS IV
LIMITED PARTNERSHIP
By the Phoenix Management
IV, L.L.C. its General Partner
By: /s/ David B. Johnston
-----------------------------------
David B. Johnston,
Member
INTEL CORPORATION
By: /s/ Arvind Sodhani
-----------------------------------
Title: Vice President and Treasurer
-----------------------------------
Signature:
-------------------------------
LEE ENTERTAINMENT L.L.C.
By: Mie Kyung Lee
-----------------------------------
Title: Executive Director
-----------------------------------
Signature: /s/ Mie Kyung Lee
-------------------------------
<PAGE> 26
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
INVESTORS RIGHTS AGREEMENT
DATED FEBRUARY 27, 1998
ISLAND TRADING CO, INC.
By: Lawrence Mestel
-----------------------------------
Title: Chief Operating Officer
-----------------------------------
Signature: /s/ Lawrence Mestel
-------------------------------
SOFTBANK VENTURES INC.
By: Yoshitaka Kitao
-----------------------------------
Title: President and CEO
-----------------------------------
Signature: /s/ Yoshitaka Kitao
-------------------------------
NEW INVESTORS:
GENERAL ELECTRIC CAPITAL CORPORATION
By: Russell W. Howard
-----------------------------------
Title: Region Operations Manager
-----------------------------------
Signature: /s/ Russell W. Howard
-------------------------------
<PAGE> 27
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
INVESTORS RIGHTS AGREEMENT
DATED FEBRUARY 27, 1998
AVALON TECHNOLOGY LLC
By: Richard D. Snyder
-----------------------------------
Title: President
-----------------------------------
Signature: /s/ Richard D. Snyder
-------------------------------
NBC MULTIMEDIA, INC.
By: Edmond Santos
-----------------------------------
Title: Vice President
-----------------------------------
Signature: /s/ Edmond Santos
-------------------------------
GATEWAY 2000, INC.
By: N/A
-----------------------------------
Title:
-----------------------------------
Signature:
-------------------------------
<PAGE> 28
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
INVESTORS RIGHTS AGREEMENT
DATED FEBRUARY 27, 1998
DIGITAL VENTURES LIMITED
By: Grange Trustees Limited
----------------------------------
Title: Secretary
----------------------------------
Signature: For and on behalf of Grange
Trustees Limited, Authorized
Signatory
ALLEN & COMPANY INCORPORATED
By: Stanley S. Shuman
----------------------------------
Title: Executive Vice President
----------------------------------
Signature: /s/ Stanley S. Shuman
------------------------------
FOUNDING SHAREHOLDERS:
/s/ David Goldberg
-----------------------------------------
David Goldberg
/s/ Robert Roback
-----------------------------------------
Robert Roback
<PAGE> 29
AMENDMENT NO. 1
TO SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
This Amendment No. 1 dated May 29, 1998 (the "Rights Agreement Amendment")
to Second Amended and Restated Investors Rights Agreement dated February 27,
1998 (the "Rights Agreement"), is entered into by and among Launch Media, Inc.,
a Delaware corporation (the "Company"), the undersigned holders of Series A,
Series B, Series C and Series D Stock of the Company (the "Prior Investors"),
Allen & Company Incorporated as a holder of a warrant to purchase the Company's
Common Stock and Goran Enterprises Limited as a new investor of Series D Stock
(hereinafter the "New Investor"). Capitalized terms used herein and not
otherwise defined herein shall have the same meanings as in the Rights
Agreement.
RECITALS
A. The Company and the holders of Series D Stock have previously entered
into the Series D Securities Purchase Agreement dated February 27, 1998.
B. The Company, the Prior Investors and Allen & Company Incorporated have
previously entered into the Rights Agreement.
C. Concurrent herewith, the Company, holders of the Company's Series D
Stock and the New Investor are entering into an Amendment No. 1 to the Series D
Securities Purchase Agreement (the "Amendment") to provide for among other
things, the issuance and sale of up to 2,287,582 shares of Series D Stock to the
New Investor in an Additional Closing (as defined in the Amendment).
D. The Board of Directors of the Company has determined that it is in the
best interests of the Company to amend the Rights Agreement in the form hereof.
E. It is intended that by its signatures hereto the New Investor becomes a
party to the Rights Agreement, as amended by this Agreement, effective as of the
date upon which it purchases shares of Series D Stock and be included in the
definition of "Investors" as that term is defined in the Rights Agreement.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
A new Section 7.1(h) in the form set forth below is hereby added to the
Rights Agreement as follows:
"(h) As long as Goran Enterprises Limited or an affiliate of Goran
Enterprises Limited in the aggregate owns at least seventy-five percent (75%) of
the shares of Series D Stock originally purchased by Goran Enterprises Limited,
or has the power to vote or dispose of or to
1
<PAGE> 30
direct the vote or disposition of such shares, each Investor who or which holds
Series D Stock agrees to vote all shares of Series D Stock held by such Investor
by written consent or a duly held meeting of stockholders in favor of the
representative of Goran Enterprises Limited to serve as a director of the
Company elected by the holders of the Series D Stock. The director
representative of Goran Enterprises Limited shall be Thomas Hoegh or such other
nominee who is approved by the Board of Directors of the Company, which approval
shall not be unreasonably withheld."
7. By its signature hereto, the New Investor becomes a party to the Rights
Agreement, as amended by this Agreement, and are included for all purposes in
the definition of Investors as that term is defined in the Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date referenced above.
"COMPANY"
LAUNCH MEDIA, INC.
By: /s/ Robert D. Roback
--------------------------------
Name: Robert D. Roback
--------------------------------
Title: President
--------------------------------
2
<PAGE> 31
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
DATED AS OF MAY 29, 1998
"PRIOR INVESTOR"
THE PHOENIX PARTNERS II LIMITED PARTNERSHIP
By: By the Phoenix Management Partners II
Its: General Partner
By: /s/ David B. Johnston
-------------------------------------
David B. Johnston
General Partner
"PRIOR INVESTOR"
THE PHOENIX PARTNERS III LIMITED PARTNERSHIP
By: The Phoenix Management Partners III
Its: General Partner
By: /s/ David B. Johnston
-------------------------------------
David B. Johnston
General Partner
"PRIOR INVESTOR"
THE PHOENIX PARTNERS IV LIMITED PARTNERSHIP
By: The Phoenix Management IV, L.L.C.
Its: General Partner
By: /s/ David B. Johnston
-------------------------------------
David B. Johnston
Member
3
<PAGE> 32
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
DATED AS OF MAY 29, 1998
"PRIOR INVESTOR"
INTEL CORPORATION
By: /s/ Arvind Sodhani
-------------------------------------
Title: Vice President and Treasurer
-------------------------------------
"PRIOR INVESTOR"
LEE ENTERTAINMENT L.L.C.
By: [Illegible]
-------------------------------------
Title: President
-------------------------------------
"PRIOR INVESTOR"
SOFTBANK VENTURES INC.
By: /s/ Yoshitaka Kitao
------------------------------------
Name: Yoshitaka Kitao
------------------------------------
Title: President and CEO
------------------------------------
4
<PAGE> 33
"PRIOR INVESTOR"
ISLAND TRADING CO., INC.
By: /s/ Lawrence Mestel
------------------------------------
Name: Lawrence Mestel
------------------------------------
Title: COO
------------------------------------
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
DATED AS OF MAY 29, 1998
"PRIOR INVESTOR"
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Russell W. Howard
------------------------------------
Name: Russell W. Howard
------------------------------------
Title: Region Operations Manager
------------------------------------
"PRIOR INVESTOR"
NBC MULTIMEDIA, INC.
By: /s/ C. Glowacki
------------------------------------
Name: C. Glowacki
------------------------------------
Title: Vice President
------------------------------------
"PRIOR INVESTOR"
AVALON TECHNOLOGY LLC
By: /s/ Richard D. Snyder
------------------------------------
Name: Richard D. Snyder
------------------------------------
Title: Avalon Ventures LLC
------------------------------------
5
<PAGE> 34
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
DATED AS OF MAY 29, 1998
"PRIOR INVESTOR"
ALLEN & COMPANY INCORPORATED
By: /s/ Stanley S. Shuman
------------------------------------
Name: Stanley S. Shuman
------------------------------------
Title: Exec. V.P.
------------------------------------
"PRIOR INVESTOR"
DIGITAL VENTURES LIMITED
By: For and on behalf of
Grange Trustees Limited,
Authorized Signatory
------------------------------------
Name: Grange Trustees Limited
------------------------------------
Title: Secretary
------------------------------------
"NEW INVESTOR"
GORAN ENTERPRISES LIMITED
By: For and on behalf of
Grange Trustees Limited,
Authorized Signatory
------------------------------------
Name: Grange Trustees Limited
------------------------------------
Title: Secretary
------------------------------------
6
<PAGE> 1
EXHIBIT 4.2
SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
This Second Amended and Restated Co-Sale Agreement is made and entered
into as of February 27, 1998, by and among 2Way Media, Inc., a Delaware
corporation (the "Company"), the undersigned holders of the Series B and Series
C Stock (the "Prior Investors"), David Goldberg and Robert Roback (the "Founding
Stockholders"), the undersigned purchasers of the Series D Stock and additional
signatories to this Agreement, if any, who purchase Series D Stock pursuant to
the Series D Securities Purchase Agreement subsequent to the date hereof (the
"New Investors" or collectively with the "Prior Investors," the "Investors").
RECITALS
A. The Prior Investors and Founding Stockholders entered into the
Amended and Restated Co-Sale Agreement and the Securities Purchase Agreement
(the "Prior Agreements") as of March 29, 1996.
B. The Prior Investors and New Investors (sometimes individually
referred to as "Investor" and sometimes collectively referred to as the
"Investors") intend to purchase from the Company shares of its Series D Stock
and certain warrants pursuant to that certain Series D Securities Purchase
Agreement (the "Series D Agreement") entered into by and among the Company and
the Investors dated of even date herewith.
C. To induce the Investors to purchase such shares of the Series D Stock
and certain warrants from the Company, the parties to the Prior Agreement have
agreed to amend and restate the Amended and Restated Co-Sale Agreement to grant
the Investors the rights of first refusal and rights of co-sale with respect to
Common Stock currently owned by such Stockholders and any other stock of the
Company hereafter owned or acquired by such Stockholders, all on the terms and
conditions set forth in this Agreement.
D. The Founding Stockholders own shares of Common Stock of the Company
in the amounts set forth on Attachment 1 hereto. The Shares of Common Stock
owned by each Founding Stockholder as of the date hereof, and any other Common
Stock of the Company (or securities convertible into or exercisable for Common
Stock of the Company, with each share of such security treated as representing
the number of shares of Common Stock into which such security could be converted
or for which such security could be exercised) acquired by a Founding
Stockholder during the term of this Agreement, shall be deemed to be "Founder
Stock" for all purposes hereunder.
E. The decision by the Investors to purchase Series D Stock and warrants
where applicable was based in part on each Founding Stockholder's agreement to
enter into this Agreement.
1
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other consideration, the receipt and adequacy of which hereby is
acknowledged, the parties hereto agree that the Amended and Restated Co-Sale
Agreement is hereby amended and restated to read in its entirety as follows:
1. Exempt Transfers. "Exempt Transfers" shall mean
(a) Any transfer or series of transfers in any year of up to a
total of 10,000 shares of Founder Stock; provided such transfers are approved in
writing in advance by Investors holding a majority of the Series A, Series B,
Series C and Series D Stock (which for all purposes hereof shall include the
Series D Stock issuable upon exercise of the warrants purchased under the Series
D Agreement) held by the Investors;
(b) Any pledge of Founder Stock made pursuant to a bona fide
loan transaction that creates a mere security interest; any transfer to a
Founding Stockholder's ancestors, descendants or spouse or to trusts for the
benefit of such persons or a Founding Stockholder; or any bona fide gift;
provided that the pledgee, transferee or donee shall enter into a written
agreement to be bound by and comply with all provisions of this Agreement and
provided such pledges or transfers are approved in writing in advance by
Investors holding two-thirds (2/3) of the Series A, Series B, Series C and
Series D Stock held by the Investors. Such transferred stock shall remain
"Founder Stock" hereunder, and such pledgee, transferee or donee shall be
treated as a "Founding Stockholder" for purposes of this Agreement;
(c) Any sale to the Company, provided such sale is approved in
writing in advance by Investors holding two-thirds (2/3) of the Series A, Series
B, Series C and Series D Stock held by the Investors; and
(d) Any sale prior to which (x) the Founding Stockholder held
less than 2% of the Company's outstanding Common Stock (treating all securities
convertible into Common Stock as if converted) or (y) the Founders collectively
held less than 4% of the Company's Common Stock (treating all securities
convertible into Common Stock as if converted), provided such sale is approved
in writing in advance by Investors holding two-thirds (2/3) of the Series A,
Series B, Series C and Series D Stock held by the Investors.
2. Rights of Co-Sale.
(a) In the event that any Founding Stockholder proposes to sell
or otherwise transfer any Founder Stock to any person or entity, other than by
an Exempt Transfer, each Investor shall have a right of co-sale (the "Right of
Co-Sale") to sell such Investor's "Pro Rata Share" (as defined below) of the
Common Stock referred to in a Co-Sale Notice delivered by such Founding
Stockholder as provided below.
(b) An Investor's "Pro Rata Share" shall be equal to a fraction,
the numerator of which is the number of shares of Common Stock held by such
Investor and the denominator of which is the total number of shares of Common
Stock held by all Investors plus the total number of
2
<PAGE> 3
shares of Founder Stock held by the Founding Stockholder. For purposes of making
such computation, Common Stock shall be deemed to include shares of Common Stock
issuable upon conversion of shares of the Company's Series A, Series B, Series C
and Series D Stock (including Series D Stock issuable upon exercise of the
warrants issued under the Series D Agreement).
(c) At least 20 days before the proposed date of a sale or
transfer of Founder Stock, each Founding Stockholder desiring to transfer
Founder Stock shall give a written notice (the "Co-Sale Notice") simultaneously
to each of the Investors in the manner provided in paragraph 7. The Co-Sale
Notice shall describe in detail the proposed transfer, including the number of
shares of Founder Stock proposed to be transferred, the proposed transfer price
or consideration to be paid (which, for consideration the value of which is not
readily ascertainable, shall be the fair market value of the Founder Stock to be
transferred as most recently determined in good faith by the Board of Directors
of the Company), the address of the Founding Stockholder proposing to transfer
shares, and the name and address of the proposed transferee (the "Transferee").
Each Investor shall have the right to sell to the Transferee (or, upon the
unwillingness of any prospective purchaser to purchase directly from such
Investor, to the selling Founding Stockholder) its Pro Rata Share (determined as
of the date the Co-Sale Notice is delivered to the Company) of the Common Stock
referred to in the Co-Sale Notice on the terms set forth in the Co-Sale Notice.
(d) An Investor shall exercise its Right of Co-Sale by
delivering a notice of exercise of the Right of Co-Sale (the "Election Notice")
to the Founding Stockholder proposing to transfer shares within 10 days after
the date the Co-Sale Notice has been deemed delivered from the Founding
Stockholder to each of the Investors. The Investor shall specify in the Election
Notice the number of shares (up to its Pro Rata Share) such Investor desires to
sell. The selling Founding Stockholder shall inform each Investor with a Right
of Co-Sale of the decision of each other Investor with a Right of Co-Sale
promptly upon learning it. The Investors agree to cooperate with each other by
advising each other of their intentions under this paragraph 2 as soon as
reasonably feasible after receiving the Notice.
(e) The selling Founding Stockholder shall assign to each
Investor which exercises its Right of Co-Sale hereunder as much of his interest
in the agreement of sale with the prospective purchaser or purchasers as such
Investor shall be entitled to and shall accept hereunder. To the extent that any
prospective purchaser or purchasers prohibits such assignment or otherwise
refuses to purchase shares or other securities from an Investor exercising its
Right of Co-Sale hereunder, the selling Founding Stockholder shall not sell to
such prospective purchaser or purchasers any Founder Stock unless and until,
simultaneously with such sale, the selling Founding Stockholder shall purchase
such shares or other securities from such Investor for the same consideration
and on the same terms and conditions as the proposed transfer described in the
Co-Sale Notice.
3. Transfer of Shares Upon Failure to Exercise Right of Co-Sale. If none
of the Investors elects to exercise the Right of Co-Sale with respect to the
Shares subject to the Co-Sale Notice, the Founding Stockholder may, not later
than 90 days following delivery to the Company
3
<PAGE> 4
and each of the Investors of the Co-Sale Notice, conclude a transfer of the
Founder Stock covered by the Co-Sale Notice on terms and conditions not more
favorable to the transferor than those described in the Co-Sale Notice. Any
proposed transfer on terms and conditions more favorable than those described in
the Co-Sale Notice, as well as any subsequent proposed transfer of any of the
Founder Stock by the Founding Stockholder, shall again be subject to the Right
of Co-Sale.
4. Termination of Right of Co-Sale. The Right of Co-Sale shall terminate
on the first to occur of (i) the closing of the initial firm commitment public
offering of the Company's securities pursuant to a registration statement filed
under the Securities Act of 1933 and resulting in the conversion of all
outstanding Series A, Series B, Series C and Series D Stock into Common Stock
pursuant to the Company's Restated Certificate of Incorporation (an "IPO"), as
amended or (ii) a merger of the Company with or into any other corporation, a
reorganization of the Company or the sale of all or substantially all of the
assets of the Company to any other person or entity, in a transaction in which
the stockholders of the Company immediately before the transaction own
immediately after the transaction less than a majority of the outstanding voting
securities of the surviving entity (or its parent).
5. Limitations on Public Resales of Shares. For a period commencing on
the IPO closing date and extending for two years thereafter, each Founding
Stockholder shall not sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any shares of Common Stock of the
Company (or securities exchangeable for or convertible into Common Stock)
without the prior approval of the board of directors of the Company.
6. Legends.
(a) All certificates representing Founder Stock shall be
endorsed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND MAY BE
TRANSFERRED ONLY IN COMPLIANCE WITH A CERTAIN SECOND AMENDED AND
RESTATED CO-SALE AGREEMENT AMONG THE HOLDER OF THESE SECURITIES AND
OTHER PARTIES NAMED THEREIN, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THE ISSUER.
(b) Each Founding Stockholder agrees that the Company may
instruct its transfer agent not to transfer any of the Securities on its books
without first ascertaining compliance with all of the applicable provisions of
this Agreement with respect to such transfer.
7. Miscellaneous.
(a) Entire Agreement: Successors and Assigns. This Agreement
constitutes the entire contract between the parties relative to the specific
subject matter hereof. Any previous agreement among the parties relative to the
specific subject matter hereof is superseded by this Agreement. The terms and
conditions of this Agreement shall inure to the benefit of and
4
<PAGE> 5
be binding upon the respective executors, administrators, heirs, successors, and
assigns of the parties. Any Investor may assign its rights hereunder to any
transferee of such Investor that is a general or limited partner or affiliate of
such Investor or a limited partnership or investment fund under common
management and control with such Investor or to any other investor who acquires
a minimum of 50,000 shares of Series A, Series B, Series C or Series D Stock.
(b) Waivers and Amendments. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such waiver, amendment, discharge or termination is sought;
provided, however, that Investors holding two-thirds (2/3) of the Series A,
Series B, Series C and Series D Stock (or Common Stock issued upon conversion
thereof) held by the Investors in the aggregate may, with the prior written
consent of the Founding Stockholders, waive, modify, or amend on behalf of all
Investors any provisions hereof. Notwithstanding the foregoing, no such waiver,
modification or amendment shall affect any series of Series A, Series B, Series
C or Series D Stock in a manner different than any other series of such stock
without the approval of two-thirds (2/3) of the holders of the outstanding
voting shares of such series.
(c) Notices. Any notice required or permitted hereunder shall be
given in writing and shall be conclusively deemed effectively given or upon
personal delivery, or 72 hours after deposit in the United States mail, by
registered or certified mail, addressed to a Founding Stockholder at the
Company's address shown below, or to an Investor at such person's address as
shown on the records of the Company. Notwithstanding the foregoing, all notices
to addresses outside the United States shall be sent by telecopier with
confirming personal delivery sent by overnight or two-day courier service.
Company's Address: 2Way Media, Inc.
1632 Fifth Street, Suite 330
Santa Monica, CA 90401
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(e) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(f) Nominees. Securities registered in the name of a nominee for
an Investor shall, for purposes of this Agreement, be deemed to be owned by such
Investor.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
FOUNDING SHAREHOLDERS:
/s/ David Goldberg
-----------------------------------------
David Goldberg
/s/ Robert Roback
-----------------------------------------
Robert Roback
PRIOR INVESTORS:
THE PHOENIX PARTNERS II
LIMITED PARTNERSHIP
By: the Phoenix Management Partners II,
its General Partner
By: /s/ David B. Johnston
--------------------------------------
David B. Johnston,
General Partner
THE PHOENIX PARTNERS III
LIMITED PARTNERSHIP
By: the Phoenix Management Partners III,
its General Partner
By: /s/ David B. Johnston
--------------------------------------
David B. Johnston,
General Partner
<PAGE> 7
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
CO-SALE AGREEMENT
DATED FEBRUARY ___, 1998
THE PHOENIX PARTNERS IV
LIMITED PARTNERSHIP
By: the Phoenix Management IV, L.L.C.
its General Partner
By: /s/ David B. Johnston
--------------------------------------
David B. Johnston,
Member
INTEL CORPORATION
By: Arvind Sodhani
--------------------------------------
Title: Vice President and Treasurer
-----------------------------------
Signature: /s/ Arvind Sodhani
-------------------------------
ISLAND TRADING CO, INC.
By: Lawrence Mestel
--------------------------------------
Title: Chief Operating Officer
-----------------------------------
Signature: /s/ Lawrence Mestel
-------------------------------
<PAGE> 8
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SECOND AMENDED AND RESTATED
CO-SALE AGREEMENT
DATED FEBRUARY ___, 1998
SOFTBANK VENTURES INC.
By: Yoshitaka Kitao
--------------------------------------
Title: President and CEO
-----------------------------------
Signature: /s/ Yoshitaka Kitao
-------------------------------
NEW INVESTORS:
GENERAL ELECTRIC
CAPITAL CORPORATION
By: Russell W. Howard
--------------------------------------
Title: Region Operations Manager
-----------------------------------
Signature: /s/ Russell W. Howard
-------------------------------
NBC MULTIMEDIA, INC.
By: Edmond Santos
--------------------------------------
Title: V.P.
-----------------------------------
Signature: /s/ Edmond Santos
-------------------------------
<PAGE> 1
EXHIBIT 10.1
2WAY MEDIA, INC.
1994 STOCK OPTION PLAN
Mayer, Brown & Platt
Chicago, Illinois
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
SECTION PAGE
- ------- ----
<S> <C> <C>
1 General............................................................ 1
Purpose....................................................... 1
Effective Date and Duration................................... 1
Administration................................................ 1
Shares Subject to the Plan.................................... 1
Adjustments to Number of Shares Subject to the Plan........... 2
Gender and Number............................................. 2
Employment, Director and Shareholder Status................... 2
2 Participation...................................................... 2
3 Grants............................................................. 3
Option Grants................................................. 3
Option Agreement.............................................. 3
Option Price.................................................. 3
Expiration of Options......................................... 4
Exercise of Options........................................... 4
Compliance With Applicable Laws............................... 5
Withholding................................................... 6
Nontransferability............................................ 6
4 Amendment and Termination of the Plan......................... 6
</TABLE>
<PAGE> 3
2WAY MEDIA, INC.
1994 STOCK OPTION PLAN
SECTION 1
General
1.1. Purpose. 2Way Media, Inc. (the "Company") has established 2Way
Media, Inc. 1994 Stock Option Plan (the "Plan") as set forth herein to promote
the long term interests of the Company by (i) attracting, motivating and
retaining key employees; and (ii) strengthening the Company's ability to attract
and retain the services of experienced and knowledgeable directors and providing
such directors with an opportunity to acquire an equity interest in the Company.
1.2. Effective Date and Duration. Subject to the approval of the
shareholders of the Company, the Plan shall be effective as of September 15,
1994; provided, however, that to the extent any Options (as defined in Section
3) have been granted under the Plan prior to receipt of such approval, such
Options shall be contingent on such approval being obtained and shall
automatically terminate and be of no further force or effect if such approval is
not obtained. The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any Options granted under it are
outstanding; provided, however, that no Incentive Stock Options (as defined in
subsection 3.1) may be granted under the Plan on a date that is more than 10
years from the date the Plan is adopted or, if earlier, the date the Plan is
approved by the shareholders of the Company.
1.3. Administration. The authority to manage and control the operation
and administration of the Plan shall be vested in the Company's Board of
Directors (the "Board") or a designated committee of the Board (the
"Committee"). The determination of the Board or the Committee on matters within
its authority shall be conclusive and binding upon the Company and all other
persons. Notwithstanding the foregoing, no member of the Board or the Committee
shall act or participate in any way with respect to the grant of an Option to
himself.
1.4. Shares Subject to the Plan. An aggregate of 642 shares of common
stock of the Company ("Stock") shall be available for issuance under the Plan.
Such shares shall be either authorized and unissued shares or treasury shares of
Stock. If any Option under the Plan or portion thereof shall expire
unexercised, terminate, be surrendered, cancelled or settled in such a manner
that all or some of the shares subject to the Option are not issued to the
Participant, such shares
<PAGE> 4
shall (unless the Plan shall have terminated) become available for the
grant of additional Options under the Plan, except shares withheld pursuant to
subsection 3.7.
1.5. Adjustments to Number of Shares Subject to the Plan. In the event of
any merger, consolidation, reorganization, recapitalization, spinoff, stock
dividend, stock split, exchange or other change in corporate structure or
capitalization affecting the Stock of the Company, the aggregate number of
shares of Stock with respect to which Options may be granted under the Plan and
the type and number of shares subject to any outstanding Options under the Plan
and the terms thereof may be equitably adjusted by the Board or the Committee in
its sole discretion.
1.6. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
1.7. Employment, Director and Shareholder Status. The Plan does not
constitute a contract of employment or continued service, and participation in
the Plan will not give any employee or Participant the right to be retained in
the employ of the Company or the right to continue as a director of the Company,
or any right or claim to any benefit under the Plan unless such right or claim
has specifically accrued under the terms of the Plan or any agreement evidencing
the grant of the Option. No Option under the Plan shall confer upon the holder
thereof any right as a shareholder of the Company prior to the issuance of Stock
pursuant to the exercise thereof.
SECTION 2
Participation
Subject to the terms and conditions of the Plan, the Board or the Committee
shall determine and designate from time to time the key employees of the Company
and the members of the Board or the Committee who shall be "Participants" in the
Plan. In making this determination, the Board or the Committee shall take into
account the employee's or director's contribution and potential contribution to
the Company and any other factors that the Board or the Committee determines to
be relevant.
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SECTION 3
Grants
3.1. Option Grants. Subject to the terms and conditions of the Plan,
each Participant designated by the Board or the Committee in accordance with
Section 2 shall be granted an option to purchase shares of Stock ("Options")
and the Board or the Committee shall determine the number, type and terms of
the Options to be granted to each of them. Each Option shall entitle the
Participant to purchase shares of Stock upon the terms and conditions as the
Board or the Committee specifies and which are not inconsistent with the Plan
and at the Option Price (as defined in subsection 3.3) determined by the Board
or the Committee at the time the Option is granted, subject to the following
provisions of this Section 3. Any Option granted under this Section 3 that is
awarded to an employee of the Company and that satisfies all of the
requirements of section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), may be designated by the Board or the Committee as an "Incentive
Stock Option"; provided, however, that to the extent that the aggregate fair
market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by an individual during any calendar year (under
the Plan and all other plans of the Company and its affiliates) exceeds
$100,000, such Options shall be treated as Non-Qualified Options.
"Non-Qualified Options" are Options that are not designated as Incentive Stock
Options or that do not satisfy the requirements of section 422 of the Code.
3.2. Option Agreement. Each grant of an Option under the Plan shall be
evidenced by an agreement between the Participant and the Company in a form
specified by the Board or the Committee containing such terms and conditions,
not inconsistent with the Plan, as the Board or the Committee may, in its sole
discretion, prescribe.
3.3. Option Price. The purchase price of each share of Stock under an
Option granted under this Section 3 (the "Option Price") shall be determined by
the Board or the Committee at the time of the grant of the Option; provided,
however, that in no event shall the Option Price be less than the Fair Market
Value (as defined below) of a share of Stock on the date the Option is granted
or, if greater, par value; and provided further that, in the case of a grant of
an Incentive Stock Option to a Participant who, as of the date of grant, is a
10 percent shareholder of the Company (determined in accordance with section
422 of the Code), the Option Price shall not be less than 110 percent of the
Fair Market Value of a share of Stock as of the date of grant. For all purposes
of the Plan, the term "Fair Market Value" of a share of Stock as at any date
shall mean the fair market value of such
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<PAGE> 6
share of Stock determined, in good faith, in accordance with procedures
established by the Board or the Committee or in accordance with procedures
established by the Board or the Committee.
3.4 Expiration of Options. All rights with respect to an Option granted
under the Plan, whether or not then exercisable, shall automatically terminate
as of the Option's Expiration Date. The "Expiration Date" with respect to an
Option or any portion thereof, granted to a Participant under the Plan shall be
the earliest of:
(a) the date which is 10 years after the date on which the Option is
granted (5 years in the case of an Incentive Stock Option which is
granted to an individual who, as of the date of grant, is a 10 percent
shareholder of the Company);
(b) the date established by the Board or the Committee at the time of the
grant of the Option;
(c) the date which is one year after the date on which the Participant's
employment with the Company (or service as a director of the Company)
is terminated by reason of his becoming disabled (within the meaning
of section 22(e)(3) of the Code) or his death;
(d) the date which is three months after the date on which the
Participant's employment with the Company (or service as a director of
the Company) is terminated for any reason other than Cause (as
defined below) or voluntary resignation; or
(e) the date on which the Participant's employment with the Company (or
service as a director of the Company) is terminated for any reason
other than as described in paragraph (c) or (d) next above (including,
but not limited to, termination by the Company on account of Cause or
by the Participant by voluntary resignation).
For purposes of the Plan, the term "Cause" shall mean (a) the willful and
continued failure by the Participant to substantially perform his duties for
the Company; (b) the willful engaging by the Participant in conduct which is
demonstrably and materially injurious to the Company, monetarily or otherwise;
or (c) an illegal or negligent action of the Participant which substantially
and adversely affects the Company.
3.5 Exercise of Options. To the extent then exercisable, Options awarded
under the Plan shall be exercised, in whole or in part, by filing a written
notice with the Secretary of the
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<PAGE> 7
Company at its corporate headquarters prior to the Option's Expiration Date.
Such notice shall specify the number of shares of Stock which the Participant
elects to purchase and shall be accompanied by payment of the Option Price for
such shares, plus any required withholding taxes. The Option Price of each share
of Stock purchased upon the exercise of any Option granted under this Section 3,
and any required withholding taxes, shall be paid in cash (including check, bank
draft or money order) or, to the extent provided by the Board or the Committee
at the time of grant, in shares of Stock (valued at Fair Market Value as of the
date of exercise, and including shares of Stock acquired pursuant to the
exercise of the Option) or in any combination of cash and Stock. If applicable,
in the discretion of the Board or the Committee separate certificates
representing the shares purchased by exercise of Incentive Stock Options and by
exercise of Non-Qualified Options shall be delivered to the person entitled
thereto as soon as practicable after such exercise.
3.6 Compliance With Applicable Laws. Notwithstanding any other
provision of the Plan:
(a) The Company shall have no liability to issue any shares of Stock
under the Plan unless such issuance would comply with all
applicable laws and the applicable requirements of any securities
exchange or similar entity.
(b) Prior to the issuance of any shares of Stock under the Plan, the
Company may require a written statement that the recipient is
acquiring the shares of Stock solely for investment and not for the
purpose or with the intention of distributing the shares and will
not dispose of such shares in violation of the Securities Act of
1933 or any applicable state securities registration law and any
certificate representing such shares shall bear a legend referring
to such restrictions.
(c) If, at any time, the Company, in its sole discretion, determines
that the listing, registration or qualification (or any updating
of any such document) of the Stock is necessary on any securities
exchange or under any federal or state securities or blue sky law,
or that the consent or approval of any governmental regulatory body
is necessary or desirable as a condition or, in connection with the
issuance of Stock pursuant to the exercise of an Option, the Stock
shall not be issued, in whole or in part, unless such listing,
registration, qualification consent or approval shall have been
effected or obtained free of any condition not acceptable to the
Company.
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<PAGE> 8
3.7 WITHHOLDING. All exercises of Options under the Plan are
subject to withholding of all applicable taxes, which withholding obligation
shall be satisfied by the payment of cash or check payable to the Company, or,
to the extent permitted by the Board or the Committee at the time of the grant
of an Option, through the surrender of shares of Stock which the Participant
already owns or the withholding of shares of Stock to which a Participant is
otherwise entitled upon exercise of the Option.
3.8 NONTRANSFERABILITY. No option under the Plan, and no interest
therein, shall be transferable except by the Participant by will or by the laws
of descent and distribution and shall be exercisable during a Participant's
lifetime only by the Participant. After a Participant's death, Options shall be
exercisable, to the extent exercisable by the Participant on the date of his
death, by the executor or administrator of the Participant's estate or by the
person or persons who shall have acquired the Option from the Participant by
bequest or inheritance, subject to the terms of the Plan and the agreement
between the Company and the Participant evidencing such Option.
SECTION 4
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time and in any manner amend, suspend or
terminate the Plan; provided, however, that no such amendment, suspension or
termination shall alter or impair the rights of Participants with respect to
Options previously granted under the Plan without the consent of the holder
thereof.
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<PAGE> 1
EXHIBIT 10.4
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of ____________, 19__, is made by and
between Launch Media, Inc., a Delaware corporation (the "Company"), and
______________ (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company
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and its subsidiaries, it is necessary for the Company to contractually indemnify
its directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents in
connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its subsidiaries and the Company's
stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the Company
means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
out-of-pocket costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however,
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that "expenses" shall not include any judgments, fines, ERISA excise taxes or
penalties, or amounts paid in settlement of a proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue
to serve as agent of the Company, at its will (or under separate agreement, if
such agreement exists), in the capacity Indemnitee currently serves as an agent
of the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the By-laws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Mandatory Indemnification. Subject to Section 8 below, the Company
shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses
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<PAGE> 4
actually and reasonably incurred by him in connection with the investigation,
defense, settlement, or appeal of such proceeding, provided the Indemnitee acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company and its stockholders; except that no
indemnification under this subsection 3(c) shall be made in respect to any
claim, issue or matter as to which such person shall have been finally adjudged
to be liable to the Company by a court of competent jurisdiction unless and only
to the extent that the court in which such proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 3(a), 3(b), or 3(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be
obligated to indemnify the Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) for which payment is actually
made to or on behalf of Indemnitee under a valid and collectible insurance
policy of D&O Insurance, or under a valid and enforceable indemnity clause,
by-law or agreement.
4. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
5. Mandatory Advancement of Expenses. Subject to Section 7(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
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<PAGE> 5
6. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement
of a proceeding pursuant to Section 6(a) hereof, the Company has D&O Insurance
in effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense, or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
7. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
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(c) Unauthorized Settlements. To indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
8. Non-exclusivity. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or By-laws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
9. Enforcement. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 5
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 3 and 7 hereof. Neither the failure of the Company
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
10. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
11. Survival of Rights.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in
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the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place.
12. Interpretation of Agreement. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
13. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 12 hereof.
14. Modification and Waiver. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
15. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
16. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
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The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
THE COMPANY:
LAUNCH MEDIA, INC.
By:
-----------------------------------
--------------------------------------
(Printed Name)
Title:
--------------------------------
Address:
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INDEMNITEE:
By
------------------------------------
--------------------------------------
(Indemnitee's Printed Name)
Address:
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8
<PAGE> 1
EXHIBIT 10.5
STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement (this "Agreement"), dated as of
February 26, 1998 (the "Effective Date"), is by and between 2 WAY MEDIA, INC. a
Delaware corporation, ("LAUNCH"), and NBC MULTIMEDIA, INC., a Delaware
corporation ("NBC").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, and
pursuant to the terms and conditions of that certain Securities Purchase
Agreement of even date herewith (the "Securities Purchase Agreement") by and
between LAUNCH, NBC and other investors, LAUNCH shall issue and NBC shall
receive 1,960,784 ($3mm) shares (the "Purchased Shares") of LAUNCH, Series D
Stock, as such term is defined in the Securities Purchase Agreement. In
addition, LAUNCH shall issue a Warrant which will permit NBC to purchase
1,979,323 additional shares of LAUNCH, Series D Stock (the "Warrant") which
number of shares is subject to certain adjustments described in the Warrant
itself.
B. As a condition to, and as sole consideration for, the issuance of
1,307,190 ($2mm) of the Purchased Shares covered by the Securities Purchase
Agreement and the Warrant by LAUNCH to it, NBC has agreed to enter into this
Agreement pursuant to which, and subject to the terms and conditions set forth
below, LAUNCH shall supply music content and information in connection with
NBC's NBC.com world wide web site as described below.
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties hereto, NBC and LAUNCH agree as
follows:
AGREEMENT
1. DEFINITIONS
(a) "Adult Content" shall mean any material, including audio or video
material, which is pornographic or which contains nudity, explicit sexual
material or depictions of sexual acts any of which is beyond that normally
broadcast over the NBC Television Network.
(b) "Affiliates" of a specified person means a person who directly or
indirectly through one or more intermediaries Controls, is Controlled by, or is
under common Control with, such specified person.
(c) "Co-branded Area(s)" shall mean that area (or areas) of myLAUNCH
which contains NBC Branding or other material provided by NBC with the
characteristics described in Section 2(a).
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE> 2
(d) "Control" shall mean, with respect to any world wide web site,
distribution channel or source of any content, the ability to control, and the
actual control, including the final approval right, of the presentation of
content on such world wide web site, distribution channel or source, and with
respect to any entity, the possession, directly or indirectly, of the power to
appoint a majority of the directors or such other persons who direct or cause
the direction of the management and policies of a legally recognizable entity,
whether through the ownership of voting shares, by contract, or otherwise. Where
such entity is a partnership, limited liability company, corporation, or similar
entity and has partners, members, or shareholders with equal ownership interests
or equal control interests, by contract or otherwise, then each such partner,
member, or shareholder will be deemed to possess, directly or indirectly, the
power to direct or cause the direction of the management and policies of that
entity.
(e) "Confidential Information" shall mean (i) any trade secrets relating
to either party's product or service, plans, designs, costs, prices and names,
finances, marketing plans, business opportunities, personnel, research,
development or know-how; and (ii) the specific terms and conditions of this
Agreement. "Confidential Information" shall not include information that: (i) is
or becomes generally known or available, whether by publication, commercial use
or otherwise, without restriction on disclosure and through no fault of the
receiving party; (ii) is known by the receiving party prior to the time of
disclosure; (iii) is independently developed or learned by the receiving party
without reference to any Confidential Information of the disclosing party; or
(iv) is lawfully obtained from a third party that the receiving party reasonably
believes has the right to make such disclosure.
(f) "Derivative Material" shall mean any material, including any text,
graphics or story ideas, concepts or characters, which is based upon, or derived
from, NBC Material (i.e., any "derivative" thereof) as well as the "look and
feel" thereof and of the pages and areas of NBC.com and myLAUNCH on which such
material appears, regardless of which party actually produces it.
(g) "Intellectual Property Rights" shall mean all artistic or
proprietary rights owned or Controlled throughout the world, including, but not
limited to, copyrights, moral rights, trade secrets, trademarks, service marks
and patents.
(h) "Internet" shall mean (i) the distributed interactive computer
network commonly referred to as the internet, and (ii) any other interactive
on-line or distributed computer network distribution methods in their current
form as of the date hereof, including, without limitation, America Online,
@Home, Road Runner, CompuServe and Prodigy. The term Internet shall not include
any traditional analog or digital broadcast or distribution medium (e.g.,
traditional analog or digital broadcast and digital or analog cable or satellite
transmission) by which television, film, other audio/visual or textual
programming is disseminated to viewers.
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<PAGE> 3
(i) "LAUNCH Branding" shall mean any LAUNCH trademarks, service marks,
designs or logos which LAUNCH may designate for use hereunder.
(j) "LAUNCH Material" shall mean any material, other than NBC Material
or Derivative Material but including LAUNCH Branding, which LAUNCH produces or
provides to NBC in connection with the activities described herein.
(k) "myLAUNCH" shall mean the world wide web site on the Internet
operated by LAUNCH with the URL address of www.mylaunch.com or its successors
and any successor or replacement of www.mylaunch.com on the Internet during the
Term, if any, which replacement site contains LAUNCH Branding, provides the
material substantially similar to that currently provided at www.mylaunch.com
and is Controlled by LAUNCH.
(l) "NBC Advertising Standards" shall mean any and all standards set by
NBC for advertising appearing on the NBC Television Network, including any
amendments thereto, about which LAUNCH is made aware by NBC and which are
relevant to material on the Internet.
(m) "NBC Branding" shall mean any NBC trademarks, service marks, designs
or logos which NBC may designate for use hereunder.
(n) "NBC.com" shall mean the world wide web site on the Internet
operated by NBC with the URL address of www.nbc.com or its successors and any
successor or replacement of www.nbc.com on the Internet during the Term, if any,
which replacement site contains NBC Branding, provides the material
substantially similar to that currently provided at www.nbc.com and is
Controlled by NBC. The parties agree that the ten-n "NBC.com" shall not include
any of the world wide web sites on the Internet operated by or associated with
[ * ] specifically described in the previous sentence.
(o) "NBC Material" shall mean any material, including any text,
graphics, audio, video, photos or software as well as any NBC Branding, provided
to LAUNCH or primarily created by NBC or its affiliates, licensors or suppliers.
(p) "Net Advertising Revenue" shall mean all advertising revenue
actually collected by LAUNCH in connection with the Co-branded Areas (including
in-kind compensation) less actual selling commissions, agency commissions, and
all actual out of pocket expenses directly incurred by LAUNCH in connection with
creating, selling and fulfilling such advertising, which commissions and
expenses shall in no event in total exceed [ * ] of gross advertising revenues.
(q) "Original Purchase Price" shall mean the price per share applicable
to the Purchased Shares as of the Effective Date hereof which is $1.53.
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 4
(r) "Other Networks" shall mean [ * ].
(s) "Products" shall mean any merchandise or services offered for sale
by LAUNCH on myLAUNCH, including music CDs, audio tapes or CD-ROMs but excluding
any merchandise directly based on LAUNCH Branding (e.g., LAUNCH T-shirts) and
the LAUNCH CD-ROM magazine.
(t) "Prohibited Sponsors" shall mean [ * ].
(u) "Term" shall mean, collectively, the Initial Term and any Renewal
Terms, as those terms are defined in Section 12 below.
2. LAUNCH RESPONSIBILITIES.
(a) Creation of Co-branded Area. LAUNCH agrees that it will create,
update and maintain, at its own expense, a sub-site or area of MyLAUNCH which
will be branded as described in Section 2(c) below and which shall contain (i)
content and information to be originally created or obtained by LAUNCH for use
thereon, (ii) content and information created or obtained by LAUNCH for use
elsewhere on myLAUNCH or other LAUNCH projects which is relevant to the topics
on the Co-branded Area and (iii) content and information that NBC provides to
LAUNCH for use thereon. The Co-branded Area will be directly or indirectly tied
to the music content, information and services appearing on NBC.com and shall
have a design and format which serves to provide a seamless experience for the
end user and is mutually agreeable to LAUNCH and NBC. LAUNCH agrees that it
shall use commercially reasonable efforts to make the initial version of the
Co-Branded Area available for use by commercial users by no later than [ * ]
months following the Effective Date hereof, provided, however, that if the
Co-branded Area is not available within such [ * ] month period and such delay
is primarily caused by LAUNCH, NBC's promotional obligations described in
Section 3(c) shall be reduced in a pro rata manner to reflect the time that the
Co-branded Area is not available (e.g., the on-air promotional time shall be
reduced by [ * ] for every month that the Co-branded Area is not available).
(b) LAUNCH Production. Except for any NBC Material which NBC chooses to
provide for use hereunder, LAUNCH will be primarily responsible for creating or
obtaining all material to be placed in the Co-branded Area at its own expense.
LAUNCH will designate one of its own producers whose primary function will be to
act as the LAUNCH liaison for NBC's NBC.com production team as reasonably
requested at any time. The LAUNCH liaison will work with the NBC producers to
coordinate the production, orchestration and hosting of all music content and
information tied to
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 5
NBC.com and the relevant NBC.com entertainment sub-sites that NBC chooses to
make a part of NBC.com or an extension thereof using the Co-branded Area
pursuant to the procedures described herein. The LAUNCH liaison will follow the
reasonable direction of the NBC production team in creating or obtaining
material to be placed in the Co-branded Areas, and, in addition, will make
suggestions to the NBC production team regarding other material or services
possessed by or available to LAUNCH which would improve the Co-branded Area.
LAUNCH will create and update the Co-branded Area daily and on any time schedule
reasonably requested by NBC in connection with any television broadcast of
programming containing music-related guests, content or information. LAUNCH
agrees that it will use reasonable efforts to keep the Co-branded Area and
myLAUNCH free of computer viruses and material crash bugs in any form.
(c) Co-Branding. Each page of the Co-branded Area will be co-branded
with NBC Branding to be provided by NBC. All co-branding design decisions will
be at NBC's sole discretion; provided, however, that in no event shall the
myLAUNCH branding appear less than [ * ] the size of the NBC branding on any of
the pages or areas within the Co-branded Area (but not NBC.com) which are
co-branded pursuant hereto.
(d) Approvals. NBC shall pre-approve all uses of NBC Material by LAUNCH.
LAUNCH agrees that it shall place any and all NBC Material provided by NBC upon
the Co-branded Area whenever requested by NBC. LAUNCH agrees that NBC shall have
final approval regarding all aspects of the Co-branded Area, including, but not
limited to, any material to be placed thereon by LAUNCH and LAUNCH'S integration
of NBC Material into the Co-branded Area. NBC shall have sole discretion
regarding how it exercises such approval rights (except that such exercise
thereof may not involve any pre-approval of any LAUNCH Material) and may reject
any LAUNCH Material or presentation of NBC Material in the Co-branded Area for
any, or no, reason. All material in the Co-branded Area and any LAUNCH Material
which appears on NBC.com must comply with all NBC guidelines regarding the use
of intellectual property related to any NBC television show or talents' names,
likenesses and images and any other requirements related thereto of which LAUNCH
is informed by NBC. LAUNCH agrees to obtain NBC's prior written approval to any
use of any NBC Branding or other NBC Material by LAUNCH which is not
specifically contemplated by the terms hereof or provided by NBC for use by
LAUNCH.
(e) Registrations. LAUNCH agrees to allow all users to have access to
all areas and services of the Co-branded Areas without having to complete the
registration process offered to users of myLAUNCH. Such users will receive all
myLAUNCH features currently accessible in the myLAUNCH "Guest" mode which are
described in Exhibit A as well as the right to purchase Products. NBC
acknowledges that LAUNCH may make commercially reasonable efforts to encourage
all users to register with LAUNCH through promotional opportunities within the
Co-branded Area which are reasonably acceptable to NBC.
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 6
(f) User Tracking. LAUNCH will collect and provide any data and
statistics regarding usage, traffic, user feedback and users of the Co-branded
Area and myLAUNCH which NBC reasonably requests on a quarterly basis. In order
to provide such data and statistics, LAUNCH agrees to track users throughout the
Co-branded Area and the rest of myLAUNCH as well as any Orders placed by such
users.
(g) Product Purchasing Services. All users of the Co-branded Areas will
have the opportunity and right to purchase Products which are relevant or
related to the music content and information appearing on NBC.com or in the
Co-branded Areas. In addition, each page of the Co-branded Area shall contain a
clearly identifiable and prominent link to an area within the Co-branded Area or
within myLAUNCH which will permit users to purchase any or all of the Products.
In order to encourage such purchases, LAUNCH will foster transactions related
thereto by (i) describing procedure and information required to purchase the
Products, (ii) providing an order form and procedures which when completed and
followed will permit users to place an order ("ORDER") for the Products (iii)
placing hotlinks back to the Co-branded Areas from any order fufillment area of
myLAUNCH which commercial users may utilize once they have completed their
Orders. The descriptions and Order procedures in the Co-branded Areas will be
similar to those currently included elsewhere on myLAUNCH but shall be modified
by LAUNCH subject to NBC's reasonable approval in order to provide a seamless
experience between the Co-branded Area and the order fulfillment area of
myLAUNCH. LAUNCH shall provide all services relating to the ordering for and
sale of the Products, including, but not limited to, (i) the procurement of all
Products, (ii) the creation and maintenance of a reputable, reliable supplier
network for the fulfillment of all Orders, and (iii) the creation and
maintenance of a customer service system which insures the optimum fulfillment
of all Orders placed hereunder and which provides mechanisms for solving all
customer complaints and problems. LAUNCH's performance of each of these
functions will conform to at least reasonable commercial standards, and LAUNCH
recognizes that its failure to meet such standards shall constitute a material
breach of this Agreement.
3. NBC RESPONSIBILITIES.
(a) Editorial Guidance. NBC agrees to create, update and maintain
NBC.com and to cause its NBC. com production team to work with the LAUNCH
liaison to find acceptable methods of making appropriate links to the Co-branded
Areas accessible to users of NBC.com. Subject to the requirements of Section
3(b), LAUNCH acknowledges that NBC shall have sole discretion in determining
when and if it shall choose to include music content, information or services as
part of NBC. com or any part thereof and how any LAUNCH Material applicable to
such music content, information or services, if any, shall actually be
integrated into NBC.com. In addition, while NBC may choose, in its sole
discretion, to provide NBC Material to LAUNCH for use in the Co-branded Area, it
shall have sole discretion in determining how or whether such NBC Material may
actually be used by LAUNCH.
(b) Access to Co-branded Areas from NBC.com. NBC agrees that the
Co-Branded Area will be accessible through both (i) a link on the NBC.com home
page or a
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<PAGE> 7
page directly accessible from the NBC.com home page (i.e., [ * ]) and (ii) some
form of a link on any NBC.com entertainment show sub-sites on which NBC chooses
to include music content, information or services, provided that if any sub-site
or page of NBC.com contains music content or information supplied by any of the
third parties described in 4(a)(i)-(iv), and either (A) the arrangements with
such party would prevent NBC from placing LAUNCH material on such sub-site or
page or (B) LAUNCH does not have, and is unable to create in a timely manner,
any music content or information that would be relevant to such page or
sub-site, then no link to myLAUNCH shall be required. NBC agrees that the size
and positioning of links to myLAUNCH on NBC.com or its sub-sites shall be [ * ].
In addition, NBC may choose, in its sole discretion, to provide any LAUNCH
material which is integrated into, or available via, any NBC.com page as part of
any interactive or digital television broadcast(s) which NBC chooses to do in
its sole discretion.
(c) On-Air Promotion. NBC agrees to reference myLAUNCH music-related
content, information and services available on NBC.com within appropriate NBC
promotion (on-air and online) for NBC.com, provided that such reference need not
contain any LAUNCH branding or specific textual descriptions. Any such
promotion, and the nature thereof, shall be at NBC's sole discretion. In
addition, NBC will use good faith efforts to provide a total of [ * ] for NBC.
com's on-air music-related promotions described above during the Initial Term of
this Agreement; provided, however, that if any on-air music-related promotions
promote services on NBC.com which are not provided by LAUNCH as permitted
pursuant to the terms of Section 4(b), such promotion shall not be counted when
determining the seconds of on-air music-related promotion delivered by NBC for
purposes hereof. Such on-air promotions may be placed in either late night,
prime-time, or Saturday morning television programming at NBC's sole discretion.
LAUNCH acknowledges that none of the promotion described above will occur during
the first [ * ] of the Term due to the "ramp-up" period described in Section
2(a). Failure to fulfill the promotional obligations described in this Section
3(c) shall not be deemed a material breach of this Agreement. However, if NBC
falls short of such obligations as measured after the first [ * ] of the Term
(i.e., NBC has provided less than a total of [ * ]) or at the end of the Initial
Term (i.e., NBC has provided less than a total of [ * ]) and if this Agreement
has not been terminated by either party as provided in Section 13 below, then
LAUNCH's sole remedy shall be, at LAUNCH's option, either (i) for NBC to return
to LAUNCH an amount of Purchased Shares of a value equal to the value of the
on-air promotion foregone, with the per share price of the Purchased Shares to
be returned equal to the Original Purchase Price, or (ii) for additional on-line
promotion to be provided by NBC over a one year period in a dollar amount equal
to the value of the promotion foregone, provided that NBC shall have sole
discretion in determining where, when and how often such on-line promotion shall
appear and whether
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 8
the total volume of such on-line promotion will constitute an inappropriate
percentage of NBC's total on-line promotions. The value of the on-air promotion
foregone shall be based upon an average rate for all types of promotion of
[ * ] of air time. If this Agreement has been terminated pursuant to the terms
of Section 13, then LAUNCH shall have no further recourse for NBC's failure to
fulfill the terms of this Section 3(c).
4. EXCLUSIVITY.
(a) NBC Exclusivity. LAUNCH will be the exclusive provider of third
party music content and information and music purchasing services within the
entertainment areas of NBC.com, including, sub-sites thereof which contain any
NBC Internet entertainment shows, where NBC has chosen to include music related
content or information in its sole discretion; provided, however, that such
exclusivity shall not apply to banner advertising or any music content,
information or service provided or created by (i) NBC and its Affiliates, (ii)
any of NBC's or its Affiliates' contractors who provide or create such material
under the direction of NBC or the relevant Affiliates as long as NBC or the
relevant Affiliate obtains either ownership or the free right to use and exploit
such material and no Prohibited Sponsor receives online credit therefor, (iii)
NBC and its Affiliates' licensers which supply, directly or indirectly, such
content and information in connection with the underlying entertainment
properties included on NBC.com or (iv) any of NBC and its Affiliates' sponsors.
Notwithstanding the foregoing, (A) no sponsorship material of any Prohibited
Sponsors, other than banner advertising, which is provided directly to NBC shall
appear on the home page of NBC.com or any sub-pages of NBC.com and (B) NBC shall
not be prohibited from entering into agreements and arrangements with sponsors
that are not Prohibited Sponsors which may involve the inclusion of content and
information from the Prohibited Sponsors as part of such other sponsors'
material as long as the branding of such Prohibited Sponsors is not promoted, or
made apparent, on the home page of NBC.com or any NBC.com page which contains
music or information provided by LAUNCH; provided, however, that if such other
sponsor wishes to place any such music content or information on any page of
NBC.com which does not contain LAUNCH material, NBC agrees to make a good faith
effort to persuade such other sponsor to use music content and information
provided by LAUNCH rather than any Prohibited Sponsors if such other sponsor has
not already made arrangements to the contrary.
(b) Non-Exclusive Functional Areas. The parties agree that LAUNCH may be
a non-exclusive third party provider of the following functional or operational
services required by or associated with NBC.com subject to the conditions
described below:
(i) NBC may obtain instant messaging and personal web page
creation services from third parties, other than the Prohibited Sponsors, as
long as (1) music content and information is not the focus of such third
parties' services, and (2) NBC uses commercially reasonable efforts to include
LAUNCH Material or otherwise include LAUNCH in any such activities when they
relate to music;
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 9
(ii) NBC may obtain chatting services, both personal and
auditorium, from third parties, other than the Prohibited Sponsors, as long as
(1) music content and information is not the focus of such third parties'
services, (2) NBC agrees that it will utilize those myLAUNCH chatting services
which are accessible from the Co-branded Area in connection with a majority of
the NBC.com music related activities which NBC chooses to do, and (3) NBC uses
commercially reasonable efforts to include LAUNCH Material or otherwise include
LAUNCH in any such activities when they relate to music;
(iii) NBC may obtain e-mail services from third parties, other
than the Prohibited Sponsors, as long as (1) music content and information is
not the focus of such third parties' services, (2) the e-mail content created
and delivered by such third parties does not contain music related content and
information constituting more than [ * ] of the total amount of content, (3) NBC
uses commercially reasonable efforts to include LAUNCH Material or otherwise
include LAUNCH in any such activities when they relate to music;
(iv) NBC may obtain any other functional or operational services
which it requires, including, but not limited to video related services and
content, from third parties, other than the Prohibited Sponsors, as long as (1)
no such third party's service is primarily a music content and information
service (i.e., music content and information does not constitute more than
[ * ] of the total audio and/or video services or content offered by such third
party), (2) NBC does not promote the aspects of such third parties' services
which relate to music content and information on NBC.com (other than through
banner advertising and sponsorships paid for by third parties and subject to the
conditions of Section 4(a)), and (3) NBC.com does not contain any links to the
areas of such third parties' Internet sites, if any, which contain music content
or information other than a link to such parties' home pages, and (4) NBC uses
commercially reasonable efforts to include LAUNCH Material or otherwise include
LAUNCH in any such activities when they relate to music. Notwithstanding the
foregoing and subject to the terms of Section 4(a), the parties agree that
LAUNCH shall be the exclusive provider of personalized music content and
recommendation services and music audio content in connection with NBC.com.
(c) LAUNCH Exclusivity. LAUNCH agrees not to provide myLAUNCH content or
services to or enter into sponsorship arrangements (other than paid banner
advertising) with any Other Networks. In addition, LAUNCH will not provide
similar myLAUNCH content or services to any third-party interactive media
company acting as a content or service aggregator that redistributes myLAUNCH
content or services to the Other Networks. The parties agree that no material
provided by the Other Networks (except for banner advertising appearing anywhere
other than the Co-branded Area) or Prohibited Sponsors will appear on myLAUNCH,
including on the Co-branded Area.
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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5. OWNERSHIP AND EXPLOITATION.
(a) NBC Material and Derivative Material. NBC hereby grants LAUNCH a
non-exclusive, non-transferable, royalty-free license during the Term to use the
NBC Branding and any NBC Material and Derivative Material which NBC chooses to
provide to LAUNCH for use in the Co-branded Areas but only in the manner
specifically described and approved by NBC described herein. All use by LAUNCH
of any NBC Branding shall inure to the benefit of NBC and LAUNCH shall not
obtain any ownership interests in any NBC Branding. Any use by LAUNCH of the NBC
Branding shall be subject to NBC's then-applicable policies that have been
disclosed to the LAUNCH regarding the use, appearance and affixation of such
branding and the quality of any materials or products to which such branding is
affixed. LAUNCH acknowledges that any use by it of any NBC Material, including
any NBC Branding, or any Derivative Material shall be subject to prior review
and written approval by NBC which review and approval may be withheld by NBC in
its sole discretion as described in Section 2(d). As part of such review and
approval process, LAUNCH agrees to submit all uses of NBC Branding or NBC
Material to NBC for approval prior to use. LAUNCH agrees that it shall not use
the NBC Branding or the NBC Material in any manner, including for promotional
purposes, except as provided herein and that it shall not sublicense or
authorize any other person or entity to use the NBC Branding, the NBC Material
or any other material containing the voice or image of any NBC or NBC affiliate
television personality, without the prior written consent of NBC. Upon the
termination of this Agreement, LAUNCH will immediately remove such NBC Branding,
other NBC Material or Derivative Material from the Co-Branded Areas and return
any copies thereof to NBC. Except for the license described above, LAUNCH will
obtain no rights of any kind, including Intellectual Property Rights, whether
pre-existing or future, in the NBC Branding, other NBC Materials or the
Derivative Materials as a result of the activities described in this Agreement.
(b) LAUNCH Material. LAUNCH hereby grants NBC an unlimited, royalty-free
license in perpetuity to use any LAUNCH Material which LAUNCH provides to NBC
for placement upon NBC.com (not in the Co-branded Area) for any purpose. LAUNCH
also grants NBC an unlimited, royalty-free license in perpetuity to use the
LAUNCH Material which appears in the Co-branded Area in connection with any
archives related to NBC.com which NBC may choose to create; provided, however,
that (i) NBC will be responsible for its own costs associated with any such
archiving as well as any actual costs that LAUNCH may incur in providing such
LAUNCH Material to NBC on which NBC and LAUNCH agree in writing in advance and
(ii) if NBC earns any net income from providing the LAUNCH Material which
appears solely in the Co-branded Area (i.e., not on NBC.com) as part of such
archives, then the parties will mutually agree upon how the parties will share
and define such net income. All use by NBC of any LAUNCH Branding shall inure to
the benefit of LAUNCH and NBC shall not obtain any ownership interests in any
LAUNCH Branding. Any use by NBC of the LAUNCH Branding shall be subject to
LAUNCH's then-applicable policies that have
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been disclosed to NBC regarding the use, appearance and affixation of such
branding and the quality of any materials or products to which such branding is
affixed. Except for the licenses described above and below, NBC will obtain no
additional rights of any kind, including Intellectual Property Rights, whether
pre-existing or future, in the LAUNCH Branding or LAUNCH Materials as a result
of the activities described in this Agreement.
(c) Exploitation of Co-branded Areas. The parties agree that NBC shall
have the exclusive right to create, distribute and exploit in any way any
derivative or ancillary product or service which may be based upon the
Co-branded Areas which are co-branded with, or which contain, NBC Material or
Derivative Material; provided, however, that if NBC actually creates,
distributes or exploits such material or areas, NBC agrees to have good faith
negotiations with LAUNCH prior to completing the final arrangements or
agreements regarding such use in order to determine how LAUNCH may be
compensated for the LAUNCH Material which is actually used in such derivative or
ancillary product or service. The parties acknowledge that NBC may freely
exploit and distribute the NBC Material and Derivative Material which appears on
any co-branded myLAUNCH pages or elsewhere as well as any derivatives thereof
without any obligation of any kind to LAUNCH.
(d) Exploitation of LAUNCH Material. The parties further acknowledge
that LAUNCH may freely exploit and distribute the LAUNCH Material as well as any
derivatives thereof without any obligation of any kind to NBC, provided,
however, that LAUNCH will (i) agree to exclusively maintain the LAUNCH Material
within the Co-branded Areas for a period of one week after such material first
appears before using such LAUNCH Material for any other purpose permitted
hereunder and (ii) notify NBC in advance of each intended use or exploitation,
other than any use or exploitation over the Internet or in connection with the
LAUNCH CD-ROM magazine, of LAUNCH Material which has appeared on NBC.com or a
Co-branded Area so that the parties may enter into good faith discussions
regarding the possible mutually beneficial use or exploitation thereof.
6. ADVERTISING IN CO-BRANDED AREAS.
(a) Advertising Sales. LAUNCH will be responsible for selling all
advertising and sponsorship material appearing in the Co-branded Areas and will
pay NBC [ * ] attributable thereto. LAUNCH will use best efforts to sell such
advertising, and if any such inventory remains unsold, then each party shall
have the right to use [ * ] of such unsold inventory for its own purposes
subject to the restrictions described herein and the [ * ] of such unsold
inventory shall be used to promote other co-branded areas of myLAUNCH. NBC shall
have no right to share in any revenue collected by LAUNCH for advertising and
sponsorships appearing in areas of myLAUNCH other than the Co-branded Areas, and
LAUNCH shall have no right to share in any revenue collected by NBC for
advertising and sponsorships appearing anywhere in NBC.com.
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 12
(b) Restrictions. NBC and LAUNCH will coordinate their advertising
efforts so that they can avoid confusion in the marketplace and elsewhere.
LAUNCH will (i) comply with all LAUNCH advertising standards as well as any and
all relevant NBC Advertising Standards, (ii) not act as a representative for NBC
or any NBC content or property in the advertising marketplace, (iii) will not
sell advertising appearing in the Co-branded Areas to any Other Network, and
(iv) not permit any such advertising to refer to, or imply an endorsement of any
kind by, NBC or any of NBC's properties, talent or licensors. In addition, all
such advertising and sponsorships shall be subject to NBC's approval as
described in Section 2(d) and will comply with any applicable NBC guidelines
regarding the use of intellectual property related to any NBC television show or
its talent's likenesses and images and any other requirement related thereto.
7. TRANSACTIONS AND OTHER REVENUE.
(a) Transactions. LAUNCH shall pay to NBC [ * ] of the total of (i) all
actual LAUNCH gross receipts from transactions occurring anywhere on myLAUNCH,
including the sale of any Products, attributable to users coming to myLAUNCH
through NBC.com or the Co-Branded Area, less only (ii) the direct, identifiable
and actual cost of goods sold, fulfillment expenses, discounts, bad debts, sales
taxes, and returns related to such transactions; provided that NBC will not
share in any revenue derived from the sale of any merchandise based on LAUNCH
Branding, including the LAUNCH CD-ROM magazine. If the total expenses exceed
revenues for such transactions, such amount may not be used to offset any
payments otherwise owed to NBC hereunder, including payments attributable to
advertising. Subject to the right to deduct such expenses from revenues as
described above, LAUNCH shall be solely responsible for the payment of any and
all sales and applicable taxes related to the Orders and sales of Products.
LAUNCH agrees that the revenue share described in this Section 7(a) is [ * ].
(b) Other Revenue. The parties agree that if LAUNCH derives any other
type of revenue from myLAUNCH other than that described in Sections 6 and 7,
then the portion of such revenue attributable to traffic coming from NBC.com and
the Co-branded Area shall be divided between the parties in a manner which is
mutually agreed upon by both parties at the time when LAUNCH begins to collect
such revenue.
8. PAYMENT AND REPORTING OBLIGATIONS.
(a) Payments. LAUNCH will remit to NBC, within thirty (30) days after
the end of each calendar quarter, an amount equal to the total fees owed to NBC
by LAUNCH pursuant to Section 6 and 7 for activities occurring during the
previous quarter. Such payment shall be accompanied by a statement which will
provide support for
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 13
LAUNCH's calculation of such fees. Such support shall, at a minimum, provide
enough detail regarding each element involved in making the revenue calculations
in Section 6 and 7 (e.g., advertising revenues and each cost component related
thereto) to permit NBC to independently verify such calculations.
(b) Statements. In addition to the quarterly revenue statements, LAUNCH
shall render to NBC an additional quarterly statement which will include, at a
minimum, the following types of information:
(i) Details regarding the traffic to the Co-branded Area and
other areas of myLAUNCH Site who are directed there via either NBC.com or the
Co-branded Areas including the number of visitors to the Co-Branded Area and
myLAUNCH which originated from NBC.com, the number of separate subpages of the
Co-branded Area and myLAUNCH accessed by such visitors and the number of users
who placed Orders during the relevant period.
(ii) Descriptions of users of the Co-branded Areas and other
areas of myLAUNCH who are directed there via either NBC.com or the Co-branded
Areas, including the name, address, form of Order payment (e.g. Visa or AMEX),
if any, and electronic mail address of each user, the Products, if any, ordered
by such user, the sales price for the items in any Order placed by the user and
any other information gathered by LAUNCH regarding such users; provided,
however, that NBC shall not receive any such information which LAUNCH is
forbidden to disclose due to outstanding contractual arrangements or the
standard privacy policy which LAUNCH provides to users when it collects such
information.
(iii) Details regarding quality control in connection with any
Orders which will include, at a minimum, the number of complaints received by
LAUNCH in connection with the Orders during the relevant period and statistics
regarding the failure rate of LAUNCH's order fulfillment system as well as the
causes thereof.
(c) Audit Rights. LAUNCH shall at all times keep an accurate and
auditable account of the sources of revenue and expenses described in Sections 6
and 7 adequate to verify (i) any fees or other payments required pursuant to the
terms hereof, (ii) all Net Revenues, (iii) all transactions on myLAUNCH covered
by the terms hereof and (iv) any other information which LAUNCH is obligated to
provide NBC hereunder. LAUNCH shall retain such records during the Term of this
Agreement and for a period of one year following the expiration or termination
of the Agreement. NBC, its agents, or an independent auditor appointed by NBC,
shall have the right to inspect, audit and analyze such records up to two times
each year upon reasonable notice during regular business hours to verify
compliance with this Agreement. NBC shall bear the costs of such audits unless
(i) such audits reveal a discrepancy of more than five percent (5%) between the
payments paid by LAUNCH to NBC and the actual payments due pursuant to this
Agreement or (ii) in the event such audit reveals a material breach of the
Agreement, in which cases LAUNCH shall reimburse NBC for the reasonable cost of
such audit.
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<PAGE> 14
9. REPRESENTATIONS AND WARRANTIES.
(a) LAUNCH. LAUNCH represents and warrants that (i) it has the right and
power to perform its obligations and to grant the rights granted herein; (ii)
its creation and operation of the Co-branded Area pursuant to this Agreement
will not violate any applicable laws or regulations; and (iii) the LAUNCH
Material, including the LAUNCH Branding, will be accurate and correct, will not
violate or infringe any Intellectual Property Rights, any right of publicity or
privacy or any other right of any entity or person or contain any material which
is libelous, slanderous or defamatory. LAUNCH further represents and warrants
that the Co-branded Area and myLAUNCH, including any software or hardware and
any customer services provided in connection therewith, (y) will be operated and
maintained with professional diligence and skill and in a manner consistent with
reasonable commercial standards, and (z) will operate substantially as described
in this Agreement, including any specifications and guidelines described.
Finally, LAUNCH represents, warrants and agrees that the Co-branded Area and
myLAUNCH do not currently, and shall not in the future, contain or link to Adult
Content. Notwithstanding the foregoing, NBC acknowledges and agrees that LAUNCH
cannot prevent users of myLAUNCH and the Co-branded Area from placing links to
Adult Content of users own choosing on users' customized "member" pages, but
LAUNCH agrees that it shall not promote any Adult Content or encourage users to
link thereto.
(b) NBC. NBC represents and warrants that: (i) it has the right and
power to perform its obligations and to grant the rights granted herein; (ii)
its activities related to the creation and operation of the Co-branded Area
pursuant to this Agreement will not violate any applicable laws or regulations;
and (iii) the NBC Material, including the NBC Branding, will be accurate and
correct, will not violate or infringe any Intellectual Property Rights, any
right of publicity or privacy or any other right of any entity or person, or
contain any material which is libelous, slanderous or defamatory.
10. INDEMNIFICATION AND DEFENSE.
(a) LAUNCH's Obligation. LAUNCH agrees to indemnify and hold harmless
NBC, its Affiliates, and their respective directors, officers, agents,
employees, shareholders, partners and members against and from any and all third
party claims, and any liability, loss and damages, including reasonable
attorneys' fees, related thereto, caused by or arising wholly or in part out of
(i) LAUNCH's violation of the representations and warranties described in
Section 9(a), (ii) LAUNCH's performance of the services described in this
Agreement, (iii) LAUNCH's acts or omissions including any breach of any of its
obligations under this Agreement and (iv) any transactions with users of the
Co-branded Areas or LAUNCH, including, but not limited to, any purchases of
Products by such users.
(b) NBC's Obligation. NBC agrees to indemnify and hold harmless LAUNCH
and its respective directors, officers, agents, employees, shareholders,
partners
-14-
<PAGE> 15
and members against and from any and all third party claims, and any liability,
loss and damages, including reasonable attorneys' fees, related thereto, caused
by or arising wholly or in part out of (i) any violation of the representations
and warranties described in Section 9(b), (ii) NBC's performance of the services
described in this Agreement, (iii) NBC's acts or omissions including any breach
of any of its obligations under this Agreement.
(c) Control of Litigation. The indemnitor hereunder shall have full
control of the defense of such litigation and, subject to sub-section (d) below,
may settle, compromise or adjust the same, provided, however, that the
indemnitee, upon relieving the indemnitor in writing of the obligations imposed
hereunder for defense and indemnification, shall have the right, if it so
elects, to conduct such litigation at its own expense by its own counsel.
(d) Notice and Duration. The above obligations for defense and
indemnification shall be imposed only if (1) the indemnitee sends to the
indemnitor timely written notice of first service of process upon the indemnitee
and a timely written request to defend the litigation (such notice and request
shall be deemed timely if given within a reasonable length of time after receipt
of service by the indemnitee and a reasonable length of time prior to the date
by which first response to such process is legally required, considering all the
circumstances); (2) while such litigation is pending, the indemnitee upon
request, shall furnish to the indemnitor all relevant facts and documentary
material in the former's possession or under its Control, and shall make its
employees or other persons under its Control with knowledge of relevant facts
available to the indemnitor for consultation and as witnesses at their customary
places of business; and (3) the indemnitee does not enter into any settlement
relating to any claim for which it requests indemnification hereunder without
the approval of the indemnitor.
11. LIMITATION OF LIABILITY.
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY LOSS OF PROSPECTIVE
PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES
BY REASON OF ANY FAILURE BY SUCH PARTY TO PERFORM ITS OBLIGATIONS PURSUANT TO
THIS AGREEMENT EXCEPT UNDER THE INDEMNITY PROVISIONS OF SECTION 10. NBC will
have no liability for the adequacy of performance of myLAUNCH OR THOSE PORTIONS
OF the Co-branded Areas WHICH ARE NOT CONTROLLED BY NBC.
12. TERM.
The initial term of this Agreement (the "Initial Term") will be for
twenty-six (26) months from the Effective Date. At the end of the Initial Term,
NBC shall have an option to renew this Agreement for an additional two (2) year
term upon the terms contained herein if it has provided at least 360 seconds of
on-air promotion as described in Section 3(c) (the "Renewal Term"). If NBC
chooses to exercise such option and has the right to do so, it shall provide
LAUNCH with
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<PAGE> 16
written notice of such fact prior to the end of the Term. Upon receipt of NBC's
written notice regarding its choice to extend the Term, LAUNCH shall have the
right to either accept or reject NBC's offer in its sole discretion and shall
indicate its choice in a written response which will be delivered to NBC within
five business (5) days of LAUNCH's receipt of NBC's notice.
13. TERMINATION
(a) By NBC for Convenience. NBC can terminate this Agreement at any time
and for any reason by providing LAUNCH with [ * ] days prior written notice
subject to the Following terms:
(i) For any termination taking effect at any time within
[ * ] of the Effective Date, NBC shall return [ * ] of the Purchased Shares to
LAUNCH (i.e., [ * ] of Purchased Shares attributable to this Agreement) with the
price per share of the Purchased Shares equal to the Original Purchase Price;
(ii) For any termination taking effect at any time after
[ * ] from the Effective Date and up to the end of the Initial Term, NBC shall
return [ * ] of the Purchased Shares to LAUNCH (i.e., [ * ] of Purchased
Shares attributable to this Agreement) with the price per share of the Purchased
Shares equal to the Original Purchase Price.
(b) By NBC for Change in Control. In addition, if the ownership of a
significant portion of the equity of LAUNCH or all or substantially all of the
assets of LAUNCH, is transferred at any time during the term, then NBC shall
have the option of terminating this Agreement on five (5) business days prior
written notice without returning any of the Purchased Shares if the ownership of
such equity or assets are transferred to any (i) Other Network, (ii) any
provider of Adult Content or (iii) any other party with whom NBC reasonably
chooses not to be associated, other than LAUNCH's current shareholders,
including all purchasers of Series D Preferred Stock of LAUNCH. Transfer of any
amount of such equity or assets shall be deemed significant when the parties
described in (i) and (ii) in the previous sentence are involved, but such figure
shall be deemed to be at least [ * ] of LAUNCH's equity when the parties
described in (iii) in the previous sentence are involved.
(c) By LAUNCH for Convenience. LAUNCH may terminate this Agreement at
any time and for any reason by providing LAUNCH with [ * ] prior written notice
subject provided that in the case of such termination NBC shall be entitled to
retain all of the Purchased Shares.
(d) By LAUNCH for Failure to Fulfill Promotional Commitments. If NBC
does not provide at least [ * ] of on-air promotion as described in Section
above by the end of the first [ * ] months of this Agreement, LAUNCH may, in its
sole discretion, terminate this Agreement by providing NBC with five (5) days
prior written notice of its intention and require NBC to return [ * ] of the
Purchased
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 17
Shares with the price per share of the Purchased Shares equal to the Original
Purchase Price. LAUNCH will have the ability to exercise this termination right
for a period of [ * ] following the end of the first [ * ] months of this
Agreement.
(e) Due to Material Breach by NBC. In the event that NBC commits a
material breach of a material obligation of this Agreement, LAUNCH shall provide
NBC with written notice of such breach, and if NBC fails to cure such breach
within thirty (30) days of receipt of such written notice, this Agreement shall
immediately terminate at the end of such cure period. Upon a termination
pursuant to this Section 13(e), NBC shall return the Purchased Shares, if any,
which it would have been otherwise required to return pursuant to the terms of
Section 13(a), calculated as of the effective date of such termination with the
price per share of the Purchased Shares equal to the Original Purchase Price.
This right of termination shall be in addition to all other rights and remedies
at law or in equity.
(f) Due to Material Breach by LAUNCH. In the event that LAUNCH commits a
material breach of a material obligation of this Agreement, which shall include
any distribution of Adult Content in the Co-branded Areas or myLAUNCH in
violation of Section 9(a), NBC shall provide LAUNCH with written notice of such
breach, and if LAUNCH fails to cure such breach within thirty (30) days of
receipt of such written notice, this Agreement shall immediately terminate at
the end of such cure period. Upon a termination pursuant to this Section 13(e),
NBC shall be entitled to retain all of its Purchased Shares. This right of
termination shall be in addition to all other rights and remedies at law or in
equity.
14. CONFIDENTIALITY.
(a) Restrictions on Use and Disclosure. Each party shall protect the
other's Confidential Information from unauthorized dissemination and use with
the same degree of care that such party uses to protect its own like
information. Neither party will use the other's Confidential Information for
purposes other than those necessary to directly further the purposes of this
Agreement. Each party will use its best efforts not to disclose to third parties
the other's Confidential Information without the prior written consent of the
other party. Except as expressly provided in this Agreement, no ownership or
license rights are granted in any Confidential Information.
(b) Limitations. The other provisions of this Agreement notwithstanding,
either party will be permitted to disclose the terms and conditions of this
Agreement to their outside legal and financial advisors and to the extent
required by applicable law; provided however that before making any such
required filing or disclosure, the disclosing party shall first give written
notice of the intended disclosure to the other party, within a reasonable time
prior to the time when disclosure is to be made, and the disclosing party will
exercise best efforts, in cooperation with the other party, consistent with
reasonable time constraints, to obtain confidential treatment for all non-public
and
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 18
sensitive provisions of this Agreement, including without limitation dollar
amounts and other numerical information.
15. MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York (excluding the laws regarding
conflict of laws questions).
(b) Relationship of the Parties: It is understood that this Agreement
does not create any partnership, joint venture or employment relationship
between the parties, that both parties are acting as independent contractors
with respect to each other, and that none of the employees of either party shall
be deemed to be employees of the other party for any purpose. Each party shall
pay and be solely responsible for all contributions, taxes and premiums payable
under any and all applicable, laws, rules or regulations with respect to
employees.
(c) Severability. If any provision of this Agreement shall be found by a
court of competent jurisdiction to be invalid or unenforceable, such finding
shall not affect the validity or enforceability of this Agreement as a whole or
of any other part of this Agreement. Any such provision shall be enforced to the
maximum extent permissible. In the event such provision is considered an
essential element of this Agreement, LAUNCH and NBC agree to promptly negotiate
a replacement thereof.
(d) Notices. Any notice or other communication under this Agreement
shall be sufficiently given if given in writing and delivered by hand delivery,
or in lieu of such personal service, twenty-four (24) hours after delivery to a
courier service, to the addresses listed below. Either party may designate a
different address by giving notice of change of address in the manner provided
above.
To LAUNCH: To NBC:
2 Way Media, Inc. NBC Multimedia, Inc.
1632 Fifth Street, #330 30 Rockefeller Plaza
Santa Monica, California 90401 New York, New York 10112
Attn: Robert Roback Attn: Steve Spinner
Fax: (310) 576-6070 Fax: (212) 664-5561
With a copy to:
National Broadcasting Company, Inc.
30 Rockefeller Plaza, 10th Floor
New York, New York 10112
Attn: Legal Department
Fax: (212) 977-7165
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<PAGE> 19
(e) Survival. Sections 1, 5, 8(c), 9, 10, 11, 13, 14 and 15 will survive
the expiration or termination of this Agreement.
(f) Assignment. Either party shall have the right to freely assign or
transfer, in whole or in part, any of its rights, interests, benefits or
obligations hereunder, including the Agreement itself, to any party in its sole
discretion. Notwithstanding the foregoing, LAUNCH may not assign this Agreement
to any of the parties described in subsections (i)-(iii) of Section 13(b), and
NBC may not assign this Agreement to any Prohibited Sponsor. This Agreement
shall be fully binding upon, inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns.
(g) Waiver/Modification. No modification or amendment to, or waiver of,
this Agreement will be binding and valid unless it is in writing and executed by
the party against whom enforcement is sought. No waiver of a breach of any
provision of this Agreement or of any default hereunder shall be deemed a waiver
of any other breach or default of this Agreement.
(h) Force Majeure. Neither party shall be liable for any delay or
failure in performance of any part of this Agreement from any cause beyond its
control and without its fault or negligence including, without limitation, acts
of nature, acts of civil or military authority, embargoes, epidemics, terrorist
acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents,
floods, work stoppages, equipment failure, power blackouts, volcanic action,
other major environmental disturbances, unusually severe weather conditions,
inability to secure products or services of other persons or third party
suppliers of such products and services, or transportation facilities or acts or
omissions of transportation carriers. No delay or other failure to perform shall
be excused pursuant to this Section 15(h) unless such delay or failure and
consequences thereof are beyond the control and without the fault or gross
negligence of the party claiming excusable delay or other failure to perform. In
the event of any such excused delay in the performance of a party's
obligation(s) under this Agreement, the due date for the performance of the
original obligation(s) shall be extended by a term equal to the time lost by
reason of the delay. In the event of such delay, the delaying party shall
perform its obligations at a performance level no less than that which it uses
for its own operations. In the event of a labor dispute or strike, the parties
agree to provide service to each other at a level equivalent to the level they
provide themselves during such dispute or strike.
(i) Construction. If for any reason a court of competent jurisdiction
finds any provision of this Agreement, or portion thereof, to be unenforceable,
that provision of the Agreement will be enforced to the maximum extent
permissible so as to effect the intent of the parties, and the remainder of this
Agreement will continue in full force and effect. Failure by either party to
enforce any provision of this Agreement will not be deemed a waiver of future
enforcement of that or any other provision. This Agreement has been negotiated
by the parties and their respective counsel and will be interpreted fairly in
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<PAGE> 20
accordance with its terms and without any strict construction in favor of or
against either party.
(j) Entire Agreement. The provisions of this Agreement set forth the
entire agreement and understanding between LAUNCH and NBC as to the subject
matter hereof and supersedes all prior agreements, oral or written, and all
other communications between LAUNCH and NBC relating to the subject matter
hereof, other than the Securities Purchase Agreement, the Warrant, the NBC-IN
Agreement and the Non-Disclosure Agreement between the parties. Nothing in this
Agreement, express or implied, is intended to confer upon the General Electric
Capital Corporation ("GECC"), Allen & Company, Incorporated ("Allen") or any
other party other than the parties hereto and their respective successors and
assigns, any rights, remedies, obligations, or liabilities under or by reason of
this Agreement. The parties acknowledge that certain acts or omissions of NBC
hereunder may trigger certain terms contained in a warrant issued to GECC by
LAUNCH and a warrant issued to Allen, but NBC's acts or omissions hereunder
shall not give GECC or Allen any right or cause of action against NBC or its
affiliates therefor.
(k) Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original but all of which, when taken together,
shall constitute one agreement, and shall become effective when one or more such
counterparts have been signed by each of the parties and delivered to the other
party.
This Agreement is accepted and agreed by:
NBC Multimedia, Inc. 2 Way Media, Inc.
By: By: /s/ Robert D. Roback
-------------------------------------- --------------------------------
Name: Name: Robert D. Roback
------------------------------------ -------------------------------
Title: Title: President
----------------------------------- ------------------------------
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<PAGE> 21
This Agreement is accepted and agreed by:
NBC Multimedia, Inc. 2 Way Media, Inc.
By: /s/ EDMOND By: /s/ ROBERT D. ROBACK
-------------------------------------- --------------------------------
Name: Edmond Name: Robert D. Roback
------------------------------------ -------------------------------
Title: V.P. Title: President
----------------------------------- ------------------------------
<PAGE> 22
EXHIBIT A
Description of Services in myLAUNCH Guest Mode
Music news
Music features/interviews
Concert news and features
Album reviews
New release and upcoming release information
Certain artist information (i.e. biographies, discography)
Certain album information (i.e. song list liner notes)
<PAGE> 1
EXHIBIT 10.6
NBC-IN CONTENT PROVIDER AGREEMENT
This NBC-IN Content Provider Agreement (this "Agreement"), dated as of
February 26, 1998 (the "Effective Date"), is by and between 2 WAY MEDIA, INC. a
Delaware corporation, ("Company"), and NBC MULTIMEDIA, INC., a Delaware
corporation ("NBC").
RECITALS
A. Concurrently with the execution and delivery of this Agreement and the
Strategic Alliance Agreement of even date herewith between the parties
(the "Strategic Alliance Agreement"), and pursuant to the terms and
conditions of that certain Securities Purchase Agreement of even date
herewith (the "Securities Purchase Agreement") by and between Company,
NBC and other investors, Company shall issue and NBC shall receive
1,960,784 ($3mm) shares (the "Purchased Shares") of Company, Series D
Stock, as such term is defined in the Securities Purchase Agreement.
B. As a condition to, and as sole consideration for, the issuance of
653,595 ($1mm) of the Purchased Shares covered by the Securities
Purchase Agreement, NBC has agreed to enter into this Agreement pursuant
to which, and subject to the terms and conditions set forth below,
Company shall create myLAUNCH Local Sites in connection with NBC's
NBC-IN online service as described below.
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties hereto, NBC and Company agree as
follows:
AGREEMENT
1. Description of NBC-IN. NBC has created a menu of localized world wide
web services ("NBC-IN") which it offers to the NBC Television Network's
("NBC TV") owned and operated stations and interested affiliates (the
"Stations"). NBC agrees that customized versions of the purchasing
service which is part of the myLAUNCH online music content, information
and purchasing service created and operated by the Company ("myLAUNCH")
shall be among the services offered as part of such platform subject to
the terms and conditions hereof Company acknowledges (i) that each
Station will have the sole right to determine which individual services
it will accept as part of the NBC-IN, (ii) that myLAUNCH may or may not
be included in any individual Station's list of such services, and (iii)
that NBC and declining Stations shall have no liability or obligations
to Company due to any Stations' decision not to so include myLAUNCH.
2. Creation of myLAUNCH Local Sites. (a) Company agrees that it shall
create a new version of its myLAUNCH site which will consist of a
customized and localized jump page containing certain material which is
relevant to such user and which will primarily direct NBC-IN users to
areas of myLAUNCH focused on the on-line-purchase of any merchandise or
services offered for sale by Company on myLAUNCH, including music
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
1
<PAGE> 2
CDs, audio tapes or CD-ROMs ("Products") but which may, in addition,
direct such users to myLAUNCH areas containing certain mutually
agreeable supplementary information which relates to such purchases
(i.e., reviews and release information) for use by Stations
participating in the NBC-IN ("myLAUNCH Local Sites"). Such customized
versions will be designed and operated through the technological
cooperation of Company, NBC, the Stations and NBC's technology partners
(as described below in Section 4(c)) so that online users of the
Stations' world wide web sites (the "Station Sites") shall be provided
with a version of myLAUNCH which is designed to provide branding and
purchasing information relevant to such users' geographical markets.
Company agrees that it shall use commercially reasonable efforts to make
the initial version of the myLAUNCH Local Sites available for use by
commercial users by no later than [*] months following the Effective
Date hereof.
(b) NBC and Company shall mutually agree upon the final form and content of
the myLAUNCH Local Sites, but, at a minimum, the myLAUNCH Local Sites
will consist of: (i) individualized Station "jump pages" which contain
branding and other material to be provided by NBC and each of the
relevant Stations and which will contain links to the areas of myLAUNCH
described in Exhibit A, and (ii) customized, traveling branding and
advertising that will appear on any myLAUNCH pages accessed by users
after the initial jump page has been viewed. All such NBC and Station
branding shall link back to either the NBC-IN homepage or the
appropriate page on the Station Site. Each such myLAUNCH Local Site
shall be framed within a sub-page of the Station Site but will contain
material to be provided by Company and located on Company's server. As a
result, all online users will be accessing and bookmarking the myLAUNCH
Local Site content through the NBC-IN's portion of the Station's URL.
Except as described above and approved by NBC, the "jump pages" of the
myLAUNCH Local Sites and any pages of the myLAUNCH Local Sites which are
reached directly (i.e., in one click) from the "jump pages", other than
the page accessed via the General Service Link (as described in Exhibit
A), will not include any (i) local music content or information (e.g., a
list of upcoming local music events), other than purchasing information,
(ii) news, or (iii) any branding of, or links to, any Other Networks'
material (as such term is defined below). Finally, if the categories of
content currently included in any of the areas of myLAUNCH which are
reached from the "jump pages", other than via the General Service Link,
are changed in the future and any of the new categories of content
include any categories of information which NBC reasonably believes are
in violation of either any contracts with other NBC-IN content providers
existing as of the date hereof or NBC Broadcast Standards and Practices,
then Company may choose to either alter such areas in a manner which
removes or blocks such objectionable categories of content for users of
the myLAUNCH Local Sites in a manner which is acceptable to NBC or
permit NBC to remove the links on the "jump pages" to such areas.
(c) Company agrees to allow all users to have access to all myLAUNCH
features currently accessible in the myLAUNCH "Guest" mode which are
described in Exhibit A, as well as the right to purchase Products,
without having to complete the registration process offered to users of
myLAUNCH. NBC acknowledges that Company may make
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE> 3
commercially reasonable efforts to encourage all users to register with
Company through promotional opportunities within the myLAUNCH Local
Sites which are reasonably acceptable to NBC.
3. Links. (a) As a condition of utilizing the NBC-IN, each participating
Station will be required to devote a standardized portion of the front
page of the Station Site to NBC-IN, subject to Station's right to have
overall design control of the Station Site. Each Station shall be
encouraged to devote enough space on its front page to permit the
placement of a NBC-IN navigation menu, but at a minimum, each
participating Station Site's front page shall contain a prominent
hotlink to a special sub-page devoted to hotlinks for all of the
services making up the NBC-IN the size of which shall be comparable to
that of any other link to a service offered by the Station.
(b) NBC agrees that a hotlink to the myLAUNCH Local Sites will either appear
on the NBC-IN navigation menu or will be rotated into such navigation
menu on an equal basis with the hotlinks of other content providers,
subject to NBC's right to group brands and/or generic categories and
sub-categories concerning all of its service providers in manners and
sizes which are most useful to users of the Station Sites. In addition,
NBC agrees that a hotlink to the myLAUNCH Local Sites will appear on the
main NBC-IN homepage which NBC-IN homepage shall be accessible in one
link from NBC.com as well as all Station Sites participating in NBC-IN.
The various hotlinks to the myLAUNCH Local Sites shall contain an icon
and/or text provided by Company which is reasonably acceptable to NBC
(the "myLAUNCH Link").
4. Management of myLAUNCH Local Sites. The day-to-day management of the
myLAUNCH Local Sites, and all costs associated therewith, shall be the
responsibility of the Company subject to the following:
(a) Content and Service - Company will provide all of the content and
services for each of the myLAUNCH Local Sites, provided that as part of
the localization and customizing process required herein, NBC and the
Stations may provide material in their own discretion for use on the
relevant myLAUNCH Local Sites and Company will make good faith efforts
to include such material on the relevant myLAUNCH Local Sites. Company
will acquire all necessary rights and licenses required for the
operation of each myLAUNCH Local Site as contemplated herein and for the
acquisition and use of any content and technology not provided by NBC
and the Stations. Each of the Company, NBC and the Stations will retain
and own all copyrights and other intellectual property rights in, and
to, the material which that entity contributes for use hereunder.
(b) Editorial - Once the parties have mutually agreed upon the final form
and content of themyLAUNCH Local Sites pursuant to Section 2, day to day
editorial standards and direction regarding the inclusion and
presentation of content of material on the myLAUNCH Local Sites will
come from Company, subject to NBC's right to reject the types of content
described in Section 2(b) and right to approve all uses of any material
provided by NBC or the Stations as described below. In addition, Company
agrees to
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consider all reasonable requests and suggestions regarding individual
myLAUNCH Local Sites which are made by NBC and the relevant Stations.
Company also agrees that the myLAUNCH Locals Sites and myLAUNCH will not
contain any Adult Content and will comply with any other NBC Broadcast
Standards and Practices which may apply thereto and with the Rules and
Regulations of the Federal Communications Commission and any other
governmental body having jurisdiction. For purposes hereof, the term
"Adult Content" shall mean any material, including audio or video
material, which is pornographic or which contains nudity, explicit
sexual material or depictions of sexual acts any of which is beyond that
normally broadcast over NBC TV.
(c) NBC and Station Material - Company agrees that NBC shall have final
approval regarding all aspects of Company's integration of any material
provided by NBC or the Stations or their affiliates, licensors or
suppliers into the myLAUNCH Local Sites. NBC shall have sole discretion
regarding how it exercises such approval rights and may reject any use
or presentation of such material in the myLAUNCH Local Sites for any, or
no, reason. The use by Company of any material provided by NBC or the
Station or their affiliates, licensors or suppliers must comply with all
NBC guidelines regarding the use of intellectual property related to any
NBC TV television show or talents' names, likenesses and images and any
other requirements related thereto of which Company is informed by NBC.
Company agrees to obtain NBC's prior written approval to any use of any
NBC or Station branding or other material provided by NBC or the Station
or their affiliates, licensors or suppliers which is not specifically
contemplated by the terms hereof.
(d) Technology - myLAUNCH will be responsible for all maintenance of the
myLAUNCH Local Sites (including customer service, technical upkeep,
etc.) and the costs associated therewith, including the costs of coding
such sites to recognize which Station Site directed the user thereto.
NBC and its technology partner shall be responsible for the framing of
the myLAUNCH Local Sites as contemplated herein. Company will provide
all necessary facilities, servers, connectivity and related equipment
and technology required to host the myLAUNCH Local Sites on Company's
internet servers. Company agrees that, at all times during the term of
this Agreement, the resources it provides to host the myLAUNCH Local
Sites shall be sufficient to support and manage the simultaneous users
that wish to use the myLAUNCH Local Sites at any time. Company will
identify and track users who enter the myLAUNCH Local Sites via NBC-IN
and be able to organize this data, including transaction data, in order
to show which Station Site sent such user thereto. Company will also
provide any other data and statistics regarding users of the myLAUNCH
Local Sites which NBC reasonably requests, including the data described
in Section 9(b). Company agrees to work with NBC's technology partners
to coordinate the interface between the myLAUNCH Local Sites and the
Station Sites so that the myLAUNCH Local Sites will provide the required
services contemplated herein.
(e) Branding - The myLAUNCH Link may be branded with material to be provided
by Company, subject to NBC's approval thereof. The myLAUNCH Local Sites
will be co-branded with trademarks and other material to be provided by
NBC, the Stations and
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Company subject to the approval of each party and provided that the size
of all such brands and the design of all NBC and Station brands shall be
left to the sole discretion of NBC. The parties agree that the Company's
brands on the MYLAUNCH Local Sites shall be no less than [*] the size
of, but as visible as, the brands of NBC and the relevant Stations.
Company agrees to abide by all requirements and guidelines which NBC and
the Stations may have regarding the use of their trademarks, service
marks and other brands and agrees that it shall make no use of such
marks and brands which is not approved in advance by NBC and the
relevant Stations. All use by Company of any NBC or Station trademarks,
service marks or other brands shall inure to the benefit of NBC and the
relevant Station, and Company shall not obtain any ownership interests
in any such branding. NBC agrees to abide by all requirements and
guidelines which Company may have regarding the use of its trademarks,
service marks and other brands on NBC-IN. All use by NBC of any Company
trademarks, service marks or other brands shall inure to the benefit of
Company, and NBC shall not obtain any ownership interests in any such
branding. Branding for all other areas of the NBC-IN and the Station
Sites shall be at the sole discretion of NBC and the Stations.
5. Promotion. As a condition of utilizing the NBC-IN, each Station will be
required to offer a minimum of [*] on-air promos concerning, or mentions
of, the URL address of the Station Site per week. NBC shall provide
Stations with appropriate "calls-to-action" examples to enable such
Stations to include NBC-IN information as part of such promos or
mentions. In addition, Company will provide NBC with regular information
which NBC will provide to the Stations for use in such Stations' sole
discretion if they choose to promote the MYLAUNCH Local Sites in
connection with such Stations' Station Sites.
6. Exclusivity. (a) For the term hereof, NBC agrees that NBC-IN will
feature myLAUNCH as its primary provider of online music purchasing
services, provided that Company acknowledges that nothing in this
Section 6 or elsewhere in this Agreement shall restrict NBC's rights in
any way in connection with NBC's world wide web site ("NBC.com"), MSNBC
Interactive, Intellicast.com or any other or future NBC related
interactive (or other) services other than NBC-IN. Notwithstanding the
foregoing, Company acknowledges that (i) other services provided by
third parties, such as [*] may be offered to the Stations by NBC as part
of NBC-IN which provide online music purchasing services in addition to
their primary services as long as NBC does not offer such third party
services in place of Company's service on NBC-IN or materially promote
such competing aspects of such third party services to the Stations or
the public (other than through general advertising) in connection with
NBC-IN and (ii) NBC will have no ability to prevent the Stations from
placing competing services elsewhere on their own Station Sites. In
addition, NBC agrees that it will make commercially reasonable efforts
to prevent the "jump pages" of the localized versions of any future
third party services included on NBC-IN from containing a material
amount of music content or information of a type that would be
reasonably considered competitive with that provided on the
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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myLAUNCH service; provided, however, that such prohibition shall not
apply to online services related to radio broadcasting (e.g., radio
network schedules and information) or third party media sites which
contain information regarding a variety of topics (e.g., newspaper or
general entertainment services). In addition, NBC will not enter into
any additional agreements with any other third-party primarily relating
to the provision of music content and information to NBC-IN. The
exclusivity terms hereof will not prevent NBC or the Stations from
placing banner advertising of any party, including any Prohibited
Sponsor, on NBC-IN or anywhere else other than on the myLAUNCH Local
Sites.
(b) Company agrees that it will not provide substantially similar localized
myLAUNCH content or service to, or allow the content or service to be
connected or integrated in any way with, any television broadcasters or
stations, any regional television broadcast network or cable programmers
[*] or their affiliates, other than [*], or such entities' world wide
web sites (the "Other Networks"). In addition, Company will not provide
a substantially similar myLAUNCH local site or service to any
third-party interactive media company acting as an aggregator of content
and/or services that redistributes myLAUNCH content to Other Networks.
Notwithstanding the foregoing, if any Station chooses not to accept the
myLAUNCH Local Site as part of NBC-IN, then Company will be free to
provide its myLAUNCH service to any Other Network within such market as
long as the service is localized and intended for use within such
geographic market only. The exclusivity terms hereof will not prevent
Company from placing banner advertising of any party, including any
Other Network, anywhere on the general myLAUNCH Service other than on
the myLAUNCH Local Sites.
7. Advertising Sales. (a) Company shall be responsible for the sale of
advertising inventory and sponsorships to be placed on each myLAUNCH
Local Site. Company will use best efforts to sell such advertising and
sponsorships, and if any such inventory remains unsold, then each party
shall have the right to use [*] of the amount of such unsold inventory
for its own purposes, subject to the restrictions described herein, and
[*] of such inventory shall be used to promote other areas of myLAUNCH
co-branded with Company and NBC branding. Company shall have the
responsibility of administering the contract for such advertising,
paying all necessary expenses and collecting all fees related thereto.
Company acknowledges that NBC and the Stations will be solely
responsible for the sale of advertising which appears within the area of
the Station Sites which frames myLAUNCH Local Sites and that Company
will have no right to advertising revenues received by NBC and Stations
in connection with such frames or any other portions of the Station
Sites other than the myLAUNCH Local Sites.
(b) NBC and Company will coordinate their advertising efforts so that they
can avoid confusion in the marketplace and elsewhere. Company will (i)
comply with all Company advertising standards as well as any and all
relevant NBC Advertising Standards, (ii) not act as a representative for
NBC or any NBC content or property in the advertising
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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marketplace, (iii) will not sell advertising appearing in the myLAUNCH
Local Sites to any Other Network, and (iv) not permit any such
advertising to refer to, or imply an endorsement of any kind by, NBC or
its affiliates or any of NBC's or its affiliates', licensors' or
suppliers' properties, talent or licensors. In addition, all such
advertising and sponsorships shall be subject to NBC's approval and will
comply with any applicable NBC guidelines regarding the use of
intellectual property related to any NBC TV television show or its
talent's likenesses and images and any other requirement related
thereto.
8. Financial Terms. Company agrees that it will be responsible for all
costs and expenses associated with the creation and operation of the
myLAUNCH Local Sites. All revenues associated with myLAUNCH shall be
split among NBC and Company monthly as follows:
(a) Advertising Sales on myLAUNCH Local Sites. Company will pay NBC [*]
attributable to sales of advertising and sponsorships on the myLAUNCH
Local Sites. For purposes hereof, the term "Net Advertising Revenue"
shall mean all advertising revenue actually collected by Company in
connection with the myLAUNCH Local Sites (including in-kind
compensation) less actual selling commissions, agency commissions, and
all actual out of pocket expenses directly incurred by Company in
connection with creating, selling and fulfilling such advertising, which
commissions and expenses shall in no event in total [*].
(b) Transactions. Company shall pay NBC fifty percent (50%) of the total of
(i) all actual Company gross receipts from transactions occurring
anywhere on myLAUNCH, including the sale of any Products, attributable
to users coming to the myLAUNCH through NBC-IN or the myLAUNCH Local
Sites, less only (ii) the direct, identifiable and actual cost of goods
sold, fulfillment expenses, discounts, bad debts, sales taxes, and
returns related to such transactions; provided that NBC will not share
in any revenue derived from the sale of any merchandise directly based
on Company's trademarks, service marks, designs or logos (e.g., LAUNCH
T-shirts) and the LAUNCH CD-ROM magazine. If the total expenses exceed
revenues for such transactions, such amount may not be used to offset
any payments otherwise owed to NBC hereunder, including payments
attributable to advertising. Subject to the right to deduct such
expenses from revenues as described above, Company shall be solely
responsible for the payment of any and all sales and applicable taxes
related to the orders and sales of Products. Company agrees that the
revenue share described in this Section 8(b) is [*].
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE> 8
(c) Other Revenue. The parties agree that if Company derives any other type
of revenue from myLAUNCH other than that described in sub-sections (a)
and (b) above, then the portion of such revenue attributable to traffic
coming from NBC-IN and the myLAUNCH Local Sites shall be divided between
the parties in a manner which is mutually agreed upon by both parties at
the time when Company begins to collect such revenue.
9. Payment and Audit Conditions. (a) Payments. Company will remit to NBC,
within thirty (30) days after the end of each calendar quarter, an
amount equal to the total fees owed to NBC by Company pursuant to
Section 8 for activities occurring during the previous quarter. Such
payment shall be accompanied by a statement which will provide support
for Company's calculation of such fees. Such support shall, at a
minimum, provide enough detail regarding each element involved in making
the revenue calculations in Section 8 (e.g., advertising revenues and
each cost component related thereto) to permit NBC to independently
verify such calculations. The parties agree that all revenues associated
with the myLAUNCH Local Sites collected by Company and not otherwise
owed to Company shall be paid directly to NBC and not to any of the
individual Stations.
(b) Statements. In addition to the quarterly revenue statements, Company
shall render to NBC an additional quarterly statement which will
include, at a minimum, the following types of information:
(i) Details regarding the traffic to the myLAUNCH Local Sites and other
areas of myLAUNCH who are directed there via either NBC-IN or the
myLAUNCH Local Sites including the number of visitors to the myLAUNCH
Local Sites, the number of separate subpages of the myLAUNCH Local Sites
and myLAUNCH accessed by such visitors and the number of users who
placed orders for Products during the relevant period.
(ii) Descriptions of users of the myLAUNCH Local Sites and other areas
of myLAUNCH who are directed there via either NBC-IN or the myLAUNCH
Local Sites, including the name, address, form of order payment (e.g.
Visa or AMEX), if any, and electronic mail address of each user, the
Products, if any, ordered by such user, the sales price for the items in
any order placed by the user and any other information gathered by
Company regarding such users; provided, however, that NBC shall not
receive any such information which Company is forbidden to disclose due
to outstanding contractual arrangements or the standard privacy policy
which Company provides to users when it collects such information.
(iii) Details regarding quality control in connection with any purchases
of Products by users which will include, at a minimum, the number of
complaints received by Company in connection with the orders during the
relevant period and statistics regarding the failure rate of Company's
order fulfillment system as well as the causes thereof.
(c) Audit Rights. Company shall at all times keep an accurate and auditable
account of the sources of revenue and expenses described in Section 8
adequate to verify (i) ny fees or other payments required pursuant to
the terms hereof, (ii) all Net Revenues, (iii) all transactions on
myLAUNCH covered by the terms hereof and (iv) any other information
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which Company is obligated to provide NBC hereunder. Company shall
retain such records during the term of this Agreement and for a period
of one year following the expiration or termination of the Agreement.
NBC, its agents, or an independent auditor appointed by NBC, shall have
the right to inspect, audit and analyze such records up to two times
each year upon reasonable notice during regular business hours to verify
compliance with this Agreement. NBC shall bear the costs of such audits
unless (i) such audits reveal a discrepancy of more than five percent
(5%) between the payments paid by Company to NBC and the actual payments
due pursuant to this Agreement or (ii) in the event such audit revels a
material breach of the Agreement, in which cases Company shall reimburse
NBC for the reasonable cost of such audit.
10. Representations and Warranties. (a) Company represents and warrants to
NBC and the Stations that it has the right and power to perform its
obligations and to grant the rights granted herein, that Company's
creation and operation of the myLAUNCH Local Sites pursuant to this
Agreement will not violate any agreement or obligation between Company
and a third party or any laws or regulations and that, except for
material provided by NBC and the Stations, the content included on the
myLAUNCH Local Sites and the myLAUNCH Link as well as the operation of
the myLAUNCH Local Sites as contemplated herein will be accurate and
correct, will not violate or infringe the copyright, trademark, trade
name, patent, literary, intellectual, artistic or dramatic right, right
of publicity or privacy or any other right of any entity or person or
contain any material which is Adult Content, libelous, slanderous or
defamatory. Company also agrees that the myLAUNCH Local Sites, including
any software or hardware provided by Company in connection therewith,
(i) will not violate or infringe the intellectual property rights of any
third party, (ii) will be operated and maintained with professional
diligence and skill and in a manner consistent with reasonable
commercial standards, and (iii) will operate as described in this
Agreement, including any specifications and guidelines mutually agreed
upon by the parties from time to time during the term hereof. Finally,
Company represents, warrants and agrees that the myLAUNCH Local Sites
and myLAUNCH do not currently, and shall not in the future, contain or
link to Adult Content. Notwithstanding the forgoing, NBC acknowledges
and agrees that Company cannot prevent users of myLAUNCH and the
myLAUNCH Local Sites from placing links to Adult Content of users own
choosing on users' customized "member" pages, but Company agrees that it
shall not promote any Adult Content or encourage users to link thereto.
(b) NBC represents and warrants to Company that it has the right and power
to perform its obligations and to grant the rights granted herein and
that the material provided by NBC to Company for inclusion on the
myLAUNCH Local Sites, which NBC has approved for use as contemplated
herein, will be accurate and correct and will not violate or infringe
any third party rights, including intellectual property rights.
11. Indemnity. (a) Company agrees to indemnify and hold harmless NBC, its
affiliates, and their respective directors, officers, agents, employees,
shareholders, partners and members against and from any and all third
party claims, and any liability, loss and
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damages, including reasonable attorneys' fees, related thereto, caused
by or arising wholly or in part out of (i) Company's violation of the
representations and warranties described in Section 10(a), (ii)
Company's performance of the services described in this Agreement, (iii)
Company's acts or omissions including any breach of any of its
obligations under this Agreement and (iv) any transactions with users of
the myLAUNCH Local Sites or myLAUNCH, including, but not limited to, any
purchases of Products by such users.
(b) NBC's Obligation. NBC agrees to indemnify and hold harmless Company and
its respective directors, officers, agents, employees, shareholders,
partners and members against and from any and all third party claims,
and any liability, loss and damages, including reasonable attorneys'
fees, related thereto, caused by or arising wholly or in part out of (i)
any violation of the representations and warranties described in Section
10(b), (ii) NBC's performance of the services described in this
Agreement, (iii) NBC's acts or omissions including any breach of any of
its obligations under this Agreement.
(c) Control of Litigation. The indemnitor hereunder shall have full control
of the defense of such litigation and, subject to sub-section (d) below,
may settle, compromise or adjust the same, provided, however, that the
indemnitee, upon relieving the indemnitor in writing of the obligations
imposed hereunder for defense and indemnification, shall have the right,
if it so elects, to conduct such litigation at its own expense by its
own counsel.
(d) Notice and Duration. The above obligations for defense and
indemnification shall be imposed only if (1) the indemnitee sends to the
indemnitor timely written notice of first service of process upon the
indemnitee and a timely written request to defend the litigation (such
notice and request shall be deemed timely if given within a reasonable
length of time after receipt of service by the indemnitee and a
reasonable length of time prior to the date by which first response to
such process is legally required, considering all the circumstances);
(2) while such litigation is pending, the indemnitee upon request, shall
furnish to the indemnitor all relevant facts and documentary material in
the former's possession or under its control, and shall make its
employees or other persons under its control with knowledge of relevant
facts available to the indemnitor for consultation and as witnesses at
their customary places of business; and (3) the indemnitee does not
enter into any settlement relating to any claim for which it requests
indemnification hereunder without the approval of the indemnitor.
(e) IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY LOSS OF PROSPECTIVE
PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL
DAMAGES BY REASON OF ANY FAILURE BY SUCH PARTY TO PERFORM ITS
OBLIGATIONS PURSUANT TO THIS AGREEMENT EXCEPT UNDER THE INDEMNITY
PROVISIONS OF SECTION 10. NBC will have no liability for the adequacy of
performance of myLAUNCH OR THOSE PORTIONS OF the myLAUNCH LOCAL SITES
WHICH ARE NOT CONTROLLED BY NBC.
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12. Term. The initial term of this Agreement (the "Initial Term") shall be
for twenty-six (26) months from the Effective Date. At the end of the
Initial Term, if the parties have extended the Strategic Alliance for an
additional two (2) year period pursuant to the terms of that Agreement,
then the term hereof shall also be extended for an additional two (2)
years upon the terms hereof (the "Renewal Term").
13. Termination. (a) By NBC for Convenience - NBC can terminate this
Agreement at any time and for any reason by providing Company with
ninety (90) days prior written notice subject to the following terms:
(i) For any termination taking effect at any time within [*] months of
the Effective Date, NBC shall return [*] of the Purchased Shares to
Company (i.e., [*] of Purchased Shares attributable to this Agreement)
with the price per share of the Purchased Shares equal to the Original
Purchase Price;
(ii) For any termination taking effect at any time after [*] months from
the Effective Date and up to the end of the Initial Term, NBC shall
return [*] of the Purchased Shares to Company (i.e., [*] of Purchased
Shares attributable to this Agreement) with the price per share of the
Purchased Shares equal to the Original Purchase Price. For purposes
hereof, the term "Original Purchase Price" shall mean the price per
share applicable to the Purchased Shares as of the Effective Date hereof
which is $1.53.
(b) By NBC for Change in Control - In addition, if the ownership of a
significant portion of the equity of Company, or all or substantially
all of the assets of Company, is transferred at any time during the
term, then NBC shall have the option of terminating this Agreement on
five (5) business days prior written notice without returning any of the
Purchased Shares if the ownership of such equity or assets are
transferred to any (i) Other Network, (ii) any provider of Adult Content
or (iii) any other party with whom NBC reasonably chooses not to be
associated, other than Company's current shareholders (including all
purchasers of Series D Preferred Stock of the Company). Transfer of any
amount of such equity or assets shall be deemed significant when the
parties described in (i) and (ii) in the previous sentence are involved,
but such figure shall be deemed to be at least [*] of Company's equity
when the parties described in (iii) in the previous sentence are
involved.
(c) By Company for Convenience - Company may terminate this Agreement at any
time and for any reason by providing Company with [*] days prior written
notice subject provided that in the case of such termination NBC shall
be entitled to retain all of the Purchased Shares.
(d) Due to Material Breach by NBC - In the event that NBC commits a material
breach of a material obligation of this Agreement, Company shall provide
NBC with written notice of such breach, and if NBC fails to cure such
breach within [*] days of receipt of such written notice, this Agreement
shall immediately terminate at the end of such cure period. Upon a
termination pursuant to this Section 13(d), NBC shall return the
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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<PAGE> 12
Purchased Shares, if any, which it would have been otherwise required to
return pursuant to the terms of Section 13(a), calculated as of the
effective date of such termination. This right of termination shall be
in addition to all other rights and remedies at law or in equity.
(e) Due to Material Breach by Company - In the event that Company commits a
material breach of a material obligation of this Agreement, which shall
include any distribution of Adult Content in the Co-branded Areas or
myLAUNCH in violation of Section 4(b), NBC shall provide Company with
written notice of such breach, and if Company fails to cure such breach
within [*] of receipt of such written notice, this Agreement shall
immediately terminate at the end of such cure period. Upon a termination
pursuant to this Section 13(e), NBC shall be entitled to retain all of
its Purchased Shares. This right of termination shall be in addition to
all other rights and remedies at law or in equity.
14. Confidentiality. (a) Restrictions on Use and Disclosure - Each party
shall protect the other's Confidential Information from unauthorized
dissemination and use with the same degree of care that such party uses
to protect its own like information. Neither party will use the other's
Confidential Information for purposes other than those necessary to
directly further the purposes of this Agreement. Each party will use its
best efforts not to disclose to third parties the other's Confidential
Information without the prior written consent of the other party. Except
as expressly provided in this Agreement, no ownership or license rights
are granted in any Confidential Information. For purposes hereof, the
term "Confidential Information" shall mean (i) any trade secrets
relating to either party's product or service, plans, designs, costs,
prices and names, finances, marketing plans, business opportunities,
personnel, research, development or know-how; and (ii) the specific
terms and conditions of this Agreement, but "Confidential Information"
shall not include information that: (i) is or becomes generally known or
available, whether by publication, commercial use or otherwise, without
restriction on disclosure and through no fault of the receiving party;
(ii) is known by the receiving party prior to the time of disclosure;
(iii) is independently developed or learned by the receiving party
without reference to any Confidential Information of the disclosing
party; or (iv) is lawfully obtained from a third party that the
receiving party reasonably believes has the right to make such
disclosure.
(b) Limitations - The other provisions of this Agreement notwithstanding,
either party will be permitted to disclose the terms and conditions of
this Agreement to their outside legal and financial advisors and to the
extent required by applicable law; provided however that before making
any such required filing or disclosure, the disclosing party shall first
give written notice of the intended disclosure to the other party,
within a reasonable time prior to the time when disclosure is to be
made, and the disclosing party will exercise best efforts, in
cooperation with the other party, consistent with reasonable time
constraints, to obtain confidential treatment for all non-public and
sensitive provisions of this Agreement, including without limitation
dollar amounts and other numerical information.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
12
<PAGE> 13
15. Press Release. Within a reasonable period following the execution
hereof, NBC and Company will issue a mutually agreeable joint press
release and any other mutually agreed upon promotional materials
regarding the relationship described in this Agreement and the Strategic
Alliance Agreement.
16. Miscellaneous. (a) Governing Law - This Agreement shall be governed and
construed in accordance with the laws of the State of New York
(excluding the laws regarding conflict of laws questions).
(b) Relationship of the Parties - It is understood that this Agreement does
not create any partnership, joint venture or employment relationship
between the parties, that both parties are acting as independent
contractors with respect to each other, and that none of the employees
of either party shall be deemed to be employees of the other party for
any purpose. Each party shall pay and be solely responsible for all
contributions, taxes and premiums payable under any and all applicable,
laws, rules or regulations with respect to employees.
(c) Severability - If any provision of this Agreement shall be found by a
court of competent jurisdiction to be invalid or unenforceable, such
finding shall not affect the validity or enforceability of this
Agreement as a whole or of any other part of this Agreement. Any such
provision shall be enforced to the maximum extent permissible. In the
event such provision is considered an essential element of this
Agreement, Company and NBC agree to promptly negotiate a replacement
thereof/
(d) Notices - Any notice or other communication under this Agreement shall
be sufficiently given if given in writing and delivered by hand
delivery, or in lieu of such personal service, twenty-four (24) hours
after delivery to a courier service, to the addresses listed below.
Either party may designate a different address by giving notice of
change of address in the manner provided above.
To Company: To NBC:
2 Way Media, Inc. NBC Multimedia, Inc.
1632 Fifth Street, #330 30 Rockefeller Plaza
Santa Monica, California 90401 New York, New York 10112
Attn: Robert Roback Attn: Andrew Shotland
Fax: (310) 576-6070 Fax: (212) 245-4622
With a copy to:
National Broadcasting Company, Inc.
30 Rockefeller Plaza, 10th Floor
New York, New York 10112
Attn: Legal Department
Fax:(212) 977-7165
13
<PAGE> 14
(e) Survival - Sections 9, 10, 11, 13, 14 and 16 will survive the expiration
or termination of this Agreement.
(f) Assignment - Either party shall have the right to freely assign or
transfer, in whole or in part, any of its rights, interests, benefits or
obligations hereunder, including the Agreement itself, to any party in
its sole discretion. Notwithstanding the foregoing, Company may not
assign this Agreement to any of the parties described in subsections
(i)-(iii) of Section 13(b), and NBC may not assign this Agreement to any
Prohibited Sponsor. This Agreement shall be fully binding upon, inure to
the benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
(g) Waiver/Modification - No modification or amendment to, or waiver of,
this Agreement will be binding and valid unless it is in writing and
executed by the party against whom enforcement is sought. No waiver of a
breach of any provision of this Agreement or of any default hereunder
shall be deemed a waiver of any other breach or default of this
Agreement.
(h) Force Majeure - Neither party shall be liable for any delay or failure
in performance of any part of this Agreement from any cause beyond its
control and without its fault or negligence including, without
limitation, acts of nature, acts of civil or military authority,
embargoes, epidemics, terrorist acts, riots, insurrections, fires,
explosions, earthquakes, nuclear accidents, floods, work stoppages,
equipment failure, power blackouts, volcanic action, other major
environmental disturbances, unusually severe weather conditions,
inability to secure products or services of other persons or third party
suppliers of such products and services, or transportation facilities or
acts or omissions of transportation carriers. No delay or other failure
to perform shall be excused pursuant to this Section 16(h) unless such
delay or failure and consequences thereof are beyond the control and
without the fault or gross negligence of the party claiming excusable
delay or other failure to perform. In the event of any such excused
delay in the performance of a party's obligation(s) under this
Agreement, the due date for the performance of the original
obligation(s) shall be extended by a term equal to the time lost by
reason of the delay. In the event of such delay, the delaying party
shall perform its obligations at a performance level no less than that
which it uses for its own operations. In the event of a labor dispute or
strike, the parties agree to provide service to each other at a level
equivalent to the level they provide themselves during such dispute or
strike,
(i) Construction - If for any reason a court of competent jurisdiction finds
any provision of this Agreement, or portion thereof, to be
unenforceable, that provision of the Agreement will be enforced to the
maximum extent permissible so as to effect the intent of the parties,
and the remainder of this Agreement will continue in full force and
effect. Failure by either party to enforce any provision of this
Agreement will not be deemed a waiver of future enforcement of that or
any other provision. This Agreement has been negotiated by the parties
and their respective counsel and will be interpreted fairly in
accordance with its terms and without any strict construction in favor
of or against either party.
14
<PAGE> 15
(j) Entire Agreement - The provisions of this Agreement set forth the entire
agreement and understanding between Company and NBC as to the subject
matter hereof and supersedes all prior agreements, oral or written, and
all other communications between Company and NBC relating to the subject
matter hereof, other than the Securities Purchase Agreement, the
Warrant, the Strategic Alliance Agreement and the Non-Disclosure
Agreement between the parties. Nothing in this Agreement, express or
implied, is intended to confer the parties hereto and their respective
successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
(k) Counterparts - This Agreement may be executed in counterparts, each of
which shall constitute an original but all of which, when taken
together, shall constitute one agreement, and shall become effective
when one or more, such counterparts have been signed by each of the
parties and delivered to the other party.
This Agreement is accepted and agreed by:
NBC Multimedia, Inc. 2 Way Media, Inc.
By: /s/ Vincent E. Grosso By: /s/ Robert D. Roback
-------------------------- --------------------------
Name: Vincent E. Grosso Name: Robert D. Roback
------------------------ ------------------------
Title: VP NBC Interactive Title: President
----------------------- -----------------------
15
<PAGE> 16
EXHIBIT A
A. Links on myLAUNCH Local Sites "jump page"
1. A link to a Product purchasing area which will permit users of the
myLAUNCH Local Sites to purchase Products, which link may be accompanied
or enhanced by certain mutually agreeable promotional material related
to purchasing such Products (e.g., promotions of latest CD releases).
This link will be the first link on the "jump pages" and shall be more
prominent than the other links described below.
2. A link to the general myLAUNCH service page which page is reasonably
similar to the current first page of the general service and which page
permits the user to enter the general myLAUNCH service in its current
"Guest" mode form, provided that such link may not contain any reference
to any of the categories of information described in the last sentence
of Section 2(b) (the "General Service Link").
3. A link to the "Features" section of myLAUNCH, as long as such section is
in a form similar to its current form.
4. A link to the "Album Review" section of myLAUNCH, as long as such
section is in a form similar to its current form.
5. A link to the "New Releases" section of myLAUNCH, as long as such
section is in a form similar to its current form.
B. Description of Services in myLAUNCH Guest Mode
1. Music news
2. Music features/interviews
3. Concert news and features
4 Album reviews
5. New release and upcoming release information
6 Certain artist information (i.e. biographies, discography)
7 Certain album information (i.e. song list, liner notes)
16
<PAGE> 1
EXHIBIT 10.7
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
This agreement ("Agreement") is entered into as of November 13, 1998,
("Effective Date") by and between Intel Corporation, having a place of business
at 2200 Mission College Blvd., Santa Clara, California, 95054 ("Intel") and
LAUNCH Media Inc., having a place of businesses at 2700 Pennsylvania Avenue,
Santa Monica, CA 90404 ("Publisher") on behalf of themselves and their
respective worldwide subsidiaries.
BACKGROUND
A. Intel plans to release a processor having Katmai New Instructions
technology (the "Katmai Technology") and desires to engage Publisher to
develop a subscription product entitled LAUNCH 3D (the "Product") which is
able to use the enhanced Katmai capabilities.
B. Intel will provide Publisher with technical assistance and fees for
Publisher to develop the Product and grant the rights set out in this
Agreement.
AGREEMENT
Intel and Publisher agree as follows:
1. PUBLISHER'S EFFORTS.
1.1 THE SUBSCRIPTION. The Product to be developed and delivered under this
Agreement is named LAUNCH 3D and is more particularly described in the
Product Requirements Document ("PRD") set forth in Attachment A. The
Product includes the versions for all PC platforms, and includes all
updates and enhancements thereof made during the term of this Agreement
and the collateral material specified in Attachment B.
1.2 COMMITMENT TO DEVELOP. Publisher shall use commercially reasonable efforts
to develop and deliver to Intel the Product according to the milestones
set forth in Section 3 and the Development Schedule in the PRD. Acceptance
criteria for the Product are contained in the PRD and include, at a
minimum, the requirements that the Product shall be merchantable, stable,
and shall make use of the Katmai Technology. The Product must therefore,
at a minimum and as early as the Alpha prototype stage set forth in
Section 3.1 herein, noticeably demonstrate the advantages of the Katmai
Technology on an Intel processor containing the Katmai Technology, a
[ * ]
1.3 LANGUAGES. The Product shall be available in retail [ * ] months after
the Effective Date of this Agreement in the following languages: United
States English. With the Intel assistance listed below in Section 2,
Publisher shall use commercially reasonable efforts to make the Product
available in retail [ * ] months after the Effective Date of this
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
-1-
<PAGE> 2
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
Agreement in the following languages: United Kingdom English, French,
German, and Japanese.
1.4 PROGRAM REVIEW. Intel, Publisher and any third party(s) working on the
Product for Publisher shall meet at least twice a month to review the
progress of the Product's development, including the milestones set out in
the Development Schedule and the compliance of the Product with the PRD.
2. TECHNICAL ASSISTANCE FROM INTEL.
2.1 HELP. Intel shall provide Publisher with the information, development
software, and the hardware identified on Attachment C ("Intel Technical
Assistance"), and may provide other similar items to Publisher, which
shall collectively be referred to as "Intel Technology."
2.2 AS IS. Intel Technical Assistance and Intel Technology are provided by
Intel to Publisher "as is."
3. FUNDS.
3.1 AMOUNT AND TIMING. Intel will pay funds totaling [*] (the "Funds") to
Publisher. Intel will pay the Funds to Publisher in the amounts specified
below within thirty (30) days after Publisher's accomplishing and
delivering, subject to Intel's reasonable satisfaction and acceptance,
each of the following milestones:
<TABLE>
<CAPTION>
MILESTONE DATE PAYMENT
--------- ---- -------
<S> <C> <C>
Contract Signing [*] [*]
Product Specification [*] [*]
Code Drop for Advisory Testing [*]
January '99 LAUNCH Demo (Alpha Prototype) [*] [*]
Artwork Complete
Engine Complete (Optimizations completed) [*] [*]
Feature Complete
Content Complete
Beta/2nd Code Drop for Advisory Testing [*] [*]
Engineering Complete
Release to Manufacturing (Gold Master)
United States English Version Available in [*] [*]
Retail
United Kingdom English, French, German, [*] [*]
Japanese Versions Available in Retail
</TABLE>
3.2 USE OF FUNDS. The Funds shall only be used for development or marketing of
the Product until the final deliverable hereunder is accepted by Intel.
-2-
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE> 3
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
4. INTEL PARTICIPATION IN MARKETING.
4.1 MARKETING. If accepted and timely delivered, Intel may include the Product
in Intel's Katmai Technology marketing efforts. Intel may include the
Product in other marketing activities with the approval of the Publisher.
4.2 LICENSE. Publisher grants to Intel a royalty-free world-wide license, to
demonstrate, display and perform publicly the Product and any related
documentation solely in connection with Intel's marketing activities
allowed in Section 4.1 above for the Product. If Intel needs copies of the
Product for marketing purposes only, Publisher will provide a reasonable
amount of copies.
4.3 OTHER SERVICES. Intel may develop or market products which are directly
competitive with the Product.
5. INTEL'S ROYALTY.
5.1 ROYALTY CALCULATION. In consideration of the Intel Technical Assistance
set forth in Section 2 herein and the other Intel obligations hereunder,
Publisher shall pay to Intel a royalty of [*] of Gross Advertising
Revenues less reasonable sales commissions on the Product until Intel
receives [*]; thereafter, Publisher shall pay to Intel a royalty of [*] of
Gross Advertising Revenues less reasonable sales commissions on the
Product until Intel receives an additional amount of [*]. After Intel
receives a total amount of [*], Publisher shall have no further payment
obligation to Intel. Publisher shall produce [*] issues of the Product
within [*] after the commercial release of the United States English
version of the Product. "Gross Advertising Revenues" means cash received
by Publisher from sales of advertisement in LAUNCH 3D, if any; it does not
include the cash value of any barter advertisement proceeds.
5.2 WEB LINKING. Publisher shall include a link to a url, specified by Intel,
in one of the following forms: (a) in the Product; or (b) on the first
myLAUNCH page that a user reaches after connecting to the Internet from
the Product. The specific form shall be determined in Publisher's sole
discretion.
5.3 DISCOUNTED SUBSCRIPTION PURCHASES. For a period of [*] months after the
Intel shall have the option, at its sole discretion to purchase
subscriptions of LAUNCH 3D at a rate of [*] per [*]-issue subscription or
[*]; and will be adjusted during the term of this contract in the event
[*].
5.4 USE OF AN INTEL LOGO. Publisher will, at Intel's request, use an Intel
logo on the Product's packaging in a manner specified by Intel and
according to standard Intel logo licensing terms [*] under the provisions
of Section 5 herein, at
-3-
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE> 4
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
which time, Publisher will have no further obligation to use Intel's logo
in any manner. Publisher will not use an Intel logo unless so requested to
do so by Intel.
6. MONEY.
6.1 MANNER OF PAYMENT. All payments shall be made in United States dollars,
and shall be sent to the address specified in this Agreement. Payments
shall be made by wire transfer or, if no wire transfer instructions are
given, by check drawn on a United States bank. Either party may specify
revised instructions and address by written notice to the other.
6.2 PAYMENTS TO INTEL. Payments to Intel shall be by wire transfer to
Citibank, New York, NY for the account of Intel Corporation, General
Account 38385954.
6.3 PAYMENTS TO PUBLISHER. Payments to Publisher shall be made by wire
transfer to:
Imperial Bank
9777 Wilshire Blvd.
Beverly Hills, CA 90212
ABA # 122201444
For Further Credit to: Name: LAUNCH Media, Inc. Acct: #
60073104
Attn: Paul Stewart
6.4 STATEMENTS. Within ninety (90) days after the end of each calendar quarter
during the term of this Agreement Publisher shall pay any amounts due and
shall deliver to Intel at the addresses set out in this Agreement a report
which sets out:
6.4.1 The period covered;
6.4.2 The number of copies of the Product distributed hereunder; and
6.4.3 A royalty statement detailing any and all royalties due Intel
pursuant to Section 5.1 herein.
6.5 RECORDS AND AUDITING. Each party shall maintain complete and accurate
records of the activities performed under this Agreement (including
records of sales and distribution) for a period of five (5) years after
the completion thereof. Records relating to the performance of this
Agreement shall be made available in confidence to other party's
independent certified public accountants (or equivalent for non-U.S.
jurisdictions) upon reasonable notice, at the providing party's place of
business during normal business hours, which records may be used for the
sole purpose of auditing a party's compliance with the Agreement. In the
event that a shortfall greater than ten percent (10%) is discovered in
royalties paid by a party, such audit shall be at the audited party's
expense, and such party shall promptly make up the difference. In no event
shall audits be made hereunder more frequently than once in any year, nor
shall records supporting any quarterly statement be audited more than
once.
-4-
<PAGE> 5
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
6.6 TAXES. Each party shall be solely responsible for its own taxes, including
any applicable sales taxes and customs duties on items acquired under this
Agreement. To the extent, if any, that the applicable taxing authority
requires withholding of taxes based on payments made hereunder, the paying
party shall withhold such taxes and provide the payee with the
documentation reasonably necessary to claim a credit therefore.
7. TERM, TERMINATION, WHAT IF SOMETHING GOES WRONG.
7.1 TERM OF AGREEMENT. This Agreement's term commences as of the Effective
Date and terminates on the later of: [*}, or until Intel receives [*] in
accordance with the royalty provisions of Section 5.1, unless earlier
terminated or unless extended by agreement of the parties.
7.2 BREACH. Either party may terminate this Agreement by written notice if the
other party is in material breach of any of its terms and fails to cure
such breach within thirty (30) days of written notice of such breach.
7.3 DELAY. Publisher shall promptly notify Intel of any anticipated delay in
meeting the Development Schedule. If it appears that there will be a delay
in having the Product delivered and accepted as set out in this Agreement,
then Intel and Publisher shall meet to discuss an appropriate course of
action in good faith before exercising any of the remedies set out below.
Both parties shall use reasonable judgment and efforts to rearrange
development and ingredient delivery schedules to deal with setbacks, such
as unavailability of specific technology ingredients or difficulty in
developing the Product.
7.3.1 If Publisher's delay is due to causes beyond its reasonable control
then the remaining dates for Publisher's deliverables, and all other
dates calculated from those date(s), shall be extended by a
reasonable amount of time, not in any case to exceed [*] in the
aggregate or the period of any delay in Intel's providing technology
labeled "Critical."
7.3.2 If the Delay will be over [*], then Intel may terminate the
Agreement by written notice to Publisher.
Product
7.4 CONVENIENCE. In addition to the provisions above, Intel may, at its sole
discretion, terminate this Agreement without cause by written notice to
Publisher. If Intel chooses to terminate this Agreement without cause,
Publisher shall be entitled to retain all Funds provided by Intel to
Publisher before the effective date of termination, and Intel shall have
no rights in Publisher's Product.
7.5 EFFECT OF TERMINATION. Upon any termination of this Agreement:
7.5.1 Publisher shall on Intel's written request, return all materials
that Intel had provided hereunder.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-5-
<PAGE> 6
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
7.5.2 The provisions of Section 9 shall survive termination.
7.5.3 Any third-party licenses directly or indirectly granted by a party
under this Agreement shall survive such termination, provided, that
the party granting such license shall be responsible for any
royalties earned on the license under this Agreement.
7.5.4 Publisher may retain that portion of the Funds paid prior to
termination, but if Publisher terminates this Agreement other than
for breach by Intel, and Publisher licenses or otherwise
commercializes the Product in any format or medium, Publisher shall
return the previously advanced Funds to Intel within thirty (30)
days of notification to Intel of termination.
7.6 RIGHTS. Publisher warrants and represents that, to the best of its
knowledge, it has or shall obtain all rights necessary to undertake the
activities described in this Agreement and to grant the licenses described
herein. Publisher shall promptly notify Intel of any charge or claim of
infringement of any third party's right relating to development or
distribution of the Product.
7.7 SUITS BASED ON PRODUCT. Publisher shall defend, indemnify, and hold Intel
and its customers harmless from and against any suit or proceeding brought
against Intel, its subsidiaries or customers, based upon the development
or distribution of Product, including any claim that the Product infringes
any third-party intellectual property right (a "Claim"). Publisher's
indemnity will include all damages and costs awarded, including attorneys'
fees, and settlement costs, provided that Intel shall not settle any Claim
without Publisher's consent.
7.8.1 The indemnified party shall promptly notify Publisher of any Claim
and will provide information, assistance, and cooperation in
defending against it (at Publisher's expense).
7.8.2 The indemnified party will have the right to participate in the
defense of any Claim, at its own expense.
7.8.3 If there appears, in Intel's opinion, to be a reasonable likelihood
that distribution of any portion of the Product may be found to
infringe the rights of any third party, then Intel may terminate the
Agreement or Publisher, at its expense, will either (i) obtain for
Intel or its customers the right to continue to use such Product as
contemplated herein, (ii) modify such Product so that it becomes
non-infringing, but without materially altering its functionality,
or (iii) replace such Product with a functionally equivalent
non-infringing Product.
7.8.4 This indemnity shall not apply to portions of the Product prepared
or provided by the indemnified party.
-6-
<PAGE> 7
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
8. GENERAL PROVISIONS.
8.1 CONFIDENTIAL TERMS. Except as otherwise provided herein, each party shall
maintain other party's confidential disclosures in confidence pursuant to
CNDA # 68431. Neither party may disclose the existence or terms of this
Agreement without the prior written consent of the other party.
8.2 PRODUCT. Except for the licenses expressly provided here, or in a "shrink
wrap" or other written license, no licenses are granted by either party,
either expressly or by implication, to any intellectual property of the
other. Notwithstanding Intel's ownership in the copyrights in the Intel
Technology, Publisher shall own all copyrights in its own original work,
including its own Products.
8.3 RELATIONSHIP OF PARTIES. The parties are not partners or joint venturers,
or liable for the obligations, acts, or activities of the other.
8.4 AMENDMENTS AND ASSIGNMENTS. Any change, modification or waiver to this
Agreement must be in writing and signed by an authorized representative of
each party. Neither party may assign this Agreement or any portion of this
Agreement to any other party without the other's prior written consent;
provided, however, that each party hereto may assign its rights and
obligations hereunder to a person or entity that acquires substantially
all of its business or assets, or merges with such party, without the
prior written consent of the other party.
8.5 MERGER AND WAIVER. This Agreement is the entire agreement between the
parties with respect to the development and distribution of the Product,
and it supersedes any prior or contemporaneous agreements and negotiations
relating thereto. No waiver of any breach or default shall constitute a
waiver of any subsequent breach or default.
8.6 LIMITED LIABILITY. Neither party shall be liable to the other for lost
profits, expected revenues, or development or support costs arising from
any termination of this Agreement. IN NO EVENT SHALL EITHER PARTY BE
LIABLE TO THE OTHER FOR LOSS OF PROFITS, DATA, OR USE OR ANY SPECIAL,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED, EVEN IF ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE. THE PARTIES ACKNOWLEDGE THAT THESE
LIMITATIONS ON POTENTIAL LIABILITIES WERE AN ESSENTIAL ELEMENT IN SETTING
CONSIDERATION UNDER THIS AGREEMENT.
8.7 EXPORT. Neither party shall export the Product or the Intel Technology in
violation of US or other applicable law.
8.8 NOTICES AND REQUESTS. All notices and requests required or made under this
Agreement must be in writing and shall be personally delivered or if
mailed postage prepaid, certified or registered mail, or overnight courier
to the addresses listed below:
-7-
<PAGE> 8
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
TO INTEL TO PUBLISHER
Intel Corporation, LAUNCH Media, Inc.
2200 Mission College Blvd., 2700 Pennsylvania Avenue
Santa Clara, California 95052 Santa Monica, CA 90404
ATTN.: GENERAL COUNSEL Attn: Angie Rho
Copy Attn: Sandeep Kundra
Copy Attn: Wendy Hafner
8.9 CHOICE OF LAW. Any claim based on this Agreement shall be governed by the
laws of the State of California and shall be subject to the exclusive
jurisdiction of the state and federal courts located there.
8.10 ATTACHMENTS. The following Attachments are incorporated by reference into
this Agreement:
8.10.1 Attachment A--Product Requirements Document
8.10.2 Attachment B--Marketing Requirements Document
8.10.3 Attachment C--Technical Assistance
8.10.4 Attachment D-Web Linking Requirements
In witness of their agreement, the parties have caused the Agreement to be
executed below by their authorized representatives.
Intel Corporation LAUNCH Media, Inc.
By: /s/ Ron Whittier By: /s/ Robert D. Roback
------------------------------- -----------------------------------
Ron Whittier Robert D. Roback
Sr. Vice President President
-8-
<PAGE> 9
ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
- --------------------------------------------------------------------------------
ATTACHMENT A
PRODUCT REQUIREMENTS DOCUMENT ("PRD")
INTEL/LAUNCH MEDIA, INC.
TECHNICAL PRODUCT REQUIREMENTS
DOCUMENT (TPRD)
Disclosure of this document is governed by the terms
of the Non-Disclosure Agreement between
Intel and LAUNCH Media Inc.
and the information contained in the applicable
Confidential Information Transmittal Record.
Technical Issues Approved by:
DRG World Wide
Application Engineering Manager:________________________________________________
James Knapp
Application Engineer Manager:___________________________________________________
Application Engineer:___________________________________________________________
LAST REVISED: 11/12/98
REVISION 3.06
Printed Date: November 12, 1998
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ARCHITECTURAL DEVELOPMENT AND ASSISTANCE AGREEMENT
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Intel Corporation disclaims all warranties and liabilities for the use of this
document and the information contained herein, and assumes no responsibility for
any errors, which may appear in this document. Intel makes no commitment to
update the information contained herein, and may make changes at any time
without notice. There are no express or implied licenses granted hereunder to
any intellectual property rights of Intel Corporation or others to design or
fabricate Intel circuits or integrated circuits based on the information in this
document. Other products and corporate names may be trademarks or registered
trademarks of other companies, and are used only for explanation and to the
owner's benefit, without intent to infringe.
MMX is a trademark of Intel Corporation.
Pentium is a registered trademark of Intel Corporation.
* Third party brands and names are property of their respective owners.
COPYRIGHT (C) 1996 AND 1997, INTEL CORPORATION, ALL RIGHTS RESERVED.
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TABLE OF CONTENTS
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1 Introduction............................................................11
1.1 Purpose and Scope.............................................11
1.2 Document Revision History.....................................11
2. Definitions of Code Drops...............................................11
2.1 Code Drop 1 or `Alpha' Code Drop..............................11
2.2 Code Drop 2 or `Beta' Code Drop...............................12
2.3 Code Drop 3 or `Gold Master'..................................12
2.4 Comdex Demo Code Drop.........................................12
3. Market Segment Information..............................................12
3.1 Product Specification Information.............................12
3.1.1 Application Overview..........................................12
3.2 Target Market.................................................13
3.2.1 Market Segment................................................13
4. Enhanced Features.......................................................13
4.1 Technical Executive Summary...................................13
4.2 Enhanced Platform Targets.....................................13
4.2.1 Scalability...................................................14
4.3 Katmai New Instructions.......................................14
4.4 Technology Applications.......................................14
4.4.1 3D Graphics...................................................14
4.4.2 Physics/Al Questions..........................................15
4.4.3 Audio.........................................................15
4.4.4 PC Imaging and Video Playback/Editing.........................15
5. System Requirements.....................................................15
5.1 Target System Configuration:..................................15
5.2 Minimum System Requirement:...................................16
5.3 Unique Requirements...........................................16
6. Application Feature Specification.......................................16
7. Dependencies............................................................17
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1. INTRODUCTION
This document is to be completed within 14 days of a successful Design Review
meeting. This document will be filled out and submitted to DRG Technical
Management for review. Review of this document will occur within 72 hours of
receipt. Once approved, this document will be sent to Program management for
use, as they deem necessary.
1.1 Purpose and Scope
This document details product-specific information for Launch Media Inc.
software application. Its purpose is to give a broad introduction to the
software Product and features. The PRD is a living document that will go through
several phases of refinement until it is agreed upon and frozen and is designed
to be used as a yardstick for Project Product development life cycle to ensure
mutual agreement on product expectations between Intel and Launch Media Inc. Any
questions regarding format or content of this PRD should be directed to
Garry Weil; [email protected].
1.2 Document Revision History
Revision Number Legend:
V3.0: Generic Edition for Katmai Program
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REVISIONS
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VERSION DATE DESCRIPTION AUTHOR
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<S> <C> <C> <C>
V3.0 11/19/1997 Generic Version Intel Corporation
V3.1 9/1/1998 Updated for Launch 3D Product. Sandeep Kundra
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2. DEFINITIONS OF CODE DROPS
2.1 Code Drop 1 or `Alpha' Code Drop
o Data structures modified to take advantage of Katmai New Instructions
o Functional incorporation of Katmai New Instructions
o Product's underlying [2D/3D/Video/Audio] Engine reflects preliminary
use of Katmai New Instructions.
o This code drop is stable enough to evaluate at least some of its
functionality on a Katmai-processor-based system. Early pre-release
versions of necessary 3rd party codecs or APIs are present and
interoperable with the Product at this stage.
o Application is stable enough to execute for 1 hour.
2.2 Code drop 2 or `Beta' Code drop
o [*] of content meets agreed-upon targets for Katmai optimizations.
o [*] of Katmai engine optimizations are completed with delivery of the
applications full statistics.
o [*] of Product's functionality is present and usable.
o Application is stable, and does not cause frequent application errors
or system crashes
o All necessary 3rd party codecs or plug-ins are present in pre-release
form (at a minimum) the Product can interact with these plug-ins or
codecs as needed. Additionally, any hardware peripherals necessary to
the features or functionality of the applications are present, and
usable with the application, and the application can recognize the
presence of the
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peripherals and interact with them.
2.3 Code drop 3 or `Gold Master'
o Product has completed performance tuning as established and specified
in the Product Requirements Document, and meets or exceeds all
agreed-upon targets (graphics, sound, etc.).
o QA testing is completed.
o Product is feature and content complete.
o Product is fully optimized for performance on the target Intel
platform: Processor with [ * ]
o Product is available on retail shelves (for English gold master, in
U.S.; for foreign language gold master, in specified geographies'
retail store shelves), and can be purchased by an end user.
2.4 Comdex Demo Code Drop
o All the features of a code drop 1 or alpha code drop.
o Must be self-running demo which can demonstrate, even in preliminary
form superior performance on [ * ]
o Should be able to run for at least ten (10) minutes without crashing.
3. MARKET SEGMENT INFORMATION
3.1 Product Specification Information
3.1.1 Application Overview
Project Product is designed as a (please provide a brief description of the type
of application this Product will be . . . i.e. this Product is a puzzle solving
adventure game, based on a 3D world with a third person perspective.) The
application highlights the superior capabilities of the Katmai processor
architecture.
3.2 [Channel] Target Market
3.2.1 Market Segment
[Enter a description of the market segment that the Product is designed for. If
no market segment information is available then state "No Market Segment
Information available for this application".]
4. ENHANCED FEATURES
(Your DEVELOPER's Application Name Here) must make use of advanced capabilities
of Intel's microprocessors and designed technologies (for example, Katmai New
Instructions, Katmai Processor, Intel's MMX(TM) technology instruction set,
Accelerated Graphics Port, and others as specified).
4.1 Technical Executive Summary
An example of a summary could be:
The DEVELOPER will implement several features on the Katmai platform that will
make the product look better on this platform than on previous Intel processors.
Specific DEVELOPER Developer/Engineer will own the technical features, and
specific DEVELOPER Developer/Engineer will own the art features. Application
Engineer of Intel will be responsible for providing the necessary technical
support so that the DEVELOPER can implement these features.
The optimized artwork will include higher polygon object models (6/98) and
higher resolution textures (9/98).
The entire rendering engine will be optimized with [ * ]
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A full list of features and timelines can be found in section 5: Application
Feature Specification.
4.2 Enhanced Platform Targets
Include in this section detailed information that will answer questions like:
What functions will benefit from using Katmai new instructions? What performance
increase do you expect from using Katmai new instructions in these functions?
What features will be added and/or will run better on a Katmai processor based
system vs. a Deschutes processor based system?
4.2.1 Scalability
Include in this section detailed information that will answer questions like:
How will platform scalability be implemented in the application? What parts of
the application will scale naturally with higher performance platforms? Which
features will be turned on or off at install and at run-time, and how will this
be determined? What features will be user adjustable? How will the application
perform a performance analysis of the platform at run-time and scale its content
accordingly? What areas of the system will your application analyze (for
example, CPU, system memory, video card, video memory, etc.)?
4.3 Katmai New Instructions
Include in this section detailed information that will answer questions like:
What functions will benefit from using Katmai new instructions? What performance
increase do you expect from using Katmai new instructions in these functions?
Please explain how the following instruction categories apply to your
application: [ * ]
4.4 Technology Applications
4.4.1 3D Graphics
Include in this section detailed information that will answer questions like:
What will be the frame rate, resolution, and color depth of the application?
Will the application use a 3D engine developed in house, or a 3rd party engine?
If 3rd party, please specify. If an in-house engine, how long has the engine
been in development? Is it being developed from scratch or is it an existing
engine that is being ported for use in your new application? If ported, please
describe. If an in-house engine, what other Products has it been used in and
which Products will use it in the future? What precision/data types are required
for calculations?
Examples of written content:
Resolution
(Your DEVELOPER's Name Here) will use the extra bandwidth of the Katmai
processor to display resolutions up to [##] with a minimum 4MB VRAM 3D
graphics accelerator. The application will scale to provide this
resolution as the bandwidth becomes greater, but (Your DEVELOPER's
Application Name Here) will maintain a minimum of 640X480 resolution.
(Your DEVELOPER's Application Name Here) will support the following
acceleration attributes.
Alpha blending, MIP mapping, Gouraud shading, BSP trees, Texture
filtering, Front/Back buffering, [list others].
[What are the HW/SW acceleration capabilities used in (Your DEVELOPER's
Application Name Here) (for example, tristrips, culling...)?]
Increased 3d Object Count
(Your DEVELOPER's Application Name Here) will display [##] times as
many objects with a [##] MHz Katmai processor with an AGP 3D graphics
accelerator, when compared to a 200 MHz Pentium processor enabled with
MMX technology.
4.4.2 Physics/AI Questions
Include in this section detailed information that will answer questions like:
How will physics be used in the application (for example, mass, friction,
dynamics, gravity, vibrations, inverse kinematics, etc.)? Where will these be
demonstrated in the application? How is Al used and will it scale according to
the platform
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(for example, characters become "more intelligent")?
4.4.3 Audio
Include in this section detailed information that will answer questions like:
What are the audio latency requirements? If there is a maximum acceptable
latency, what is it? What are the sampling rates for the various audio systems
(for example, 44.1KHz, 22KHz, 48KHz)? What is the audio resolution? (for
example, 8-bit, 16-bit, 20-bit, 24-bit)? Will the application require mixing of
audio streams at different data rates? Will the user be able to alter the
balance of effects, music, and dialog? Will there be any audio signal processing
in the application? Will there be any real-time effect processing in the
application?
4.4.4 Pc Imaging and Video Playback/editing
Include in this section detailed information that will answer questions like:
What image processing core components will the application use? (proprietary,
3rd party libraries, Intel Image Processing Library, others) How long has the
application's image processing development been going on? Currently, have any of
the core components been optimized for MMX(TM) technology? For the Pentium(R) II
Processor?
5. SYSTEM REQUIREMENTS
This section details the system configuration which is best suited to run (Your
DEVELOPER's Application Name Here).
5.1 Target System Configuration:
o [##] MHz Katmai processor.
o [##] Operating system installed (AGP Supported).
o [##] MB RAM installed.
o 64-bit Video solution.
- - 640x480x16-bit resolution required.
- - 2 MB Video RAM required.
- - 4x AGP Enabled.
o DVD ROM.
o [##] MB available Hard Drive space.
o 16-bit stereo audio solution.
o Keyboard/Mouse/Joystick support.
- - Speakers.
5.2 Minimum System Requirement:
o [##] MHz Pentium processor.
o [xxx] operating system.
o xx MB RAM
o Video Card
- - 640x480x16-bit resolution required.
- - [xxx] MB Video RAM required.
o CD-ROM.
o [xxx] MB available Hard Drive space.
o 16-bit stereo audio solution.
o Keyboard/Mouse/Joystick support.
5.3 Unique Requirements
[List unique requirements for this application.]
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11. 6. APPLICATION FEATURE SPECIFICATION
[enter the information gathered from the DEVELOPER that will give the best
representation of the information required in the table below] The DEVELOPER
will optimize the following features with Katmai New Instructions: (Note: the
dates given below are probable full completion dates, and most will be ready for
basic testing using Katmai New Instructions before the dates given)
[*]
Include a brief description of the next steps. (Example: At the current time,
the DEVELOPER's team would like to perform all Katmai New Instruction
optimizations themselves. Intel will be expected to give a thorough review of
the code and suggest how and where Katmai New Instructions will be best used by
the code, before optimization is to begin. This should occur soon after the
development systems with Katmai New Instruction emulation are delivered. The use
of AE resources for actual coding will be reevaluated at a later time.)
List any other features not specific to Katmai New Instructions:
12. 7. DEPENDENCIES
[List all dependencies for (Your DEVELOPER's Application Name Here).]
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ATTACHMENT B
MARKETING REQUIREMENTS DOCUMENT
Retail DEVELOPER's OEM Collateral Requirements
[*]
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ATTACHMENT C
INTEL'S TECHNICAL ASSISTANCE
INFORMATION
o General information regarding the Katmai New Instructions technology
o Access to Intel's secure web site relating to the technology
o Documentation, such as programming manuals
DEVELOPMENT TOOLS
HARDWARE AND LOANER SYSTEMS
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ATTACHMENT D
WEB LINKING REQUIREMENTS
ADDITIONAL DETAILS ON WEB LINKS (SECTION 5.3.1)
Intel will assign a unique identification, for tracking purposes, to be used by
Publisher in the Intel Link and On Ramp.
The Intel Link points to the home page at the Intel Showcase. Alternatively, if
a product of the Publisher is featured at the Intel Showcase, the Intel Link can
point to the Product page for that particular product. If product is not
featured any longer, Publisher will change the Intel Link to point to the home
page of the Intel Showcase.
Publisher cannot change or resize the Intel Link or any of its components
(graphics, buttons or tags) without Intel's approval.
If Publisher already links to other retailers or establishes relationships with
other retailers between [*] the Intel Link will be
displayed more prominently than such links to other retailers. In any case, the
Intel Link will be placed [*].
Publisher will only link into the Intel Showcase section of any retailers'
software store section that carries the Intel Showcase. Publisher can link to
any section whose content is not related to computer hardware or software.
ADDITIONAL DETAILS ON ON RAMP
During installation of a Publisher's product that carries On Ramp, the
installation routine will copy On-Ramp to the computer, put an icon will on the
computer desktop, and an entry into the Start Menu/Programs Group where the
Publisher's product will be installed.
Before shipment of a product containing On-Ramp, Publisher will test On Ramp to
ensure its proper integration into Publisher's product and installation
routines.
Publisher cannot modify On Ramp without Intel's written approval (including
links, tags, graphics and branding).
ADDITIONAL DETAILS ON TRACKING (SECTION 5.3.6)
Publisher is not entitled to any commission that Intel or any third party pay on
sales originated by a user following the web link from Publisher's site to Intel
or such third party.
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EXHIBIT 10.8
SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT
THIS SOFTWARE LICENSE AND DEVELOPMENT AGREEMENT is made as of this 27th
day of February 27, 1998, by and between INTEL CORPORATION, a Delaware
corporation with an office at 2111 NE 25th Avenue, Hillsboro, Oregon ("Intel")
and 2WAY MEDIA, INC. ("LAUNCH"), a Delaware corporation with an office at 1632
Fifth Street, Santa Monica, CA 90401.
RECITALS
Intel is a manufacturer of microprocessors, software and systems. LAUNCH
has certain expertise in music applications and related businesses. Intel and
LAUNCH desire to work together to create a compelling music application using
broadband broadcast distribution.
Intel and LAUNCH are entering into that certain Securities Purchase
Agreement dated as of February 27, 1998, and related agreements including
without limitation the Second Amended and Restated Investors Rights Agreement
regarding the issuance and sale to Intel of shares of capital stock of LAUNCH
(the "Equity Agreements").
NOW THEREFORE, based on the Recitals and terms and conditions herein, and
for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
SECTION 1. DEFINITIONS
1.1 "Project" means an interactive, personalized music channel delivered
to the home and updated via broadcast broadband distribution. The client system
will have a back-channel that need not be active the entire time the user is
deriving value from the Project. Critical features of the Project include: [*]
The Project shall include a trial deployment.
1.2 "Intel Software" means Intel-developed software as created by Intel
for the Project and as delivered to LAUNCH as required by this Agreement
together with all LAUNCH Improvements. Anticipated features of the Intel
Software are set forth in Section 2.2 of this Agreement.
1.3 "LAUNCH Improvements" means improvements and bug fixes that LAUNCH may
make to the Intel Software in the course of creating LAUNCH Derivatives or
otherwise, which LAUNCH shall provide to Intel in source and object code form
designated as LAUNCH Improvements.
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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1.4 "Derivative Work" means a work based upon one or more preexisting
works, such as a translation, abridgment, condensation, modification, or any
other form in which a work may be recast, transformed, or adapted.
1.5 "LAUNCH Derivatives" means any Derivative Works of the Intel Software
created by LAUNCH (but not including LAUNCH Improvements).
1.6 "Licensed Products" means any product offered by LAUNCH that (i) is
based on the Project, (ii) incorporates the Intel Software and (iii) adds
significant functionality to the Intel Software.
1.7 "Dedicated Resources" shall mean [*] with [*] provided, however, that
(i) Intel shall not be required to have [*], (ii) Intel shall have [*] and (iii)
Intel [*] and change staff assigned to the Project at its sole discretion.
Dedicated Resources shall also include all costs and expenses incurred by Intel
in connection with furnishing such engineering resources.
SECTION 2. OBLIGATIONS OF THE PARTIES
2.1 PROJECT DEVELOPMENT. Subject to the terms and conditions of this
Agreement, Intel and LAUNCH will cooperate with each other in good faith and use
commercially reasonable efforts to complete the Project by [*]. Intel agrees
that it will initially develop the Intel Software, and LAUNCH agrees that it
will perform its obligations under this Agreement, in a manner to make the
Project initially fully functional for satellite distribution. The parties
further agree that the Project shall be architected and designed such that it
can be adapted for other forms of broadcast broadband distribution including
cable modems and DSL. The Project shall be deemed complete after a Trial
conducted over a satellite system or on [*], whichever comes
first.
2.2 INTEL SOFTWARE. Intel shall develop the Intel Software for the
Project. Intel will make good faith efforts to design and architect the Intel
Software's components to be independent of the distribution system chosen for
the Project (i.e. it can be used for satellite or cable modem). The Intel
Software shall include hardened technology components in the following
functional areas:
(i) [*]
(ii) [*]
(iii) [*]
(iv) [*]
(v) [*]
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The Intel Software shall be the sole and exclusive property of Intel subject
only to license rights therein that Intel may grant to LAUNCH and any other
third party. The Parties acknowledge that further agreement is required as to
the depth of the feature sets in each of (i)-(v) above but intend that such
features are capable of being developed by Intel within the scope of Intel's
Dedicated Resources. The parties will cooperate and work together in good faith
to further refine these features, but all final decisions with respect to the
features of the Intel Software shall be made by Intel at its sole discretion.
2.3 INTEL DEDICATED RESOURCES. Intel shall use commercially reasonable
efforts to commit the Dedicated Resources to the development of the Intel
Software and the completion of the Project. Intel shall have no obligation under
this Agreement to provide any goods or services or otherwise contribute
resources to the Project and the development of the Intel Software beyond the
Dedicated Resources. If Intel's development of the Intel Software and completion
of the Project requires less than the Dedicated Resources, Intel's obligations
in regard to the Dedicated Resources shall terminate upon completion of the
Project and (i) Intel shall have no further obligation in regard to the
Dedicated Resources and (ii) LAUNCH shall not be entitled to any credit and/or
offset of any kind in regard to any consideration given by it to Intel hereunder
or otherwise. If development of the Intel Software for the Project, or
completion of the Project, requires Intel to commit resources beyond the
Dedicated Resources, the parties shall enter into good faith negotiations to
determine whether Intel shall receive additional compensation and if so the
amount and nature of such consideration. Notwithstanding the foregoing, the
parties reiterate that Intel shall have no obligation under this Agreement to
provide any goods or services or otherwise contributes resources to the Project
and the development of the Intel Software beyond the Dedicated Resources.
2.4 LAUNCH COMMITMENTS. LAUNCH shall use commercially reasonable efforts
and dedicate the resources necessary to develop, obtain all license and other
rights necessary to complete the Project in a commercially reasonable way, and
pay for at its sole expense the following elements of, the Project:
(i) [*]
(ii) [*]
(iii) [*]
(iv) [*]
(v) [*]
(vi) [*]
(vii) [*]
(viii) [*]
Technology and intellectual property owned, licensed, sub-licensed, or developed
independently by LAUNCH and incorporated into the Project or Licensed Products
(collectively, the "LAUNCH Technology") shall be the property of LAUNCH subject
only to license rights that
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LAUNCH may grant therein to Intel or other third parties. Technology developed
by LAUNCH with the assistance of Intel shall be owned by LAUNCH.
2.5 JOINT WORK. Intel and LAUNCH shall jointly work on developing [*]
All technology, inventions and related intellectual property created as a result
of this joint work ("Joint Work Technology") shall be the property of Intel
unless independently developed by LAUNCH and LAUNCH can demonstrate with
appropriate documentation that it independently developed the technology,
invention or related intellectual property. LAUNCH shall, at Intel's request,
perform all actions and execute all documents necessary to establish the Joint
Work Technology as Intel's sole and exclusive property. Technology, inventions
and intellectual property independently developed by LAUNCH shall be the
property of LAUNCH and shall be included in the definition of "LAUNCH
Technology" as that term is defined herein.
2.6 TRIAL. The parties shall conduct a trial ("Trial") to test the success
of the Project. LAUNCH and Intel will work together to determine the first
distribution channel for the Trial and perform the necessary integration of the
transport stack specific to such bandwidth provider. The parties will cooperate
and work together in good faith to further define the Trial.
2.7 CONSIDERATION AND CLOSING. The parties agree that the net value of
Intel's contribution to this Project will be [*]. Upon execution of this
Agreement at closing, LAUNCH shall pay Intel US$500,000 by issuing to and
delivering to Intel 327,797 shares of Series D Preferred Stock of LAUNCH (the
"LAUNCH Shares"). Closing shall take place on February 26, 1998, or such other
time, and at such place, as the parties shall agree. LAUNCH represents and
warrants to Intel that the issuance and delivery of the LAUNCH Shares to Intel
(i) is duly authorized and approved by LAUNCH's Board of Directors and, if
necessary, LAUNCH's shareholders, (ii) is in full compliance with any and all
applicable state and federal securities laws, and (iii) all necessary corporate,
government, administrative and other actions or approvals necessary to
effectuate the issuance and delivery of the LAUNCH Shares to Intel and perfect
Intel's ownership of the LAUNCH Shares have been duly completed and obtained and
(iv) upon delivery of the LAUNCH Shares Intel shall be the sole and exclusive
owner of the LAUNCH Shares designated as such on LAUNCH's shareholder register.
LAUNCH further agrees to indemnify, defend and hold Intel harmless from and
against any and all claims, causes of action, damages, losses, costs (including
reasonable attorney fees), liabilities and expenses arising from any action or
claim brought or threatened against LAUNCH or Intel relating to the issuance and
delivery of the LAUNCH Shares. In addition, all representations and warranties
made by LAUNCH in the Equity Agreements are incorporated by reference herein and
the LAUNCH Shares shall be entitled to the rights and subject to the obligations
set forth in the Equity Agreements.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-4-
<PAGE> 5
SECTION 3. LICENSES
Subject to the successful development of the Intel Software, completion of
the Project and conclusion of a successful Trial, all to the satisfaction of
Intel, Intel grants to LAUNCH the following licenses:
3.1 SOURCE CODE. Intel hereby grants to LAUNCH a worldwide, perpetual,
non-exclusive, non-sublicensable, royalty-free license under Intel's copyrights
to use, reproduce, perform and display the Intel Software and the Joint Work
Technology in source code form for internal use only, solely for the purpose of
(i) preparing LAUNCH Derivatives for incorporation into Licensed Products, (ii)
making Improvements, and (iii) providing technical support for Licensed
Products. LAUNCH Derivatives shall be the property of LAUNCH subject to Intel's
ownership of the Intel Software and the Joint Work Technology.
3.2 OBJECT CODE. Intel hereby grants to LAUNCH a worldwide, perpetual,
non-exclusive, royalty-free license under Intel's copyrights in the Intel
Software and the Joint Work Technology, to reproduce, distribute, license
through multiple levels of distribution, display and perform such LAUNCH
Derivatives only in binary code form and only incorporated into Licensed
Products; provided that the Intel Software and the Joint Work Technology are
licensed to end-users "AS IS" without warranties of non-infringement of any
third party intellectual property right.
3.3 RESTRICTIONS. LAUNCH shall not assign, sublicense, lease, or in any
other way transfer, use, perform, display or disclose the Intel Software and the
Joint Work Technology to any third party or reproduce or distribute any part of
the Intel Software and the Joint Work Technology except as specifically provided
in this Agreement.
3.4 NO OTHER RIGHTS. No rights or licenses are granted by Intel to LAUNCH
under this Agreement, expressly, by estoppel or by implication, with respect to
any proprietary information or patent, copyright, trade secret or other
intellectual property right owned or controlled by Intel, except as expressly
provided in this Agreement.
3.5 LAUNCH TECHNOLOGY. LAUNCH hereby grants to Intel a non-exclusive,
worldwide, royalty free, perpetual license under the LAUNCH Technology,
including but not limited to its intellectual property rights and the
intellectual property rights of third parties for which LAUNCH has the right to
grant such license, to use, reproduce, distribute, perform and display the
Project and Licensed Products for promotional purposes to demonstrate the Intel
Software and the Project.
SECTION 4. PROPRIETARY RIGHTS
The Intel Software and the Joint Work Technology, in whole or in part, and
all copies, are and shall remain owned by and be the sole and exclusive property
of Intel. Intel has the right to use, copy, modify, license, sub-license, make
derivative works of, perform and display the Intel Software and the Joint Work
Technology in any manner and for any purpose that Intel deems appropriate at its
sole discretion; provided, however, that Intel agrees that it will not license
the
-5-
<PAGE> 6
Intel Software and the Joint Work Technology for the creation of a music
application like that contemplated by the Project for a period of [*] following
completion of the Project. This restriction shall apply to the Intel Software
and the Joint Technology as a collective unit rather than discrete parts of the
Intel Software and the Joint Technology, and the restriction shall not apply to
(i) any part of the Intel Software and the Joint Technology that was developed
by Intel before the execution of this Agreement, and (ii) any part of the Intel
Software and the Joint Work Technology that was not specifically and solely
developed for the Project.
SECTION 5. TECHNICAL SUPPORT AND UPDATES
5.1 LAUNCH. LAUNCH shall provide all technical support of all kinds at all
levels for all Licensed Products.
5.2 INTEL. INTEL WILL NOT BE REQUIRED TO PROVIDE ANY TECHNICAL OR OTHER
SUPPORT, ASSISTANCE, INSTALLATION, TRAINING OR OTHER SERVICES EXCEPT AS
SPECIFICALLY PROVIDED IN THIS AGREEMENT. INTEL WILL NOT BE REQUIRED TO PROVIDE
ANY UPDATES, ENHANCEMENTS OR EXTENSIONS TO THE INTEL SOFTWARE OR THE JOINT WORK
TECHNOLOGY OF ANY KIND OR PROVIDE ANY TECHNICAL SUPPORT FOR THE LICENSED
PRODUCTS.
SECTION 6. MARKETING AND PROMOTION
The parties will issue a press release describing the Intel-LAUNCH
cooperation in relation to the Project. Text of the press release will be
subject to the prior review and approval of Intel and LAUNCH.
SECTION 7. COPYRIGHTS AND TRADEMARK
7.1 COPYRIGHTS. The Intel Software and the Joint Work Technology is
copyrighted and is protected by United States copyright laws and international
treaty provisions. LAUNCH shall use commercially reasonable efforts to prevent
any unauthorized copying of the Intel Software and the Joint Work Technology.
LAUNCH shall not remove or obscure any of Intel's or its vendors' copyright
notices or other proprietary notices from the Intel Software and the Joint Work
Technology. In addition, each Licensed Product shall display "Portions Copyright
1998 Intel Corporation" in "About" boxes of Licensed Products. LAUNCH and its
licensees shall display "Media Technologies by Intel Corporation" in [*] of
Licensed Products. Intel shall not remove or obscure any of LAUNCH's or its
vendors' copyright notices or other proprietary notices from the Licensed
Products pursuant to the license granted to Intel in Section 3.5 above.
7.2 TRADEMARKS. No rights or licenses are granted by this Agreement,
expressly or by implication, to use any Intel trademark or trade name, or any
word or mark similar thereto, in connection with any products manufactured, used
or sold by LAUNCH, or as part of LAUNCH's corporate, firm or trade name, or for
any other purpose, except as expressly provided for in this Agreement.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-6-
<PAGE> 7
SECTION 8. NO WARRANTIES; LIMITED LIABILITY
8.1 INTEL SOFTWARE AS IS. INTEL MAKES NO WARRANTY OF ANY KIND REGARDING
THE INTEL SOFTWARE AND THE JOINT WORK TECHNOLOGY AND ANY SUPPORT, INPUT,
RECOMMENDATIONS, ASSISTANCE OR OTHER CONTRIBUTIONS OF ANY KIND THAT INTEL MAY
MAKE TO THE PROJECT. INTEL SOFTWARE AND JOINT WORK TECHNOLOGY IS LICENSED TO
LAUNCH ON AN "AS IS" BASIS. INTEL SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES
OF MERCHANTABILITY, NONINFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT AND
FITNESS FOR A PARTICULAR PURPOSE.
8.2 LIMITED LIABILITY. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGE OF ANY KIND. IN NO EVENT SHALL A
PARTY BE LIABLE TO THE OTHER UNDER THIS AGREEMENT IN AN AMOUNT EXCEEDING THE
TOTAL PAYMENTS RECEIVED FROM THE OTHER PARTY UNDER THIS AGREEMENT.
8.3 EXCEPTION. NOTWITHSTANDING THE FOREGOING GENERAL LIMITATIONS, LAUNCH'S
DUTY TO INDEMNIFY, DEFEND AND HOLD INTEL HARMLESS PURSUANT TO PARAGRAPH 12 OF
THIS AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT WITHOUT LIMITATION.
SECTION 9. TERM AND TERMINATION
9.1 TERM. The term of this Agreement shall commence on the date first
written above and shall continue until the earlier of [*], and the
date that the Project is completed, unless earlier terminated by a party as
permitted herein. This Agreement may be extended for such additional term and
under such conditions as the parties may mutually agree in a duly executed
writing.
9.2 TERMINATION. Before completion of the Project, either party may
terminate this Agreement at any time with or without cause by giving the other
party written notice of termination.
9.3 EFFECT OF TERMINATION.
9.3.1 CONSIDERATION. If LAUNCH terminates the Agreement, Intel may
keep all consideration given by LAUNCH to Intel hereunder without further
obligation. If Intel terminates the Agreement due to a material breach by
LAUNCH, Intel may keep all consideration given by LAUNCH to Intel without
further obligation. In the event that Intel terminates the Agreement for other
than breach, Intel agrees to refund a pro-rated amount of the LAUNCH Shares as
follows:
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-7-
<PAGE> 8
<TABLE>
<CAPTION>
Termination Date Amount Refunded
- ----------------------------------------------------- ------------------
<S> <C>
[*] [*]
Shares (based upon
$1.53 per share)
[*] [*]
Shares (based upon
$1.53 per share)
[*] {*}
Shares (based upon
$1.53 per share)
[*] [*]
Shares (based upon
$1.53 per share)
</TABLE>
9.3.2 LICENSES. If this Agreement is terminated for any reason prior
to successful completion of the Project, LAUNCH shall have no license rights to
any Intel Software and the Joint Work Technology. Once the licenses granted by
Intel to LAUNCH have become effective as outlined in Section 3 of this
Agreement, however, they may only be revoked by Intel for material breach of the
license terms as provided in this Agreement. Intel reserves the right to verify
LAUNCH's compliance with this Agreement and the licenses granted herein by
reasonable means, and LAUNCH agrees to cooperate with Intel in that regard. In
the event that Intel, in its reasonable discretion, determines that LAUNCH is in
material breach of any of the licenses granted herein, Intel has the right to
terminate all license rights granted herein upon thirty (30) days written notice
to LAUNCH if LAUNCH fails to correct such material noncompliance within the
thirty (30) day notice period.
9.3.3 OTHER. Expiration of this Agreement shall not affect the
limitations and restrictions on LAUNCH's license rights in regard to the Intel
Software. In addition, Sections 4 (unless the licenses are terminated as
provided herein), 5, 7, 8, 9, 10, 11, 12, 15 and 16 shall survive.
SECTION 10. CONFIDENTIALITY AND NON-DISCLOSURE
10.1 SOURCE CODE. The Intel Software and Joint Work Technology source code
constitutes proprietary, confidential, and trade secret information of Intel.
LAUNCH shall ensure that the Intel Software and Joint Work Technology source
code receives at least the same degree of confidentiality that is accorded to
its own source code. Except as expressly permitted by this Agreement, LAUNCH
shall not disclose the Intel Software and Joint Work Technology source code to
any third party absent prior written approval from Intel and a prior written
confidentiality and nondisclosure agreement with each such third party that is
satisfactory to Intel in its sole discretion.
10.2 CNDA. This Agreement and the terms thereof are confidential and shall
not be disclosed to any third party without the prior written consent of the
non-disclosing party. Except
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-8-
<PAGE> 9
as expressly provided herein, this Agreement and all disclosures relating
thereto, shall be governed by CNDA number 68431 executed by the parties on
September 4, 1996.
SECTION 11. NOTICES
All notices required or permitted to be given hereunder shall be in
writing, shall make reference to this Agreement, and shall be delivered by hand,
or dispatched by prepaid air courier or by registered or certified airmail,
postage prepaid, addressed as follows:
If to LAUNCH If to Intel
2Way Media, Inc. Intel Corporation
1632 Fifth Street 211 N.E. 25th Avenue
Santa Monica, CA 90401 Hillsboro, OR 97124-5961
JF3-145
Attn: President Attn: Legal Counsel
With a copy to:
With a copy to:
Gray Cary Ware & Freidenrich Post Contract Management
400 Hamilton Ave. Same Address
Palo Alto, CA 94301
Attn: Jim Koshland
Such notices shall be deemed served when received by addressee or, if
delivery is not accomplished by reason of some fault of the addressee, when
tendered for delivery. Either party may give written notice of a change of
address and, after notice of such change has been received, any notice or
request shall thereafter be given to such party at such changed address.
SECTION 12. INDEMNITY
12.1 LAUNCH. LAUNCH shall defend, indemnify, and hold Intel harmless from
and against any loss, cost, liability and expense (including reasonable attorney
fees) arising from any action or claim brought or threatened against LAUNCH or
Intel or its customers alleging that any Licensed Product infringes any patent,
copyright, trademark, trade secret, or other intellectual property right of any
third party provided that Intel (i) promptly notifies LAUNCH in writing of any
such suit or proceeding, (ii) provides LAUNCH at its sole discretion with sole
control over the defense or settlement of such suit or proceeding, and (iii)
provides reasonable information and assistance in the defense and/or settlement
of any such claim or action. LAUNCH's indemnity obligation hereunder shall not
apply to any successful suit or proceeding based solely upon a claim that the
Intel Software or a party thereof (except any Launch Improvement), alone and not
in combination with any other technology or product (including but not limited
to the Licensed Product), constitutes a direct infringement of any United States
patent or copyright of any third party; provided that LAUNCH (i) promptly
notifies Intel in writing of any such suit or proceeding, (ii) provides Intel at
its sole discretion with sole control over the defense or settlement of such
suit or proceeding, (iii) provides reasonable information and assistance in the
defense and/or settlement of any such claim or action, and (iv) a court of
competent jurisdiction
-9-
<PAGE> 10
(after appropriate appeals have been filed) concludes that the Intel Software,
or a part thereof (except any LAUNCH Improvement), alone and not in combination
with any other technology or product (including but not limited to the Licensed
Product) constitutes a direct infringement of any United States patent or
copyright of any third party.
12.2 INTEL. Subject to the limitations set forth in Section 8.2 above,
which shall be construed to mean a limit of [*], Intel shall defend, indemnify
and hold LAUNCH harmless from and against any loss, cost, liability and expense
(including reasonable attorney fees) arising solely from an action or claim
brought against LAUNCH alleging only that the Intel Software, alone and not in
combination with any other product or technology, infringes any United States
copyright of any third party provided that LAUNCH (i) promptly notifies Intel in
writing of any such suit or proceeding, (ii) provides Intel at its sole
discretion with sole control over the defense or settlement of such suit or
proceeding, and (iii) provides reasonable information and assistance in the
defense and/or settlement of any such claim or action and (iv) a court of
competent jurisdiction (after appropriate appeals have been filed) concludes
that the Intel Software, or a part thereof (except any LAUNCH Improvement),
alone and not in combination with any other technology or product (including but
not limited to the Licensed Product) constitutes a direct infringement of any
United States copyright of any third party.
12.3 LIMITATIONS. Intel shall not be liable for any claims, liabilities,
damages, losses, and costs (including attorney fees), and LAUNCH shall
indemnify, defend and hold Intel harmless from, any claims, liabilities,
damages, losses, and costs (including reasonable attorney fees) resulting from
any suit or proceeding based upon a claim arising from (i) Intel's compliance
with LAUNCH's designs, specifications or instructions in the development of the
Intel Software, (ii) modifications to or Derivative Works of the Intel Software
by LAUNCH, or (iii) the combination of the Intel Software or any part thereof
furnished hereunder with any other product or technology of LAUNCH or its
customers.
12.4 REMEDIES. If the distribution of a Licensed Product is permanently
enjoined, or Intel determines at its sole discretion that it may be enjoined,
because the Intel Software or a part thereof, alone and not in combination with
any other technology or product (including but not limited to the Licensed
Product), constitutes or appears to constitute a direct infringement of any
patent, copyright, trademark, trade secret, or other intellectual property right
of any third party, Intel may, at its sole discretion (i) procure sufficient
rights for LAUNCH to enable distribution of the Licensed Product consistent with
this Agreement (ii) modify the Intel Software so that it becomes non-infringing,
or (iii) terminate the Intel Software licenses granted herein without liability
to LAUNCH.
SECTION 13. FORCE MAJEURE
Neither party shall be liable for any failure to perform due to unforeseen
circumstances or causes beyond that party's reasonable control, including, but
not limited to, acts of God, war, riot, embargoes, acts of civil or military
authorities, delay in delivery by vendors, fire, flood, earthquake, accident,
strikes, inability to secure transportation, facilities, fuel, energy, labor or
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-10-
<PAGE> 11
materials. In the event of force majeure, the time for delivery or other
performance will be extended for a period equal to the duration of the delay
caused thereby.
SECTION 14. ASSIGNMENT, SALE OR TRANSFER
Neither party shall transfer or assign any of its rights under this
Agreement to any person. Any attempt to assign any rights, duties or obligations
hereunder without the other party written consent shall be void.
SECTION 15. RELATIONSHIP OF THE PARTIES
This Agreement shall not be construed to create a partnership, joint
venture or other agency relationship between the parties. Neither party hereto
will be deemed the agent or legal representative of the other for any purpose
whatsoever and each party will act as an independent contractor with regard to
the other in its performance under this Agreement. Nothing herein will authorize
either party to create any obligation or responsibility whatsoever, express or
implied, on behalf of the other or to bind the other in any manner, or to make
any representation, commitment or warranty on behalf of the other.
SECTION 16. MISCELLANEOUS
16.1 EXPORT RESTRICTIONS. The Intel Software and the Joint Work Technology
may be controlled for export purposes by the U.S. Government. LAUNCH shall not
export, either directly or indirectly, any Licensed Product without first
obtaining any required license or other approval from the U.S. Department of
Commerce or any other agency or department of the United States Government as
required.
16.2 GOVERNING LAW. Any claim arising under or relating to this Agreement
shall be governed by the internal substantive laws of the State of Delaware or
federal courts located in Delaware, without regard to principles of conflict of
laws. This provision is meant to comply with 6 Del. C.
Section 2708(a).
16.3 INTEGRATION. This Agreement, together with the CNDA, constitute the
entire agreement between LAUNCH and Intel relating to the subject matter hereof.
This Agreement shall only be amended by a writing signed by both parties.
16.4 HEADINGS. The headings to the paragraphs and subparagraphs of this
Agreement are to facilitate reference only, do not form a part of this
Agreement, and will not in any way affect the interpretation thereof.
16.5 SEVERABILITY. The terms and conditions of this Agreement are
severable. If any paragraph, provision, or clause in this Agreement shall be
found or be held to be invalid or unenforceable in any jurisdiction in which
this Agreement is being performed, the remainder of this Agreement shall be
valid and enforceable and the parties shall use good faith to negotiate a
substitute, valid and enforceable provision that most nearly effects the
parties' intent in entering into this Agreement.
-11-
<PAGE> 12
16.6 REMEDIES. The rights and remedies provided in this Agreement are in
addition to any other rights and remedies provided at law or in equity.
-12-
<PAGE> 1
EXHIBIT 10.9
CONFIDENTIAL
ANCHOR TENANT AGREEMENT
This Anchor Tenant Agreement (this "Agreement"), effective as of
February 1, 1999 (the "Effective Date"), is made and entered into by and between
America Online, Inc. ("AOL"), a Delaware corporation, with its principal offices
at 22000 AOL Way, Dulles, Virginia 20166, and LAUNCH Media, Inc. ("Interactive
Content Provider" or "ICP"), a Delaware corporation, with its principal offices
at 1632 Fifth Street, Santa Monica, California 90401 (each a "Party" and
collectively the "Parties").
INTRODUCTION
AOL and ICP each desires that AOL provide access to the ICP Internet
Site through the AOL Network, subject to the terms and conditions set forth in
this Agreement. Defined terms used but not defined in the body of this Agreement
or in Exhibit C shall be as defined on Exhibit B attached hereto.
TERMS
1. DISTRIBUTION; PROGRAMMING
1.1 ANCHOR TENANCY. Beginning on the Launch Date, ICP shall receive
anchor tenant distribution within the Entertainment channel (or
any specific successor thereof) offered on the AOL Service, as
follows: AOL shall (a) continuously and prominently place an
agreed-upon ICP logo or banner (an "Anchor Tenant Button") on
each of the (i) Music channel main screen, and (ii) the Music
Genre Screens (Alternative, Rock/Pop, R&B, Country, Jazz,
Classical) (or any specific successors thereof) which Anchor
Tenant Button(s) shall link to a Welcome Mat (as defined below),
(b) provide ICP with any keyword(s) that the Parties mutually
agree upon (subject to the terms of this Agreement) which shall
link to a Welcome Mat, and (c) list the ICP Internet Site in
AOL's "Directory of Services" and "Find" features. Except to the
extent expressly described herein, the exact form, placement and
nature of the Anchor Tenant Button(s) shall be determined by AOL
in its reasonable editorial discretion, provided, however, that
each of ICP's Anchor Tenant Buttons shall be of equal or greater
size than any other anchor tenant's Anchor Tenant Button which
is continuously displayed on the same screen. So long as ICP is
in compliance with the terms of this Agreement, there shall be
no more than four (4) anchor tenants (including ICP) with their
Anchor Tenant Buttons continuously displayed on any of the
screens listed in clauses (a)(i) and (ii) above.
1.2 CONTENT. The ICP Internet Site shall consist of the Content
described on Exhibit A hereto. ICP shall not authorize or permit
any third party to distribute any Content of ICP through the AOL
Network absent AOL's prior written approval. The inclusion of
any additional Content for distribution through the
[ * ] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
1
<PAGE> 2
AOL Network (including, without limitation, any features,
functionality or technology) not expressly described on Exhibit
A shall be subject to AOL's prior written approval, which shall
not be unreasonably withheld.
1.3 LICENSE. ICP hereby grants AOL a worldwide license to use,
market, store, distribute, display, communicate, perform,
transmit, and promote the ICP Internet Site and the Licensed
Content (or any portion thereof) through the AOL Network as AOL
may determine in its sole discretion, including without
limitation the right to integrate Content from the ICP Internet
Site by linking to specific areas on the ICP Internet Site,
provided that the link to any such Content on the AOL Network
shall conform with the specifications set forth on Exhibit D.
1.4 MANAGEMENT. ICP shall design, create, edit, manage, update, and
maintain the ICP Internet Site and the Licensed Content. Except
as specifically provided for herein, AOL shall have no
obligations of any kind with respect to the ICP Internet Site.
ICP shall be responsible for any hosting or communication costs
associated with the ICP Internet Site (including, without
limitation, the costs associated with (i) any agreed-upon direct
connections between the AOL Network and the ICP Internet Site or
(ii) a mirrored version of the ICP Internet Site). AOL Members
shall not be required to go through a registration process (or
any similar process) in order to access and use the
generally-available portions of the ICP Internet Site or the
Licensed Content.
1.5 CARRIAGE FEE. ICP shall pay AOL [*] as follows:
(a) [*] on the Effective Date, which shall be non-refundable
consideration for AOL securing the placement described
in Section 1.1 for the period prior to the Launch Date;
(b) [*] on the date which is [*] months after the
Effective Date;
(c) [*] on the date which is [*] months after the Effective
Date; and
(d) [*] on the date which is [*] months after the Effective
Date.
1.6 IMPRESSIONS GUARANTEE. AOL shall provide ICP with at least [*]
Impressions from ICP's presence on the AOL Network (the
"Impressions Guarantee"). For the purposes of this Agreement,
ICP's presence on an AOL screen shall conform to the
specifications set forth on Exhibit D (each, an "ICP Presence"),
provided that only screens that contain a link to the ICP
Internet Site or a Welcome Mat will count against the
Impressions Guarantee. In the event that the Impressions
Guarantee is not met (or will not, in AOL's
2
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE> 3
reasonable judgment, be met) during the Term, at AOL's option
either (a) the Term shall be extended for up to four (4) months
without additional carriage fees payable by ICP until the
Impressions Guarantee is met, (b) AOL shall, from time to time,
provide ICP with the remaining Impressions in the form of
advertising space within the AOL Network of comparable value to
the undelivered Impressions (as reasonably determined by AOL),
or (c) some combination thereof until the Impressions Guarantee
is met.
2. PROMOTION
2.1 COOPERATION. Each Party shall cooperate with and reasonably
assist the other Party in supplying material for marketing and
promotional activities.
2.2 INTERACTIVE SITE. During the Term, ICP shall include within each
ICP Interactive Site (a) a prominent "Try AOL" feature where
users can obtain promotional information about AOL products and
services and, at AOL's option, download or order AOL's
then-current version of client software for the America
Online(R) brand service or other AOL products, such as AOL's
"Instant Messenger(R)"; (b) prominent promotion for the keywords
associated with ICP's Internet Site; and (c) links from the ICP
Interactive Site to the relevant topic areas on AOL's primary
site on the World Wide Web (and, to the extent technologically
feasible, the relevant topic areas in the ICP Internet Site).
Notwithstanding the foregoing, ICP shall be under no obligation
to provide any such promotion on any portions of the ICP
Interactive Site accessed through a co-branded or other similar
distribution arrangement with any third party.
2.3 OTHER MEDIA. ICP shall use commercially reasonable efforts to
promote AOL and the ICP Internet Site's availability through the
AOL Service in publications, programs, features and other forms
of media over which ICP exercises at least partial editorial
control.
2.4 KEYWORD PROMOTION. In any instances when ICP makes promotional
reference to an ICP Interactive Site, including any listings of
the applicable "URL(s)" for such web site(s) (each a "Web
Reference"), ICP shall include a listing of the applicable AOL
"keyword" of comparable prominence to the Web Reference;
provided, however, that ICP will be under no obligation to
promote the AOL keyword when promoting the ICP Interactive Site
in an area reasonably construed to be in competition with AOL.
2.5 PREFERRED INTERNET ACCESS PROVIDER. When promoting the
availability of the ICP Internet Site on AOL, ICP shall promote
AOL as a preferred Internet access provider through which a user
can access the ICP Internet Site (and ICP shall not implement or
authorize any other promotions on behalf of any third parties
which are inconsistent with the foregoing). Any promotions for
Internet access providers shall include an equally prominent
promotion for AOL.
3
<PAGE> 4
3. REPORTING; PAYMENT
3.1 USAGE AND OTHER DATA. AOL shall make available to ICP a monthly
report specifying for the prior month aggregate daily usage and
daily Impressions with respect to ICP's presence on the AOL
Network. ICP will supply AOL with monthly reports which reflect
total Impressions by AOL Members to the ICP Internet Site during
the prior month and the number of and dollar value associated
with the transactions involving AOL Members at the ICP Internet
Site during the period in question. ICP shall also provide AOL
with "click-through" data with respect to the promotions
specified in Section 2.
3.2 PROMOTIONAL COMMITMENTS. ICP shall provide to AOL a monthly
report documenting its compliance with any promotional
commitments it has undertaken pursuant to this Agreement in the
form attached as Exhibit E hereto.
3.3 PAYMENT SCHEDULE. Except as otherwise specified herein, each
Party agrees to pay the other Party all amounts received and
owed to such other Party as described herein on a quarterly
basis within thirty (30) days of the end of the quarter in which
such amounts were collected by such Party. The first quarter for
which payment is to be made shall (i) begin on the first day of
the month following the month of execution of this Agreement and
(ii) include the portion of the month of execution following the
Effective Date (unless this Agreement was executed on the first
day of a month, in which case the quarter shall be deemed to
begin on the first day of such month).
3.4 WIRED PAYMENTS. All payments by ICP hereunder shall be paid in
immediately available, non-refundable U.S. funds wired to the
"America Online" account, Account Number 323070752 at the Chase
Manhattan Bank, 1 Chase Manhattan Plaza, New York, New York
10081 (ABA: 021000021), or such other account of which AOL shall
give ICP written notice.
4. ADVERTISING AND MERCHANDISING
4.1 ADVERTISING SALES. AOL owns all right, title and interest in and
to the advertising and promotional spaces within the AOL Network
(including, without limitation, advertising and promotional
spaces on any AOL forms or pages preceding or framing the ICP
Internet Site). The specific advertising inventory within any
such AOL forms or pages shall be as reasonably determined by
AOL. ICP owns all right, title and interest in and to the
advertising and promotional spaces within the ICP Internet Site.
The specific advertising inventory within the ICP Internet Site
shall be as reasonably determined by ICP. AOL shall not place
pop-up advertisements between the Anchor Tenant Buttons and the
Welcome Mat or between the Anchor Tenant Buttons and the ICP
Internet Site.
4.2 WELCOME MAT ADVERTISEMENTS. AOL hereby grants ICP the right to
license or sell promotions, advertisements, links, pointers or
similar services or rights in or
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through each Welcome Mat ("Welcome Mat Advertisements"), subject
to (i) AOL's approval for each Welcome Mat Advertisement and
(ii) the Advertising Minimum. ICP shall pay AOL [*] of the
Advertising Revenues generated by ICP or its agents with
respect to Welcome Mat Advertisements.
4.3 ADVERTISING POLICIES. Any AOL Advertisements sold by ICP or its
agents shall be subject to AOL's then-standard advertising
policies. In connection with the sale by ICP of any AOL
Advertisement, ICP shall, in each instance, provide AOL with a
completed standard AOL advertising registration form relating to
such AOL Advertisement. ICP shall ensure that any AOL
Advertisement sold by ICP complies with all applicable federal,
state and local laws and regulations. To the extent ICP sells an
AOL Advertisement as part of an advertising package including
multiple placement locations (e.g., both Welcome Mat and another
area or site), ICP shall allocate the payment for such
advertising package between or among such locations in an
equitable fashion, subject to the Advertising Minimum.
4.4 INTERACTIVE COMMERCE. Any merchandising through the ICP Internet
Site and/or the Welcome Mat shall be subject to (i) the
then-current requirements of AOL's merchant certification
program, (ii) the requirements posted at keyword "Marketplace
Policy" on the America Online(R) brand service (or such other
keyword as AOL may designate during the Term), (iii) prior
approval by AOL of the type of all products, goods and services
to be offered through the ICP Internet Site or the Welcome Mat,
which approval shall not be unreasonably withheld, and (iv) ICP
implementing sufficient procedures to protect the security of
all merchandising on the site (i.e., ICP shall as of the
Effective Date use 40-bit SSL technology and, if requested by
AOL, 128-bit SSL). ICP shall not conduct any merchandising
through the ICP Internet Site or the Welcome Mat through
auctions, clubs or any method other than a direct sales format
without AOL's prior written consent. ICP shall not conduct any
merchandising of music or music-related Products to AOL Members
on or through the Welcome Mat, Rainman Programming areas, or
through any portion of the ICP Internet Site which is less than
[*] away from the AOL Service, without the prior written consent
of AOL. Prior to entering into an arrangement with any third
party for merchandising or commerce through the Welcome Mat or
through any portion of the ICP Internet Site which is less than
[*] away from the AOL Service, ICP shall give AOL written notice
of such desire and, upon request by AOL, negotiate in good faith
with AOL or its commerce or marketing ICP in the applicable
product/service category regarding a merchandising or commerce
arrangement.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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5. CUSTOMIZED LINKED INTERACTIVE SITE
5.1 PERFORMANCE. ICP shall optimize the ICP Internet Site for
distribution hereunder according to AOL specifications and
guidelines, including the Operating Standards set forth on
Exhibit F attached hereto.
5.2 CUSTOMIZATION. ICP shall customize the ICP Internet Site for AOL
Members as follows:
(a) upon AOL's request, create a customized, co-branded home
page "welcome mat" for the AOL audience for each area on
the ICP Internet Site linked to from the AOL Network on
a continuous basis (each a "Welcome Mat"), which Welcome
Mat(s) shall be subject to AOL approval;
(b) ensure that AOL Members linking to the ICP Internet Site
directly from the AOL Network do not receive
advertisements, promotions or links for any other
Interactive Service or otherwise in violation of AOL's
then-standard advertising policies or exclusivity
commitments to third parties; and
(c) provide continuous navigational ability for AOL Members
to return to an agreed-upon point on the AOL service
(for which AOL shall supply the proper address) from ICP
Internet Site (e.g., the point on the AOL service from
which the ICP Internet Site is linked), which, at AOL's
option, may be satisfied through the use of a hybrid
browser format.
5.3 LINKS ON ICP INTERNET SITE. The Parties will work together on
mutually acceptable links (including links back to AOL) within
the ICP Internet Site in order to create a robust and engaging
AOL member experience. ICP shall take reasonable efforts to
ensure that AOL traffic is generally either kept within the ICP
Internet Site or channeled back into the AOL Network. To the
extent that AOL notifies ICP in writing that, in AOL's
reasonable judgment, links from such site cause an excessive
amount of AOL traffic to be diverted outside of such site and
the AOL Network in a manner that has a detrimental effect on the
traffic flow of the AOL audience, then ICP shall immediately
reduce the number of links out of such site(s). In the event
that ICP cannot or does not so limit diverted traffic from the
ICP Internet Site, AOL reserves the right to terminate such
links from the AOL Network to the ICP Internet Site.
5.4 REVIEW. ICP shall allow appropriate AOL personnel to have access
to the ICP Internet Site for the purpose of reviewing such site
to determine compliance with the provisions of this Section 5.
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6. TERM AND TERMINATION
6.1 TERM; RENEWAL. Unless earlier terminated as set forth herein,
the initial term of this Agreement shall expire fourteen (14)
months from the Effective Date. Upon the expiration or earlier
termination of this Agreement, AOL shall have the option, for a
period equal to the initial term, to use one or more ICP
trademarks or tradenames as keywords and/or text-based links
from the AOL Network to the ICP Internet Site. In the event of
termination by either Party, all pro forma payments for days in
which the Agreement is not in effect will be refunded on a pro
rata basis.
6.2 TERMINATION FOR BREACH. Either Party may terminate this
Agreement at any time in the event of a material breach by the
other Party which remains uncured after thirty (30) days written
notice thereof.
6.3 TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may
terminate this Agreement immediately following written notice to
the other Party if the other Party (i) ceases to do business in
the normal course, (ii) becomes or is declared insolvent or
bankrupt, (iii) is the subject of any proceeding related to its
liquidation or insolvency (whether voluntary or involuntary)
which is not dismissed within ninety (90) calendar days or (iv)
makes an assignment for the benefit of creditors.
7. TERMS AND CONDITIONS. The legal terms and conditions set forth on
Exhibit C attached hereto and the Operating Standards set forth on
Exhibit F attached hereto are hereby made a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the Effective Date.
AMERICA ONLINE, INC. LAUNCH MEDIA, INC.
By: /s/ Lynne E. Crawford By: /s/ Robert S. Roback
------------------------------- -------------------------------
Print Name: Lynne Crawford Print Name: Robert S. Roback
----------------------- -----------------------
Title: VP & CFO Title: President
---------------------------- ---------------------------
Date: 2/10/98 Date: 2/1/99
----------------------------- -----------------------------
Tax ID/EIN#: 95.4463753
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EXHIBIT A
DESCRIPTION OF CONTENT
APPEARING AT URL: HTTP://WWW.MYLAUNCH.COM
1. OVERVIEW/PURPOSE OF SITE:
The ICP Internet Site ("myLAUNCH") aims to be the premier music content and
community site online. Through personalization, a rich set of back-end
databases, and community features, myLAUNCH is able to deliver specific content
and recommendations based on a user's profile.
2. CATEGORIES OF PROGRAMMING:
Original Content
- - Original music news
- - Artist Features including interviews, Q&A's and think-pieces
- - Album Reviews
- - Concert Reviews
- - New Releases
- - Upcoming Releases
- - Upcoming Concerts
Member Generated Content
- - Member Pages, with ability to include images, and personal content
- - Chat areas
- - Message boards
- - Ability to "Whisper" (equivalent of I.M.) and send internal e-mail to
other user names
Third Party Content
Customized database information from third-party suppliers including audio clips
Update Frequency
Daily; some areas multiple times/day
Commerce
users have ability to purchase CD's and cassettes
Topics Covered
All genres of music excluding classical
Games
A weekly Trivia Chat in which prizes are awarded
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3. CATEGORIES OF LINKS:
Permanent
Link to LAUNCH CD-ROM (http://www.launchcdrom.com)
Temporary
none at present
4. TECHNOLOGIES EMPLOYED:
- - Web Server Software: Microsoft IIS 4.0
- - Database Server Software: Microsoft SQL
- - Additional Software: Firefly Passport Tools; I-Chat; Custom Publishing
- - System (ASP-based); Accipiter AdManager 2.2.
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EXHIBIT B - DEFINITIONS
DEFINITIONS. The following definitions shall apply to this Agreement:
ADVERTISING REVENUES. Aggregate amounts collected plus the fair market value of
any other compensation received (such as barter advertising) by ICP or ICP's
agents, as the case may be, arising from the license or sale of AOL
Advertisements, less applicable Advertising Sales Commissions; provided that, in
order to ensure that AOL receives fair value in connection with AOL
Advertisements, ICP shall be deemed to have received no less than the
Advertising Minimum in instances when ICP makes an AOL Advertisement available
to a third party at a cost below the Advertising Minimum.
ADVERTISING MINIMUM. (i) Thirty dollars ($30) per thousand entries per month or
(ii) such different rate or rates as AOL may establish based upon market
conditions and publish during the Term.
ADVERTISING SALES COMMISSION. In the case of an AOL Advertisement, actual
amounts paid as commission to third party agencies in connection with sale of
the AOL Advertisement, or fifteen percent (15%) if sold without the aid of a
third party agency.
AFFILIATE. Any agent, distributor or franchise or AOL, or an entity in which AOL
holds at least a nineteen percent (19%) equity interest.
AOL ADVERTISEMENTS. Rainman Programming Advertisements and Welcome Mat
Advertisements.
AOL SERVICE. The narrow-bank U.S. version of the American Online(R) brand
service, specifically excluding (a) AOL.com and any other AOL Interactive site,
(b) the international versions of an America Online service (e.g., AOL Japan),
(c) "ICQ," "AOL NetFind(TM)," "AOL Instant Messenger(TM)," "Digital Cities,"
"NetMail(TM)," "Real Fans," "Love@AOL," "Entertainment Asylum" or any similar
independent product, service or property which may be offered by, through or
with the U.S. version of the America Online(R) brand service, (d) any
programming or content area offered by or through the U.S. version of the
America Online(R) brand service over which AOL does not exercise complete
operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (e) any yellow pages, white
pages, classifieds or other search, directory or review services or Content
offered by or through the U.S. version of the America Online(R) brand service,
(f) any property, feature, product or service which AOL or its affiliates may
acquire subsequent to the Effective Date and (g) any other version of an America
Online service which is materially different from the narrow-band U.S. version
of the America Online brand service, by virtue of its branding, distribution,
functionality, content or services, including, without limitation, any
co-branded version of the service and any version distributed through any
broadband distribution platform or through any platform or device other than a
desktop personal computer.
AOL, LOOK AND FEEL. The distinctive and particular elements of graphics, design,
organization, presentation, layout, user interface, navigation, trade dress and
stylistic convention (including the digital implementations thereof) within the
AOL Network and the total appearance and impression substantially formed by the
combination, coordination and interaction of these elements.
AOL MEMBER(S). Authorized users of the AOL Network, including any sub-accounts
using the AOL Network under an authorized master account.
AOL NETWORK. (i) The AOL Service and (ii) any other product or service owned,
operated, distributed or authorized to be distributed by or through AOL or its
Affiliates worldwide through which such party elects to offer the ICP Internet
Site (which may include, without limitation, AOL-related Internet sites
"offline" information browsing products, international versions of the AOL brand
service, or Compuserve).
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the course
of this Agreement, which is, or should be reasonably understood to be,
confidential or proprietary to the disclosing Party, including, but not limited
to, the material term of this Agreement, information about AOL Members,
technical processes and formulas, source codes, product designs, sales, cost and
other unpublished financial information product and business plans, projection
and marketing data. "Confidential Information" shall not include information (a)
already lawfully known to or independently developed by the receiving Party, (b)
disclosed in
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published materials, (c) generally known to the public, (d) lawfully obtained
from any third party or (c) required or reasonably advised to be disclosed by
law.
CONTENT. Text, images, video, audio (including, without limitation, music used
in time relation with text, images, or video), and other data, products,
services, advertisements, promotions, links, pointers, technology and software.
KEYWORD(TM) SEARCH TERMS. The Keyword(TM) online search terms made available on
the AOL Service for use by AOL Members, combining AOL's Keyword(TM) online
search modifier with a term of phrase specifically related to ICP (and
determined in accordance with the terms of this Agreement).
ICP INTERACTIVE SITE. Any interactive site or area which is managed, maintained
or owned by ICP or its agents or to which ICP provides and/or licenses
information, content or other materials, including, by way of example and
without limitation, (i) an ICP site on the World Wide Web portion of the
Internet, (ii) a channel or area delivered through a "push" product such as the
Pointcast Network or interactive environment such as Microsoft's proposed
"Active Desktop."
ICP INTERNET SITE. The Internet site and Content, currently located at URL:
http://www.mylaunch.com, which are managed, maintained or owned by ICP or its
agents or to which ICP licenses information, content or other materials.
IMPRESSION. User exposure to (i) the page containing an ICP Presence or (ii) a
page of the ICP Internet Site, as the context may require, as such exposure may
be reasonably determined and measured by the reporting Party in accordance with
its standard methodologies and protocols.
INTERACTIVE SERVICE. An entity offering one or more of the following: (i) online
or Internet connectivity services (e.g., an Internet service provider); (ii) a
broad selection of aggregated third party interactive content (or navigation
thereto) (e.g., an online service or search and directory service); (iii)
communications software capable of serving as the principal means through which
a user creates, sends and receives electronic mail or real time online messages.
LAUNCH DATE. The later of (i) the Effective Date, or (ii) one week after the ICP
Internet Site has been approved by the web operations division of AOL.
LICENSED CONTENT. All Content provided by ICP or its agents through the ICP
Internet Site and/or the AOL Network in connection with the subject matter of
this Agreement.
PRODUCTS. Any product, good or service which ICP offers, sells or licenses to
AOL Member through (i) the ICP Internet Site, (ii) the Welcome Mat, (iii) the
Rainman Programming area(s), or (iv) an "offline" means (e.g., toll-free number)
for receiving orders related to specific offers within the ICP Internet Site,
Welcome Mat or Rainman Programming area(s) requiring purchasers to reference a
specific promotional identifier or tracking code, including, without limitation,
products sold through surcharged downloads (to the extent permitted hereunder).
TERM. The period beginning on the Effective Date and ending upon the expiration
or earlier termination of this Agreement.
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EXHIBIT C -- STANDARD LEGAL TERMS AND CONDITIONS
I. AOL NETWORK
CONTENT. ICP represents and warrants that all Content contained within the ICP
Internet Site and/or the Welcome Mat(s) (i) does and will conform to AOL's
applicable Terms of Service, the terms of this Agreement, and any other
standard, written AOL policy, (ii) does not and will not infringe on or violate
any copyright, trademark, U.S. patent or any other third party right, including
without limitation, any music performance or other music related rights, and
(iii) does not and will not contain any Content which violates any applicable
law or regulation ((i), (ii) and (iii) collectively, the "Rules"). In the event
that AOL notifies ICP in writing that any such Content, as reasonably determined
by AOL, does not comply or adhere to the Rules, then ICP shall use its best
efforts to block access by AOL Members to such Content. In the event that ICP
cannot, through its best efforts, block access by AOL Members to such Content in
question, then ICP shall provide AOL prompt written notice of such fact. AOL may
then, at its option, either (i) restrict access from the AOL Network to the
Content in question using technology available to AOL or (ii) in the event
access cannot be restricted, direct ICP to remove any such Content. ICP will
cooperate with AOL's reasonable requests to the extent AOL elects to implement
any such access restrictions.
CHANGES TO AOL SERVICE. AOL reserves the right to redesign or modify the
organization, structure, "look and feel," navigation and other elements of the
AOL Service. If AOL eliminates or modifies the screen(s) specified in Section
1.1 in a manner that substantially modifies the nature of the placements for ICP
described in Section 1.1 in a material adverse fashion, AOL will work with ICP
in good faith to provide ICP with a comparable package of placements which are
reasonably satisfactory to ICP.
CONTESTS. ICP shall ensure that any contest, sweepstakes or similar promotion
conducted or promoted through the ICP Internet Site and/or the Welcome Mat(s) (a
"Contest") complies with all applicable laws and regulations. ICP shall provide
AOL with (i) at least thirty (30) days prior written notice of any Contest and
(ii) upon AOL's request, an opinion from ICP's counsel confirming that the
Contest complies with all applicable federal, state and local laws and
regulations.
AOL LOOK AND FEEL. ICP acknowledges and agrees that AOL shall own all right,
title and interest in and to the AOL Look and Feel. In addition, AOL shall
retain editorial control over the portions of the AOL pages and forms which
frame the ICP Internet Site (the "AOL Frames"), AOL may, at its discretion,
incorporate navigational icons, links and pointers or other Content into such
AOL Frames.
OPERATIONS. AOL shall be entitled to require reasonable changes to the ICP
Internet Site to the extent such site will, in AOL's good faith judgment,
adversely affect operations of the AOL Network.
CLASSIFIEDS. ICP shall not implement or promote any classifieds listing features
through the Welcome Mat(s) without AOL's prior written approval. Such approval
may be conditioned upon, among other things, ICP's conformance with any
then-applicable service-wide technical or other standards related to online
classifieds.
MESSAGE BOARDS. Any Content submitted by ICP or its agents within message boards
or any comparable vehicles will be subject to the license grant relating to
submissions to "public areas" set forth in the AOL Terms of Service. ICP
acknowledges that it has no rights or interest in AOL Member submissions to
message boards within the AOL Network.
DUTY TO INFORM. ICP shall promptly inform AOL of any information related to the
ICP Internet Site or the Licensed Content which could reasonably lead to a
claim, demand or liability of or against AOL and/or its Affiliates by any third
party.
RESPONSE TO QUESTIONS/COMMENTS; CUSTOMER SERVICE. ICP shall respond promptly and
professionally to questions, comments, complaints and other reasonable requests
regarding the ICP Internet or the Licensed Content by AOL Members or on request
by AOL, and shall cooperate and assist AOL in promptly answering the same.
STATEMENTS THROUGH AOL NETWORK. ICP shall not make, publish, or otherwise
communicate through the AOL Network any deleterious remarks concerning AOL or
its Affiliates, directors, officers, employees, or agents (including, without
limitation, AOL's business projects, business capabilities, performance of
duties and services, or financial
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position) which remarks are based on the relationship established by this
Agreement or information exchanged hereunder. This section is not intended to
limit good faith editorial statements made by ICP based upon publicly available
information, or information developed by ICP independent of its relationship
with AOL and its employees and agents.
PRODUCTION WORK. In the event that ICP requests any AOL production assistance,
ICP shall work with AOL to develop detailed production plans for the requested
production assistance (the "Production Plan"). Following receipt of the final
Production Plan, AOL shall notify ICP of (i) AOL's availability to perform the
requested production work, (ii) the proposed fee or fee structure for the
requested production work and (iii) the estimated development schedule for such
work. To the extent the Parties reach agreement regarding implementation of
agreed-upon Production Plan, such agreement shall be reflected in a separate
work order signed by the Parties. To the extent ICP elects to retain a third
party provider to perform any such production work, work produced by such third
party provider must generally conform to AOL's production Standards & Practices
(a copy of which will be supplied by AOL to ICP upon request). The specific
production resources which AL allocates to any production work to be performed
on behalf of ICP shall be as determined by AOL in its sole discretion.
TRAINING AND SUPPORT. AOL shall make available to ICP standard AOL training and
support programs necessary to produce any AOL areas hereunder. ICP can select
its training and support program from the options then offered by AOL. ICP shall
be responsible to pay the fees associated with its chosen training and support
package. In addition, ICP will pay travel and lodging costs associated with its
participation in any AOL training programs (including AOL's travel and lodging
costs when training is conducted at ICP's offices).
LAUNCH DATE. In the event that any terms contained herein relate to or depend on
the launch date of the ICP Internet Site or other property contemplated by this
Agreement, which launch date is later than the Effective Date, then it is the
intention of the Parties to record such launch date in a written instrument
signed by both Parties promptly following such launch date; provided that, in
the absence of such a written instrument, the launch date shall be as reasonably
determined by AOL based on the information available to AOL.
KEYWORDS. Any Keyword Search Terms to be directed to the Online Area shall be
(i) subject to availability for use by ICP and (ii) limited to the combination
of the Keyword(TM) search modifier combined with a registered trademark of ICP.
AOL reserves the right to revoke at any time ICP's use of any keyword Search
Terms which do not incorporate registered trademarks of ICP. ICP acknowledges
that its utilization of a Keyword Search Term will not create in it, nor will it
represent it has, any right, title or interest in or to such Keyword Search
Term, other than the right, title and interest ICP holds in ICP's registered
trademark independent of the Keyword Search Term. Without limiting the
generality of the foregoing, ICP will not: (a) attempt to register or otherwise
obtain trademark or copyright protection in the Keyword Search Term; or (b) use
the Keyword Search Term, except for the purposes expressly required or permitted
under this Agreement. This Section shall survive the completion, expiration,
termination or cancellation of this Agreement.
II. TRADEMARKS
TRADEMARK LICENSE. In designing and implementing any marketing, advertising,
press releases or other promotional materials related to this Agreement and/or
referencing the other Party and/or its trade names, trademarks and service marks
(the "Promotional Materials") and subject to the other provisions contained
herein, ICP shall be entitled to use the following trade names, trademarks and
service marks of AOL; the "America Online(R)" brand service, "AOL(TM)"
service/software and AOL's triangle logo; and AOL and its Affiliates shall be
entitled to use the trade names, trademarks and service marks of ICP
(collectively, together with the AOL marks listed above, the "Marks"); provided
that each Party: (i) does not create a unitary composite mark involving a Mark
of the other Party without the prior written approval of such other Party and
(ii) displays symbols and notices clearly and sufficiently indicating the
trademark status and ownership of the other Party's Marks in accordance with
applicable trademark law and practice. This Section shall survive the
______________________.
RIGHTS. Each Party acknowledges that its utilization of the Party's Marks will
not create in it, nor will it represent it has, any right, title or interest in
or to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
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QUALITY STANDARDS. Each Party agrees that the nature and quality of its products
and services supplied in connection with the other Party's Marks shall conform
to quality standards communicated in writing by the other Party for use of its
trademarks. Each Party agrees to supply the other Party, upon request, with a
reasonable number of samples of any Materials publicly disseminated by such
Party such utilize the other Party's Marks. Each Party shall comply with all
applicable laws, regulations and customs and obtain any required government
approvals pertaining to use of the other Party's Marks.
PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the other Party,
for its prior written approval, which shall not be unreasonably withheld or
delayed, any Promotional Materials; provided, however, that after initial public
announcement of the business relationship between the Parties in accordance with
the approval and other requirements contained herein, either Party's subsequent
factual reference to the existence of a business relationship between AOL and
ICP, including, without limitation, the availability of the Licensed Content
through the AOL Network, or use of screen shots relating to the distribution
under this Agreement (so long as the AOL Network is clearly identified as the
source of such screen shots) for promotional purposes shall not require the
approval of the other Party. Once approved, the Promotional Materials may be
used by a Party and its affiliates for the purpose of promoting the distribution
of the Licensed Content through the AOL Network and reused for such purpose
until such approval is withdrawn with reasonable prior notice. In the event such
approval is withdrawn, existing inventories of Promotional Materials may be
depleted.
INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other Party
of any unauthorized use of the other Party's Marks of which it has actual
knowledge. Each Party shall have the sole right and discretion to bring
proceedings alleging infringement of its marks or unfair competition related
thereto; provided, however, that each party agrees to provide the other Party,
at such other Party's expense, with its reasonable cooperation and assistance
with respect to any such infringement proceedings.
III. REPRESENTATIONS AND WARRANTIES
Each Party represents and warrants to the other Party that: (i) such Party has
the full corporate right, power and authority to enter into this Agreement, to
grant the licenses granted hereunder and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such party in accordance with its terms; (iv) such party's
Promotional Materials will neither infringe on any copyright, U.S. patent or any
other third party right nor violate any applicable law or regulation; and (v)
such Party acknowledges that the other Party makes no representations,
warranties or agreements related to the subject mater hereof which are not
expressly provided for in this Agreement.
IV. CONFIDENTIALITY
Each Party acknowledges that Confidential Information may be disclosed to the
other Party during the course of this Agreement. Each party agrees that it will
take reasonable steps, at least substantially equivalent to the steps it takes
to protect its own proprietary information, during the term of this Agreement,
and for a period of three years following expiration or termination of this
Agreement, to prevent the disclosure of Confidential Information of the other
Party, other than to its employees, or to its other agents who must have access
to such Confidential Information for such party to perform its obligations
hereunder, who will each agree to comply with this section. Notwithstanding the
foregoing, either Party may issue a press release or other disclosure containing
Confidential Information without the consent of the other Party, to the extent
such disclosure is required by law, rule, regulation or government or court
order. In such event, the disclosing Party will provide at least five (5)
business days prior written notice of such proposed disclosure to the other
Party. Further, in the event such disclosure is required of either Party under
the laws, rules or regulations of the Securities and Exchange Commission or any
other applicable governing body, such Party will (i) redact mutually agreed-upon
portions of this Agreement to the fullest extent permitted under applicable
laws, rules and regulations and (ii) submit a request to such governing body
that such portions and other provisions of this Agreement receive confidential
treatment under the laws, rules and regulations of the Securities and Exchange
Commission or otherwise be
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held in the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body.
V. RELATIONSHIP WITH AOL MEMBERS
SOLICITATION OF SUBSCRIBERS
(a) During the term of this Agreement and for a two year period thereafter, ICP
will not use the AOL Network (including, without limitation, the e-mail network
contained therein) to solicit AOL Members on behalf of another Interactive
Service. More generally, ICP will not send unsolicited, commercial e-mail (i.e.,
"spam") through or into AOL's products or services, absent a Prior Business
Relationship. For purposes of this Agreement, a "Prior Business Relationship"
will mean that the AOL Member to whom commercial e-mail is being sent has
voluntarily either (i) engaged in a transaction with ICP or (ii) provided
information to ICP through a contest, registration, or other communication,
which included clear notice to the AOL Member that the information provided
could result in commercial e-mail being sent to that AOL Member by ICP or its
agents. Any commercial e-mail to be sent through or into AOL's products or
services shall also be subject to AOL's then-standard restrictions on
distribution of bulk e-mail (e.g., related to the time and manner in which such
e-mail can be distributed through or into the AOL product or service in
question).
(b) ICP shall ensure that its collection, use and disclosure of information
obtained from AOL Members under this Agreement ("Member Information") complies
with (i) all applicable laws and regulations and (ii) AOL's standard privacy
policies, available on the AOL Service at the keyword term "Privacy" (or, in the
case of the ICP Internet Site, ICP's standard privacy policies so long as such
policies are prominently published on the site and provide adequate notice,
disclosure and choice to users regarding ICP's collection, use and disclosure of
user information). ICP will not disclose Member Information collected hereunder
to any third party in a manner that identifies AOL members as end users of an
AOL product or service or use Member Information collected under this Agreement
to market another Interactive Service.
Email NEWSLETTERS. Any email newsletters sent to AOL Members by ICP or its
agents shall (i) be subject to AOL's policies on use of the email functionality,
including but not limited to AOL's policy on unsolicited bulk email, (ii) be
sent only to AOL Members requesting to receive such newsletters, (iii) not
contain Content which violates AOL's Terms of Service, and (iv) not contain any
advertisements, marketing or promotion for any other Interactive Service.
Email SOLICITATIONS. To the extent ICP is otherwise permitted to send
communications to AOL Members (in accordance with the other requirements
contained herein): (i) any solicitations in such communications to purchase
products or services shall expressly promote the ICP Internet Site available
through the AOL Network (including, without limitation, by stating the
applicable AOL Keyword) as the principal means through which to purchase any
such products or services; (ii) any direct links to specific offers within such
communications shall link to the ICP Internet Site; (iii) any sales arising from
such communication shall be subject to any revenue sharing provisions that may
be contained herein; and (iv) ICP shall limit the subject matter of such
communications to those categories of products, services and/or content that are
specifically contemplated by this Agreement.
VI. TREATMENT OF CLAIMS
LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES
(EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES),
ARISING FROM BREACH OF THIS AGREEMENT, THE USE OF OR INABILITY TO USE THE AOL
NETWORK OR ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO,
LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS (COLLECTIVELY,
"DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY SHALL REMAIN LIABLE TO THE OTHER
PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE
SUBJECT TO INDEMNIFICATION BELOW. EXCEPT AS PROVIDED BELOW IN THE "INDEMNITY"
SECTION, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR MORE THAN THE
AGGREGATE AMOUNTS PAYABLE HEREUNDER IN THE YEAR IN WHICH THE EVENT GIVING RISE
TO SUCH LIABILITY OCCURRED; PROVIDED THAT EACH PARTY SHALL REMAIN LIABLE FOR
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THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY UNDER
THE PROVISIONS OF THIS AGREEMENT.
NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK, OR
ANY AOL PUBLISHING TOOLS, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE, WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY
OF AOL NETWORK OR THE ICP INTERNET SITE.
INDEMNITY. Either Party will defend, indemnify, save and hold harmless the other
Party and the officers, directors, agents, affiliates, distributors, franchisees
and employees of the other Party from any and all third party claims, demands,
liabilities, costs or expenses, including reasonable attorneys' fees
("Liabilities"), resulting from the indemnifying Party's material breach of any
duty, representation, or warranty of this Agreement.
If a Party entitled to indemnification hereunder (the "Indemnified Party")
becomes aware of any matter it believes is indemnifiable hereunder involving any
claim, action, suit, investigation, arbitration or other proceeding against the
Indemnified Party by any third party (each an "Action"), the Indemnified Party
shall give the other Party (the "Indemnifying Party") prompt written notice of
such Action. Such notice shall (i) provide the basis on which indemnification is
being asserted and (ii) be accompanied by copies of all relevant pleadings,
demands, and other papers related to the Action and in the possession of the
Indemnified Party. The Indemnifying party shall have a period of ten (10) days
after delivery of such notice to respond. If the Indemnifying Party elects to
defend the Action or does into respond within the requisite ten (10) day period,
the Indemnifying Party shall be obligated to defend the Action, at its own
expense, and by counsel reasonably satisfactory to the Indemnified Party. The
Indemnified Party shall cooperate, at the expense of the Indemnifying Party,
with the Indemnifying Party and its counsel in the defense and the Indemnified
Party shall have the right to participate fully, at its own expense, in the
defense of such Action. If the Indemnifying Party responds within the required
ten (10) day period and elects not to defend such Action, the Indemnified Party
shall be free, without prejudice to any of the Indemnified Party's rights
hereunder, to compromise or defend (and control the defense of) such Action. In
such case, the Indemnifying Party shall cooperate, at its own expense, with the
Indemnified Party and its counsel in the defense against such Action and the
Indemnifying Party shall have the right to participate fully, at its own
expense, in the defense of such Action. Any compromise or settlement of an
Action shall require the prior written consent of both Parties hereunder, such
consent not to be unreasonably withheld or delayed.
ACKNOWLEDGMENT. AOL AND ICP EACH ACKNOWLEDGES THAT THE PROVISIONS OF THIS
AGREEMENT WERE NEGOTIATED TO REFLECT AN INFORMED, VOLUNTARY ALLOCATION BETWEEN
THEM OF ALL RISKS (BOTH KNOWN AND UNKNOWN) ASSOCIATED WITH THE TRANSACTIONS
CONTEMPLATED HEREUNDER. THE LIMITATIONS AND DISCLAIMERS RELATED TO WARRANTIES
AND LIABILITY CONTAINED IN THIS AGREEMENT ARE INTENDED TO LIMIT THE
CIRCUMSTANCES AND EXTENT OF LIABILITY. THE PROVISIONS OF THIS SECTION VI SHALL
BE ENFORCEABLE INDEPENDENT OF AND SEVERABLE FROM ANY OTHER ENFORCEABLE OR
UNENFORCEABLE PROVISION OF THIS AGREEMENT.
VII. ARBITRATION
(a) The Parties shall act in good faith and use commercially reasonable efforts
to promptly resolve any claim, dispute, claim, controversy or disagreement (each
a "Dispute") between the Parties or any of their respective subsidiaries,
affiliates, successors and assigns under or related to this Agreement or any
document executed pursuant to this Agreement or any of the transactions
contemplated hereby. If the Parties cannot resolve the Dispute within such
timeframe, the Dispute shall be submitted to the Management Committee for
resolution. For ten (10) days after the Dispute was submitted to the Management
Committee, the Management Committee shall have the exclusive
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<PAGE> 17
right to resolve such Dispute; provided further that the Management Committee
shall have the final and exclusive right to resolve Disputes arising from any
provision of this Agreement which expressly or implicitly provides for the
Parties to reach mutual agreement as to certain terms. If the Management
Committee is unable to amicably resolve the Dispute during the ten (10) day
period, then the Management Committee will consider in good faith the
possibility of retaining a third party mediator to facilitate resolution of the
Dispute. In the event the Management Committee elects not to retain a mediator,
the Dispute will be subject to the resolution mechanisms described below.
"Management Committee" shall mean a committee made up of a senior executive from
each of the Parties for the purpose of resolving Disputes under this Section and
generally overseeing the relationship between the Parties contemplated by this
Agreement. Neither Party shall seek, nor shall be entitled to seek, binding
outside resolution of the Dispute unless and until the Parties have been unable
to amicably resolve the dispute as set forth in this paragraph (a) and then,
only in compliance with the procedures set forth in this Section.
(b) Except for Disputes relating to issues of (i) proprietary rights, including
but not limited to intellectual property and confidentiality, and (ii) any
provision of this Agreement which expressly or implicitly provides for the
Parties to reach mutual agreement as to certain terms (which shall be resolved
by the Parties solely and exclusively through amicable resolution as set forth
in paragraph (a), any Dispute not resolved by amicable resolution as set forth
in paragraph (a) shall be governed exclusively and finally by arbitration. Such
arbitration shall be conducted by the American Arbitration Association ("AAA")
in Washington, D.C. and shall be initiated and conducted in accordance with the
Commercial Arbitration Rules ("Commercial Rules") of the AAA, including the AAA
Supplementary Procedures for Large Complex Commercial Disputes ("Complex
Procedures"), as such rules shall be in effect on the date of delivery of a
demand for arbitration ("Demand"), except to the extent that such rules are
inconsistent with the provisions set forth herein. Notwithstanding the
foregoing, the Parties may agree in good faith that the Complex Procedures shall
not apply in order to promote the efficient arbitration of Disputes where the
nature of the Dispute, including without limitation the amount in controversy,
does not justify the application of such procedures.
(c) The arbitration panel shall consist of three arbitrators. Each Party shall
name an arbitrator within ten (10) days after the delivery of the Demand. The
two arbitrators named by the Parties may have prior relationships with the
naming Party, which in a judicial setting would be considered a conflict of
interest. The third arbitrator, selected by the first two, shall be a neutral
participant, with no prior working relationship with either Party. If the two
arbitrators are unable to select a third arbitrator within ten (10) days, a
third neutral arbitrators of any of the AAA Large and Complex Resolution
Programs. If a vacancy in the arbitration panel occurs after the hearings have
commenced, the remaining arbitrator or arbitrators may not continue with the
hearing and determination of the controversy, unless the Parties agree
otherwise.
(d) The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, and not state law, shall
govern the arbitrability of all Disputes. The arbitrators shall allow such
discovery as is appropriate to the purposes of arbitration in accomplishing a
fair, speedy and cost-effective resolution of the Disputes. The arbitrators
shall reference the Federal Rules of Civil Procedures then in effect in setting
the scope and timing of discovery. The Federal Rules of Evidence shall apply in
toto. The arbitrators may enter a default decision against any Party who fails
to participate in the arbitration proceedings.
(e) The arbitrators shall have the authority to award compensatory damages only.
Any award by the arbitrators shall be accompanied by a written opinion setting
forth the findings of fact and conclusions of law relied upon in reaching the
decision. The award rendered by the arbitrators shall be final, binding and
non-appealable, and judgment upon such award may be entered by any court of
competent jurisdiction. The Parties agree that the existence, conduct and
content of any arbitration shall be kept confidential and no Party shall
disclose to any person any information about such arbitration, except as may be
required by law or by any governmental authority or for financial reporting
purposes in each Party's financial statements.
(f) Each Party shall pay the fees of its own attorneys, expenses of witnesses
and all other expenses and costs in connection with the presentation of such
Party's case (collectively, "Attorneys' Fees"). The remaining costs of the
arbitration, including without limitation, fees of the arbitrators, costs of
records or transcripts and
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administrative fees (collective, "Arbitration Costs") shall be born equally by
the parties. Notwithstanding the foregoing, the arbitrators may modify the
allocation of Arbitration Costs and award Attorneys' Fees in those cases where
fairness dictates a different allocation of Arbitration Costs between the
Parties and an award of Attorneys' Fees to the prevailing Party as determined by
the arbitrators.
VIII. MISCELLANEOUS
AUDITING RIGHTS. Each Party shall maintain complete, clear and accurate records
of all expenses, revenues, fees, transactions and related documentation
(including agreements) in connection with the performance of this Agreement
("Records"). All such Records shall be maintained for a minimum of five (5)
years following termination of this Agreement. For the sole purpose of ensuring
compliance with this Agreement, each Party shall have the right, at its expense,
to direct an independent certified public accounting firm subject to strict
confidentiality restrictions to conduct a reasonable and necessary copying and
inspection of portions of the Records of the other Party which are directly
related to amounts payable to the party requesting the audit pursuant to this
Agreement. Any such audit may be conducted after twenty (20) business days prior
written notice, subject to the following. Such audits shall not be made more
frequently than once every twelve months. No such audit of AOL shall occur
during the period beginning on June 1 and ending October 1. In lieu of providing
access to its Records as described above, a Party shall be entitled to provide
the other Party with a report from an independent certified public accounting
firm confirming the information to be derived from such Records.
EXCUSE. Neither Party shall be liable for, or be considered in breach of or
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence.
INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or ICP of the other
Party. Neither Party shall have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement shall not be interpreted or
construed to create an association, agency, joint venture or partnership between
the Parties or to impose any liability attributable to such a relationship upon
either Party.
NOTICE. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be deemed
to have been delivered and given for all purposes (i) on the delivery date if
delivered by electronic mail on the AOL Network (to screenname "AOLNotice" in
the case of AOL) or by confirmed facsimile; (ii) on the delivery date if
delivered personally to the Party to whom the same is directed; (iii) one
business day after deposit with a commercial overnight carrier, with written
verification of receipt; or (iv) five business days after the mailing date,
whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available. In the case of AOL, such notice will
be provided to both the Senior Vice President for Business Affairs (fax no.
703-265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at the
address of AOL set forth in the first paragraph of this Agreement. In the case
of ICP, except as otherwise specified herein, the notice address shall be the
address for ICP set forth in the first paragraph of this Agreement, with the
other relevant notice information, including the recipient for notice and, as
applicable, such recipient's fax number or AOL e-mail address, to be as
reasonably identified by AOL.
NO WAIVER. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to exercise
any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same shall be
and remain in full force and effect.
RETURN OF INFORMATION. Upon the expiration or termination of this Agreement,
each Party shall, upon the written request of the other Party, return or destroy
(at the option of the Party receiving the request) all confidential information,
documents, manuals and other materials specified by the other Party.
SURVIVAL. Sections IV, V, VI, VII and VIII of this Exhibit C shall survive the
completion, expiration,
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termination or cancellation of this Agreement. In addition, all payment terms of
this Agreement and any provision which, by its nature, must survive the
completion, expiration, termination or cancellation of this Agreement, shall
survive the completion, expiration, termination or cancellation of this
Agreement.
ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and supersedes
any and all prior agreements of the Parties with respect to the transactions set
forth herein. Neither Party shall be bound by, and each Party specifically
objects to, any term, condition or other provision which is different from or in
addition to the provisions of this Agreement (whether or not it would materially
alter this Agreement) and which is proffered by the other Party in any
correspondence or other document, unless the Party to be bound thereby
specifically agrees to such provision in writing.
AMENDMENT. No change, amendment or modification of any provision of this
Agreement shall be valid unless set forth in a written instrument signed by the
Party subject to enforcement of such amendment.
FURTHER ASSURANCES. Each Party shall take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by the other Party for the implementation or continuing
performance of this Agreement.
ASSIGNMENT. ICP shall not assign this Agreement or any right, interest or
benefit under this Agreement without the prior written consent of AOL.
Assumption of this Agreement by any successor to ICP (including, without
limitation, by way of merger or consolidation) shall be subject to AOL's prior
written approval. Subject to the foregoing, this Agreement shall be fully
binding upon, inure to the benefit of and be enforceable by the Parties hereto
and their respective successors and assigns.
CONSTRUCTION; SEVERABILITY. In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be construed or if any
such provision is held invalid by a court with jurisdiction over the Parties to
this Agreement, (i) such provision shall be deemed to be restated to reflect as
nearly as possible the original intentions of the Parties in accordance with
applicable law, and (ii) the remaining terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect.
REMEDIES. Except where otherwise specified, the rights and remedies granted to a
Party under this Agreement are cumulative and in addition to, and not in lieu
of, any other rights or remedies which the Party may possess at law or in
equity.
APPLICABLE LAW; JURISDICTION. This Agreement shall be interpreted, construed and
enforced in all respects in accordance with the laws of the Commonwealth of
Virginia except for its conflicts of laws principles. AOL and ICP irrevocably
consent to the exclusive jurisdiction of the courts of the Commonwealth of
Virginia and the federal courts situated in the Commonwealth of Virginia, in
connection with any action brought by ICP to enforce the provisions of this
Agreement, to recover damages or other relief for breach or default under this
Agreement, or otherwise arising under or by reason of this Agreement. AOL and
ICP irrevocably consent to the exclusive jurisdiction of the courts of the State
of California and the federal courts situated in the State of California, in
connection with any action brought by AOL to enforce the provisions of this
Agreement, to recover damages or other relief for breach or default under this
Agreement, or otherwise arising under or by reason of this Agreement.
EXPORT CONTROLS. Both parties shall adhere to all applicable laws, regulations
and rules relating to the export of technical data and shall not export or
re-export any technical data, any products received from the other Party or the
direct product of such technical data to any proscribed country listed in such
applicable laws, regulations and rules unless properly authorized.
HEADINGS. The captions and headings used in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
COUNTERPARTS. This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same document.
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EXHIBIT D
FORMAT FOR ICP'S PRESENCE ON THE AOL NETWORK
- - Any ICP trademark or logo
- - Any headline or picture from ICP content
- - Any teaser, icon, link to ICP Internet Site or Welcome Mat
- - Any other Content which originates from, described or promotes ICP or
ICP's Content
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EXHIBIT E
CERTIFICATION OF COMPLIANCE WITH COMMITMENTS
REGARDING PROMOTIONS
Pursuant to Section 3.2 of the Anchor Tenant Agreement between Launch Media,
Inc. ("ICP") and America Online, Inc. ("AOL"), dated as of ___________________,
1999 (the "Agreement"), the following report is delivered to AOL for the period
beginning ___________________ and ending ___________________ the ("Period"):
PROMOTIONAL COMMITMENTS
ICP hereby certifies to AOL that ICP completed the following promotional
commitments during the period:
<TABLE>
<CAPTION>
TYPE OF PROMOTION DATE(S) OF PROMOTION DURATION/CIRCULATION RELEVANT CONTRACT
OF PROMOTION SECTION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.
- -------------------------------------------------------------------------------------------------
2.
- -------------------------------------------------------------------------------------------------
3.
</TABLE>
IN WITNESS WHEREOF, this Certificate has been executed this ____ day of _____,
199__.
___________________________________
By: _______________________________
Print Name: _______________________
Title: ____________________________
Date: _____________________________
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EXHIBIT F
OPERATIONS
1. ICP Site Infrastructure. ICP will be responsible for all communications,
hosting and connectivity costs and expenses associated with the ICP
Site. ICP will provide all hardware, software, telecommunications lines
and other infrastructure necessary to meet traffic demands on the ICP
Site from the AOL Network. ICP will design and implement the network
between the AOL Service and ICP Site such that (i) no single component
failure will have a material adverse impact on AOL Members seeking to
reach the ICP Site from the AOL Network and (ii) no single line will run
at more than 70% average utilization for a 5-minute peak in a daily
period. In this regard, ICP will provide AOL, upon request, with a
detailed network diagram regarding the network infrastructure supporting
the ICP Site. In the event that ICP elects to create a custom version of
the ICP Site in order to comply with the terms of this Agreement, ICP
will bear responsibility for all aspects of the implementation
management and cost of such mirrored site.
2. Optimization; Speed. ICP will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the ICP Site are
optimized for the client software then in use by AOL Members; and (b)
the ICP Site is designed and populated in a manner that minimizes delays
when AOL Members attempt to access such site. At a minimum, ICP will
ensure that the ICP Site's data transfers initiate within fewer than
fifteen (15) seconds on average. Prior to commercial launch of any
material promotions described herein, ICP will permit AOL to conduct
performance and load testing of the ICP Site (in person or through
remote communications), with such commercial launch not to commence
until such time as AOL is reasonably satisfied with the results of such
testing.
3. Technical Problems. ICP agrees to use commercially reasonable efforts to
address material technical problems (over which ICP exercises control)
affecting use by AOL Members of the ICP Site (a "ICP Technical Problem")
promptly following notice thereof. In the event that ICP is unable to
promptly resolve a ICP Technical Problem following notice thereof from
AOL (including, without limitation, infrastructure deficiencies
producing user delays), AOL will have the right to regulate the
promotions if provides to ICP hereunder until such time as ICP corrects
the ICP Technical Problem at issue.
4. Monitoring. ICP will ensure that the performance and availability of the
ICP Site is monitored on a continuous basis. ICP will provide AOL with
contact information (including e-mail, phone, pager and fax information,
as applicable, for both during and after business hours) for ICP's
principal business and technical representatives, for use in cases when
issues or problems arise with respect to the ICP Site.
5. Security. ICP will utilize Internet standard encryption technologies,
(e.g., Secure Socket Layer -- SSL) to provide a secure environment for
conducting transactions and/or transferring private member information
(e.g. credit card numbers, banking/financial information, and member
address information) to and from the ICP Site. ICP will facilitate
periodic review of the ICP Site by AOL in order to evaluate the security
of such site. ICP will promptly remedy any security or breaches of
security as may be identified by AOL's Operations Security Team.
6. Technical Performance.
i. ICP will design the ICP Site to support the Windows version of the
Microsoft Internet Explorer, 3.0 and 4.0 browser, the Macintosh version
of the Microsoft Internet Explorer 3.0, and make commercially reasonable
efforts to support all other AOL browsers listed at
"http://webmaster.info.aol.com/BrowTable.html."
ii. To the extent ICP creates customized pages on the ICP Site for AOL
Members, ICP will configure the server from which it serves the site to
examine the HTTP User-Agent field in order to identify the "AOL
Member-Agents" listed at "http://webmaster.info.aol.com/Brow2Text.html."
iii. ICP will periodically review the technical information made
available by AOL at "http://webmaster.info.aol.com/CacheText.html."
iv. ICP will design in its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at
"http://ds.internic.net/rfc/rfc1945.text") and to adhere to AOL's
parameters for refreshing cached information listed at
"http://webmaster.info.aol.com/CacheText.html."
v. Prior to releasing material, new functionality or features through
the ICP Site ("New Functionality"), ICP will use commercially reasonable
efforts to either (i) test the New Functionality to confirm its
compatibility with AOL Service client software or (ii) provide AOL with
written notice of the New Functionality so that AOL can perform tests of
the New Functionality to confirm its compatibility with the AOL Service
client software.
7. AOL Internet Services ICP Support. AOL will provide ICP with access to
the standard online resources, standards and guidelines documentation,
technical phone support, monitoring and after-hours assistance that AOL
makes generally available to similarly situated web-based ICPs. AOL
support will not, in any case, be involved with content creation on
behalf of ICP or support for any technologies, databases, software or
other applications which are not
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supported by AOL or are related to any ICP area other than the ICP Site.
Support to be provided by AOL is contingent on ICP providing to AOL demo
account information (where applicable), a detailed description of the
ICP Site's software, hardware and network architecture and access to the
ICP site for purposes of such performance and load testing as AOL elects
to conduct.
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<PAGE> 1
EXHIBIT 10.10
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[AMERICAN INDUSTRIAL REAL ESTATE LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
August 1, 1997, is made by and between Pennsylvania Group, Ltd. ("LESSOR") and
The Welk Group, Inc. ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 2700 Pennsylvania Avenue, located in the
City of Santa Monica, County of Los Angeles, State of California, with zip code
90404, as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING" is
that certain building containing the Premises and generally described as
(described briefly the nature of the Building): one- and two-story red brick
building containing approximately 53,977 square feet. In addition to Lessee's
rights to use and occupy the Premises as hereinafter specified, Lessee shall
have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "INDUSTRIAL CENTER." (Also
see Paragraph 2.)
1.2(b) PARKING: seventy-one (71) unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and _______________ reserved vehicle parking
spaces ("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: Ten years and ________ months ("ORIGINAL TERM") commencing
thirty days after execution hereof ("COMMENCEMENT DATE") and ending ten years
later ("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: upon execution hereof ("EARLY POSSESSION DATE").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $32,560 per month ("BASE RENT"), payable on the first
day of each month commencing See Addendum 1. (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 2, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $32,560 as Base Rent for the period
first month of the Term.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: fifty-five
percent (55%) ("LESSEE'S SHARE") as determined by
[ ] prorata square footage of the Premises as compared to the total square
footage of the Building or
[ ] other criteria as described in Addendum ___.
1.7 SECURITY DEPOSIT: $ None ("SECURITY DEPOSIT"). (Also see Paragraph
5.) and Addendum 3.
1.8 PERMITTED USE: General office use and other uses permitted by
applicable zoning laws, provided that no use shall interfere with the use of
other portions of the Building by Los Angeles Times or other Tenants including
by causing excessive parking or traffic ("PERMITTED USE"). (Also see Paragraph
6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph
8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] William D. Feldman Associates represents Lessor exclusively ("LESSOR'S
BROKER");
[ ] None represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] _____________________________ represents both Lessor and Lessee ("DUAL
AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written Agreement between Lessor and said Broker(s), the sum of
$_______) for brokerage services rendered by said Broker(s) in connection with
this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by __________________________________________________________________
("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 11 and Exhibits ___ through _____, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor,the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice form Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises, (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
<PAGE> 2
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said
hereunder. Said parking spaces shall be used for parking by vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as described in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers contractors or invitees to be loaded, unloaded, or parked in
areas other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and interior utility raceways within the
Premises that are provided and designated by the Lessor from time to time for
the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as may
exist, from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the lease hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not
be responsible to Lessee for the non-compliance with said rules and regulations
by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial Center, or
any portion thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation to
pay Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall
not, except as otherwise provided herein, be obligated to pay rent or perform
any other obligation of Lessee under the terms of this Lease until Lessor
delivers possession of the Premises to Lessee. If possession of the Premises is
not delivered to Lessee within sixty (60) days after the Commencement Date,
Lessee may, at its option, by notice in writing to Lessor within ten (10) days
[illegible] sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period. Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee
does not terminate this Lease, as aforesaid, the period free of the obligation
to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run
from the date of delivery of possession and continue for a period equal to the
period during which the Lessee would have otherwise enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions of
Lessee.
4. RENT
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day
on which it is due under the terms of this Lease. Base Rent and all other rent
and charges for any period during the term hereof which is for less than one
full month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at its
address stated herein or to such other persons or at such other addresses as
Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat,
clean, good order and condition, of the following:
(aa) THE COMMON AREAS, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management and
security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair
of Common Areas.
(v) Real Property Taxes (as defined in Paragraph
10.2) to be paid by Lessor for the Building and the Common Areas under
Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance
policies maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(viii) Any other services to be provided by Lessor
that are stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating Expenses and Real Property Taxes that are
not specifically attributable to the Building or to any other building or to
the operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Industrial Center already has the same,
Lessor already provides the services, or Lessor has agreed elsewhere in this
Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall
be payable by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor from time to time of Lessee's
Share of annual Common Area Operating Expenses and the same shall be payable
monthly or quarterly, as Lessor shall designate, during each 12-month period of
the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall
deliver to Lessee within sixty (60) days after the expiration of each calendar
year a reasonably detailed statement showing Lessee's Share of the actual
Common Area Operating Expenses incurred during the preceding year. If Lessee's
payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's
Share as indicated on said statement, Lessee shall be credited the amount of
such over-
<PAGE> 3
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose, Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the Improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor objects to withhold such consent, Lessor shall
within five (5) business days after such request give a written notification of
same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises, (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter delined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable [ILLEGIBLE] (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a
permit from, or with respect to which a report, notice, registration or business
plan is required to be filed with, any governmental authority, and (iii) the
presence in, on or about the Premises of a Hazardous Substance with respect to
which any Applicable Laws require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Lessee may, without Lessor's prior consent, but upon notice to Lessor and in
compliance with all Applicable Requirements, use any ordinary and customary
materials reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does not expose
the Premises or neighboring properties to any meaningful risk of contamination
or damage or expose Lessor to any liability therefor. In addition, Lessor may
(but without any obligation to do so) condition its consent to any Reportable
Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such
additional assurances as Lessor, in its reasonable discretion, deems necessary
to protect itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier information of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding [ILLEGIBLE] or received
from, any governmental authority or private party concerning the presence,
spill, release, discharge of, or exposure to, such Hazardous Substance including
but not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within [ILLEGIBLE] days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means or repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction), and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke
<PAGE> 4
detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving the
Common Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2, Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior walls
nor shall Lessor be obligated to maintain, repair or replace windows, doors or
plate glass of the Premises. Lessee expressly waives the benefit of any statute
now or hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS: CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is
used in this Lease to refer to all air lines, power panels, electrical
dissolution, [illigible], fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and [illigible] or about the Premises. The term "TRADE FIXTURES" shall
mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, above or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefore, Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. INSURANCE INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of premiums for the insurance policies
maintained by Lessor under this Paragraph 8 shall be a Common Area Operating
Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing
prior to, or extending beyond, the terms of this Lease shall be prorated to
coincide with the corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $3,000,000 per occurrence with
an "Additional Insured Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood unless
required by a Lender), including coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Building required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in
<PAGE> 5
this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the Commencement
Date, certified copies of, or certificates evidencing the existence and amounts
of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall
be cancelable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Paragraph 8. The
effect of such releases and waivers of the right to recover damages shall not
be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage insurance waive any
right to subrogation that such companies may have against Lessor or Lessee, as
the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's or Lessor's agent's willful misconduct,
gross negligence and/or breach of express warranties, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss
of permits, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the occupancy of the Premises
by Lessee, the conduct of Lessee's business, any act, omission or neglect of
Lessee, its agents, contractors, employees or invitees, and out of any Default
or Breach by Lessee in the performance in a timely manner of any obligation on
Lessee's part to be performed under this Lease. The foregoing shall include, but
not be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims
[illegible] against Lessor) litigated and/or reduced to judgment. In case any
action or proceeding be brought against Lessor by reason of any of the foregoing
matters, Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate
with Lessee in such defense. Lessor need not have first paid any such claim in
order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor or Lessor's agent's
willful misconduct, gross negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
of the then Replacement Cost (as defined in paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
or more of the then Replacement Cost of the Premises (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures) immediately prior to
such damage or destruction. In addition, damage or destruction to the Building,
other than Lessee Owned Alterations and Utility Installations and Trade
Fixtures of any lessees of the Building, the cost of which damage or
destruction is fifty percent (50%) or more of the then Replacement Cost
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures of any lessees of the Building) of the Building shall, at the option
of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or
coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
Improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within
such ten (10) day period, and if Lessor does not so elect to restore and
repair, then this Lease shall terminate sixty (60) days following the
occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall
in no event have any right to reimbursement from Lessor for any funds
contributed by Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3
rather than paragraph 9.2 notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available
for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the repair of such damage totally at Lessee's
expense and without reimbursement from Lessor. Lessee shall provide Lessor with
the required funds or satisfactory assurance thereof within thirty (30) days
following such commitment from Lessee. In such event this Lease shall continue
in full force and effect, and Lessor shall proceed to make such repairs as soon
as reasonably possible after the required funds are available. If Lessee does
not give such notice and provide the funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of occurrence
of such damage. Provided, however, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by (a) exercising such option, and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is ten (10)
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires.
If Lessee duly exercises such option during such period and provides Lessor
with funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth in the
first sentence of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges,
if any, as aforesaid, all other obligations of Lessee hereunder shall be
performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such damage, destruction, repair, remediation
or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to Lessor
and such Lenders and such repair or restoration is not commenced within thirty
(30) days after receipt of such notice, this Lease shall terminate as of the
date specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after the receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
<PAGE> 6
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise
provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term, "REAL PROPERTY
TAXES" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Industrial Center by any authority having the
direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage, or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof, Lessor's
right to rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in Applicable Law taking effect, during the term of this
Lease, including but not limited to a change in the ownership of the Industrial
Center or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
<PAGE> 7
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease. Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this ?????? ??????? any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided, (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph 13.1
(b), (c) or (d). In such case, the applicable grace period under the unlawful
detainer statute shall run concurrently after the one such statutory notice, and
the failure of Lessee to cure the Default within the greater of the two (2) such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and recover the rent as it becomes due, provided Lessee has the right to sublet
or assign, subject only to reasonable limitations. Lessor and Lessee agree that
the limitations on assignment and subletting in this Lease are reasonable. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this Lease,
shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
<PAGE> 8
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnifying provisions of the Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
Inducement or consideration for Lessee's entering into this lease all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a breach (as defined in Paragraph ??) of this Lease by Lessee, any such
inducement Provision shall automatically be deemed ?????? from this Lease and of
no other form of ??????????, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessee under such an inducement Provision
shall be immediately due and payable by Lessee to Lessor, and recoverable by
Lessor, as additional rent due under this Lease, notwithstanding any subsequent
cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of
the Breach which initiated the operation of this Paragraph 13.3 shall not be
deemed waiver by Lessor of the provisions of this Paragraph 13.3 unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges and late charges which may be imposed upon lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then without any requirement for notice to Lessee. Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, not
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whenever or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5. a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor.
and by any lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, than Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are hereon called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may at Lessee's opinion, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing this Lease shall remain in full force and effect
as to the portion of the Premises remaining except that the Base rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee or as severance damages; provided, however, that Lessee shall be entitled to
any compensation separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, over and above Lessee's Share of the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined
in Paragraph 39.1) granted under this Lease or any Option subsequently granted,
or (b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
Interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of the Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with
the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation of charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "Responding Party") shall within
ten (10) days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement in
writing in a form similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT, if Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or Interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due
at the prime rate charged by the largest state chartered bank in the state in
which the Premises are located plus four percent (4%) per annum, but not
exceeding the maximum rate allowed by law, in addition to the potential late
charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that it
has made, and is relying solely upon, its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this
Lease and as to the nature, quality and character of the Premises. Brokers have
no responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party
beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
II sent by regular mail, the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day
<PAGE> 9
delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone or facsimile confirmation of receipt
of the transmission thereof, provided a copy is also delivered via delivery or
mail. If notice is received on a Saturday or a Sunday or a legal holiday, it
shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time of
accepting rent, the acceptance of rent by Lessor shall not be a waiver of any
Default or Breach by Lessee of any provision hereof. Any payment given Lessor
by Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor
at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
country in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act of omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or (iii)
be bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT")
from the Lender that Lessee's possession and this Lease, including any options
to extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon, shall
be entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorney's fees
reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and
expenses incurred in preparation and service of patterns of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
Broker(s) shall be intended third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time place
on or about the Premises or Building any ordinary "For Sale" signs and Lessor
may at any time during the last one hundred eighty (180) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions of
Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Unless otherwise expressly agreed herein, Lessor reserves all
rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' and other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including but
not limited to consents to an assignment a subletting or the presence or use of
a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference in the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF A GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or refuses,
upon reasonable request by Lessor to give; (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the Guarantor
(and of the party signing on Guarantor's behalf) to obligate such Guarantor on
said guaranty, and resolution of its board of directors authorizing the making
of such guaranty, together with a certificate of incumbency showing the
signatures of the persons authorized to sign on its behalf, (b) current
financial statements of Guarantor as may from time to time be requested by
Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty
is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall have
quiet possession of the Premises for the entire term hereof subject to all of
the provisions of this Lease.
<PAGE> 10
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any Lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as part of an assignment of this Lease or separately or apart
therefrom, and no Option may be separated from this Lease in any manner, by
reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30 days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is corporation, trust, or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of this modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE> 11
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES: THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Beverly Hills Executed at: Santa Monica, CA
----------------------- ---------------------------
on: 9/8/98 on: 9/15/97
-------------------------------- ------------------------------------
By LESSOR: By LESSEE:
PENNSYLVANIA GROUP, LTD. THE WELK GROUP, INC.
- ------------------------------------ ----------------------------------------
/s/ JOHN C. BEST
- ------------------------------------ ----------------------------------------
By: John C. Best, General Manager By: /s/ MARC L. LUZZETTO
-------------------------------- ------------------------------------
Name Printed: Name Printed: Mark L. Luzetto
----------------------- --------------------------
Title: Title: President/COO
----------------------------- ---------------------------------
By: By:
-------------------------------- ------------------------------------
Name Printed: Name Printed:
----------------------- --------------------------
Title: Title:
----------------------------- ---------------------------------
Address: Address:
--------------------------- -------------------------------
- ------------------------------------ ----------------------------------------
Telephone: ( ) Telephone: ( )
-------------------- -----------------------
Facsimile: ( ) Facsimile: ( )
-------------------- -----------------------
BROKER: BROKER:
Executed at: Executed at:
----------------------- ---------------------------
on: on:
-------------------------------- ------------------------------------
By: By:
-------------------------------- ------------------------------------
Name Printed: Name Printed:
----------------------- --------------------------
Title: Title:
----------------------------- ---------------------------------
Address: Address:
--------------------------- -------------------------------
- ------------------------------------ ----------------------------------------
Telephone: ( ) Telephone: ( )
-------------------- -----------------------
Facsimile: ( ) Facsimile: ( )
-------------------- -----------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777.
<PAGE> 12
ADDENDUM
TO
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE
BETWEEN
PENNSYLVANIA GROUP, LTD.
AND
THE WELK GROUP, INC.
1. Payment of rent shall commence on the earlier of the Lessee's substantial
occupancy of the Premises or January 12, 1998, provided that payment of
rent (but not operating expenses) of $1.10 per square foot of the Premises
not being used or improved by Lessee, but not more than $23,100 (21,000
square feet times $1.10), shall not begin until three months after rent
payments begin.
2. Each thirty (30) months during the term of this Lease, the Base Rent shall
be increased in proportion to any increase in the Consumer Price Index
published by the Bureau of Labor Statistics of the U.S. Department of Labor
for Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach-
Anaheim, California, All Items (the "CPI"). The increase shall be
calculated as follows: the Base Rent for the first month of the term of
this Lease shall be multiplied by a fraction, the numerator of which shall
be the CPI for the month immediately preceding the effective date of the
rent adjustment, and the denominator of which shall be the CPI for the
month immediately preceding the first month of the Lease Term. The sum so
calculated shall constitute the new monthly Base Rent, but in no event
shall the increase be less than an annual compounded rate of two percent
(2%) nor more than an annual compounded rate of four percent (4%). In the
event the publication of the CPI shall be discontinued or transferred, then
the index most nearly the same as the CPI shall be used to make such
calculation.
3. Lessee shall initially make no security deposit. If Lessee shall fail to
pay the rent on or before the due date more than one time in any 12-month
period, Lessee shall deposit with Lessor an amount equal to the
then-current monthly rent, to be held by Lessor in accordance with
paragraph 5 of the Lease. Lessee warrants that the Net Worth of Lessee is
not less than $25,000,000. Lessee will provide to Lessor upon request
certified financial statements or a certificate of a bank or independent
certified public accountant of the Net Worth of Lessee. If the Net Worth of
Lessee shown by any such statement or certificate is less than $20,000,000,
Lessee shall deposit with Lessor an amount equal to six times the
then-current monthly rent to be held by Lessor in accordance with paragraph
5 of the
-1-
<PAGE> 13
Lease, provided that during the last half of the initial term or any option
term of the Lease, the deposit shall be three times the rent.
4. Lessor hereby grants to Lessee two (2) consecutive options to extend the
term of this Lease, each for a period of five (5) years, upon the following
terms and conditions:
(a) Lessee shall give written notice of the exercise of the option no
earlier than nine (9) months and no later than six (6) months prior to
the time that the extended period would commence.
(b) The provisions of paragraph 39 of the Lease are conditions of the
option.
(c) All of the terms and conditions of the Lease shall apply, except where
specifically modified by the option.
(d) The monthly rent during the first renewal period shall be the initial
Base Rent, increased under paragraph 2 of this Addendum, but without
regard to the maximum and minimum amount in paragraph 2. The monthly
rent during the second renewal period shall be ninety-five percent
(95%) of the fair rental value of the Premises, but not less than the
Base Rent being paid immediately prior to the effective date of the
extension. If the parties are unable to agree on the fair rental
value, Lessee may either (i) terminate the Lease and vacate the
Premises upon the expiration of the Lease Term then in effect, or (ii)
elect to have the fair rental value be determined by a broker/realtor
(the "Appraiser") familiar with the Santa Monica commercial leasing
market. If the parties cannot agree on selection of the Appraiser,
then each party shall name a broker/realtor familiar with the Santa
Monica commercial leasing market, and the two persons so appointed
shall appoint the Appraiser. The decision of the Appraiser shall be
binding upon Lessor and Lessee, and any costs incurred in the process
shall be divided equally between Lessor and Lessee.
5. Lessor hereby grants to Lessee an option to purchase the Building, on the
following terms and conditions:
(a) The provisions of paragraph 39 of the Lease are conditions of the
Option.
(b) The Option may be exercised effective during the period commencing
November 15, 2002 and ending May 15, 2006.
(c) Lessee shall give written notice of the exercise of the Option no less
than 180 days prior to the Effective Date, and be the purchase shall
completed within 60 days after the Effective Date.
-2-
<PAGE> 14
(d) The purchase price shall be determined by applying a 9-1/2% capitalization
rate to the "net cash flow" on the property and multiplying that amount by
the percentage determined under paragraph (e) or (f). "Net cash flow" is
defined as the total net rent (excluding operating expenses) paid by Los
Angeles Times and Lessee, as of the date the Tenant commences paying rent
for the entire Premises, adjusted by the Consumer Price Index. The base
month for the Consumer Price Index adjustment shall be April 1998, and the
date for determining the adjustment shall be the Effective Date of Lessee's
exercise of the Option. The purchase price shall also include the
unamortized portion of the Improvement Allowance (but not the Shell and
Core Allowance) under paragraph 8 below.
(e) If the Effective Date of the exercise of the Option is prior to November
14, 2005, the purchase price shall be 102.5% of the amount determined under
paragraph (d) above. If the exercise date is November 14, 2005 or after,
the purchase price shall be 95% of that amount.
(f) In addition, upon the death of John C. Best, the general partner of Lessor,
during the term of the lease (including any extensions and renewals),
Lessee shall have the right to exercise the Option to purchase the building
for a period of 180 days after the receipt of notice of such death. In that
event, the purchase price shall be 95% of the amount determined under
paragraph (d) above. The amount shall be calculated as of 60 days after
receipt of notice of the death, provided that if the Option is exercised
more than 60 days after receipt of such notice, then the amount shall be
calculated as of the Effective Date of the notice of exercise of the
Option. The purchase shall be completed 60 days after the notice of
exercise of the Option.
(g) If Lessee fails to exercise its option to purchase the Building by the
later of the periods specified in paragraphs 5(e) and 5(f) above, then
Lessee shall have no further right to purchase the Building, and the term
of this lease shall be extended to a date five years after the termination
of Lessee's right to purchase.
(h) If the Option is exercised, the purchase shall be completed through an
escrow with Commerce Escrow, pursuant to that company's usual escrow
instructions, costs to be shared in accordance with local practice. The
only condition to Lessee's obligation to complete the purchase will be
approval of any exceptions to title to the property other than those shown
in the preliminary title report furnished by Lessor to Lessee dated
September 10, 1997.
(i) Lessor will execute a memorandum of the option to purchase which may be
recorded by Lessee.
-3-
<PAGE> 15
6. Paragraph 2.2 of the Lease is revised to provide that Lessee acknowledges
that the Premises have been cleared of improvements and that only the main
electrical and plumbing service are in the Premises. Lessor warrants that
the plumbing and electrical systems, and those air conditioning units
which have not been scheduled to be replaced, shall be delivered in good
operating condition.
7. Lessee shall be responsible for the construction of the shell and core and
all additional improvements, which will be in accordance with the Boto
design plans, which have been approved by Lessor and Lessee, with such
changes as may be approved by Lessor. All work shall be performed in a good
and workman-like manner, conforming with all applicable laws and
regulations, by a licensed contractor selected by Lessee and approved by
Lessor. Upon completion of the improvements, Lessee shall provide Lessor
with "as built" plans for the improvements, and proof of payment for all
labor and materials. Lessee shall be responsible for obtaining all
necessary permits or approvals for such construction, and Lessor will
cooperate in the obtaining of such permits and approvals. Paragraph 7.3 and
7.4 of the Lease shall be applicable to such construction. Lessor will not
disapprove changes unless, in Lessor's judgment, the changes would have a
material detrimental effect on the Building's value.
8. Lessor will provide to Lessee (a) allowance of $350,000 toward the cost of
improvements (the "Shell and Core Allowance") and (b) an additional
allowance of $175,000 (the "Improvement Allowance"). In addition to the
base rent, Lessee will pay an amount which will repay the Improvement
Allowance, including interest at the rate of 9% per annum, over the initial
term of the lease. The Shell and Core Allowance and the Improvement
Allowance may be used only for actual costs of construction of the
improvements, to the Premises, including architectural and engineering
fees. Payment of the allowances shall be made by Lessor upon receipt of
invoices, accompanied by certification by the architect that the invoices
are proper and are for costs of construction of the Premises, and by
releases of liens for all labor and material covered by previous invoices.
If such payment is not made within fifteen (15) days, Lessee may offset the
amount due against the next rent payment due, with interest at nine percent
(9%) per annum.
9. The following language is added to paragraph 6.2 of the Lease:
"Notwithstanding the foregoing, Lessor shall indemnify, defend and hold
harmless Lessee against any and all claims, demands, liabilities, costs and
expenses incurred by Lessee during the term of the lease or to which Lessee
may be exposed during the term of the lease by reason of any environmental
problem which occurred prior to the date on which Lessee is given
possession of the Premises."
10. The following language is added to paragraph 10.3 of the Lease: "Common
Area Operating Expenses shall not include any increase in Real Property
Taxes resulting from the sale of the Premises during the Original Term of
this Lease."
ADDENDUM TO MULTI-TENANT - MODIFIED NET
-4-
<PAGE> 16
11. The following language is added as paragraph 12.1(f) of the Lease:
"Notwithstanding the foregoing, Lessee has informed Lessor that Lessee
intends initially to sublease approximately 21,000 square feet of the
Premises. The requirement of a deposit in paragraph 12.2(e), and paragraphs
12.2(g) and 12.2(h), are deleted, so that Lessee may retain any difference
between sublease rent and rent hereunder."
12. Section 39.2 of the Lease shall not be applicable to Lessee's options to
extend under paragraph 4 of this Addendum, nor to Lessee's option to
purchase under paragraph 5 of this Addendum, if it is assigned as part of
an assignment of Lessee's position under the Lease.
ADDENDUM TO MULTI-TENANT - MODIFIED NET
-5-
<PAGE> 1
EXHIBIT 10.11
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(LONG-FORM TO BE USED WITH PRE-1996 AIR LEASES)
1. PARTIES. This Sublease, dated, for reference purposes only, April 14,
1998, is made by and between The Welk Group, Inc. ("SUBLESSOR") and Launch
Media, Inc. ("SUBLESSEE").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of
the conditions set forth herein, that certain real property, including all
improvements therein, located in the County of Los Angeles, State of California
and generally described as (describe briefly the nature of the property)
approximately 21,375 square feet located at 2,700 Pennsylvania Avenue, Santa
Monica, California 90404 as outlined on Exhibit "A" attached hereto (the
"PREMISES").
3. TERM.
3.1 TERM. The term of this Sublease shall be for five (5) years
commencing on July 1, 1998 and ending on June 30, 2003 unless sooner terminated
pursuant to any provision hereof.
3.2 Sublessee shall have access to the Premises prior the
COMMENCEMENT Date as long as it has previously delivered to Sublessor evidence
of Two Million Dollars ($2,000,000) of insurance coverage reasonable acceptably
to Sublessor to cover all risks associated with Sublessee's activities in the
Premises.
4. RENT.
4.1 BASE RENT. Sublessee shall pay to Sublessor as Base Rent for
the Premises equal monthly payments of $30,994.00 in advance, on the first
(1st) day of each month of the term hereof. Sublessee shall pay Sublessor upon
the execution hereof $30,994.00 as Base Rent for July, 1998 Base Rent for any
period during the term hereof which is for less than one month shall be a pro
rata portion of the monthly installment.
4.2 RENT DEFINED. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit)
are deemed to be rent ("RENT"). Rent shall be payable in lawful money of the
United States to Sublessor at the address stated herein or to such other
persons or at such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof $123,976.00 as security for Sublessee's faithful performance
of Sublessee's obligations hereunder. If Sublessee fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any Rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion
of said deposit, Sublessee shall within ten days after written demand therefore
forward to Sublessor an amount sufficient to restore said Deposit to the full
amount provided for herein and Sublessee's failure to do so shall be a material
breach of this Sublease. Sublessor shall not be required to keep said Deposit
separate from its general accounts. No trust relationship is created herein
between Sublessor and Sublessee with respect to said Security Deposit.
6. USE.
6.1 AGREED USE. The Premises shall be used and occupied only
for general office/warehouse/studio purposes and any other comparable or
related uses permitted under the City of Santa Monica zoning code and for no
other purpose.
6.2 Intentionally Deleted.
Page 1 of 4
<PAGE> 2
6.3 ACCEPTANCE OF PREMISES AND LESSEE. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical,
HVAC and fire sprinkler systems, security, environmental aspects, and
compliance with Applicable Requirements), and their suitability for Sublessee's
intended use.
(b) Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made
any oral or written representations or warranties with respect to said matters
other than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) it is Sublessor's sole responsibility to investigate the
financial capability and/or suitability of all proposed tenants.
7. MASTER LEASE (SEE ADDENDUM)
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "MASTER LEASE", a copy of which is attached hereto marked
Exhibit 1, wherein Pennsylvania Group, Ltd. is the lessor, hereinafter the
"MASTER LESSOR".
7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent
for obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with,
for the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: SEE ADDENDUM.
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "SUBLESSEE'S ASSUMED OBLIGATIONS".
The obligations that sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "SUBLESSOR'S REMAINING OBLIGATIONS".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any Party to
the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
PAGE 2 OF 4
<PAGE> 3
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee
upon receipt of any written notice from the Master Lessor stating that a
Default exists in the performance of Sublessor's obligations under the Master
Lease, to pay to Master Lessor the Rent due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any
such statement and request from Master Lessor, and that Sublessee shall pay
such Rent to Master Lessor without any obligations or ????? to inquire as to
whether such Default exists and notwithstanding any notice from or claim from
Sublessor to the contrary that Sublessor shall have no right or claim against
Sublessee for any such Rent so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, within ten days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the
Master Lease have been guaranteed by third parties then neither this Sublease,
nor the Master Lessor's consent, shall be effective unless, within 10 days of
the date hereof, such guarantors sign this Sublease thereby giving their
consent to this Sublease.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay Rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor or anyone else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall Default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master
Lessor be liable for any other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no Default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor Defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any Default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
Default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
11. ATTORNEYS FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. ADDITIONAL PROVISIONS. [If there are no additional provisions, draw a
line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.] SEE ADDENDUM
--------------------------
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- -------------------------------------------------------------------------------
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Page 3 of 4
(C)1997 -- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
<PAGE> 4
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES. THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS AND
THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Executed at: Santa Monica, CA The Welk Group, Inc.
---------------------------- ----------------------------
on: April 14, 1998 By: /s/ Marc L. Luzzatto
---------------------------- ----------------------------
Address: 2700 Pennsylvania Avenue By: /s/ CFO
---------------------------- ----------------------------
"Sublessor" (Corporate Seal)
Executed at: Santa Monica, CA Launch Media, Inc.
---------------------------- ----------------------------
on: April 14, 1998 By: /s/ J.M. Mickeal, Chief
---------------------------- Financial Officer
----------------------------
Address: 1600 Pennsylvania Avenue By:
---------------------------- ----------------------------
"Sublessee" (Corporate Seal)
Executed at: Pennsylvania Group, Ltd.
---------------------------- ----------------------------
on: By:
---------------------------- ----------------------------
Address: By:
---------------------------- ----------------------------
"Sublessor" (Corporate Seal)
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
St., Suite 600, Los Angeles, CA 90017. (213) 687-8777.
Page 4 of 4
<PAGE> 5
[THE WELK GROUP LETTERHEAD]
April 29, 1998
VIA FACSIMILE
Jeffrey M. Mickeal
LAUNCH MEDIA, INC.
1632 Fifth Street
Santa Monica, CA 90401
Dear Jeff,
This letter confirms our agreement to amend Paragraph 1 of the Addendum to
Sublease dated as of April 14, 1998 between Launch Media, Inc. as Sublessee and
The Welk Group, Inc. as Sublessor, with respect to the Premises at 2700
Pennsylvania Avenue. It is agreed that the words "...a separate
interest-bearing account with the Imperial Bank Monarch Fund (if logistically
possible) in the name..." are hereby deleted and replaced with "...an account".
It is further agreed that the interest rate to be earned by Sublessee is six
percent (6%) per annum (payable quarterly).
It is further agreed that the date for Sublessor's delivery of a
non-disturbance agreement (referenced in Paragraph 16 of the Addendum to
Sublease) is extended to May 6, 1998.
With warmest regards, I remain
Sincerely Yours,
/s/ MARC L. LUZZATTO
-------------------------------------
Marc L. Luzzatto
President and Chief Operating Officer
AGREED: LAUNCH MEDIA, INC.
By: /s/ JEFFREY M. MICKEAL
---------------------------------
Its: Chief Financial Officer
---------------------------------
cc: William D. Feldman
<PAGE> 6
ADDENDUM TO SUBLEASE
This Addendum to Sublease (thus "Addendum") is made to that certain
Standard Sublease (the "Sublease") dated as of April 14, 1998 by and between
The Welk Group, Inc. ("Sublessor") and Launch Media, Inc. ("Sublessee").
Sublessor and Sublessee hereby agree that the provisions set forth below
shall be deemed to be a part of the Sublease and shall supersede any contrary or
inconsistent provisions in the Sublease or the Master Lease. All references in
the Sublease and in this addendum to the term Sublease shall be construed to
mean the Sublease, as amended and supplemented by this Addendum.
1. Security Deposit. At the end of the third full year of the Sublease
term and continuing every twelve months thereafter, Sublessor shall return to
Sublessee twenty percent (20%) of the security deposit held by Sublessor,
excluding the final Thirty-Six Thousand Two Hundred Fifty-Nine Dollars
($36,259) which amount Sublessor shall hold as a security deposit until the
termination of the Sublease term and any extension periods. If Sublessee
provides Sublessor evidence reasonably acceptable to Sublessor that Sublessee
has a market capitalization of Fifty Million Dollars or more, as evidenced by
either an initial public offering of Sublessee's securities or by a private
placement of equity after the commencement date of the Sublease, Sublessor
shall return to Sublessee that amount of the security deposit which exceeds
Thirty-Six Thousand Two Hundred Fifty-Nine Dollars ($36,259). As long as
Sublessee's security deposit held by Sublessor is in excess of Thirty-six
Thousand Two Hundred Fifth-Nine Dollars ($36,259), Sublessor shall keep the
entire security deposit in a separate interest-bearing account with the
Imperial Bank Monarch Fund (if logistically possible) in the name of Sublessor,
and shall credit the interest earned thereon to Sublessee on a quarterly basis.
If Sublessee performs all of its obligations hereunder, the security deposit,
or so much thereof as has not been applied by Sublessor or returned to
Sublessee, as provided herein, shall be returned to Sublessee at the expiration
of the Sublease term and after Sublessee has vacated the Premises.
2. Annual Increases in Base Rent. Commencing on the first (1st) day of
the thirteenth (13th) month of the Sublease term and continuing every year
thereafter of the initial term, the then-current Base Rent for the Premises
shall increase by four percent (4%) per year.
3. Absolute Net Sublease. The Sublease is absolute net to the Sublessor.
Sublessee shall be obligated to pay promptly upon demand, without setoff,
counterclaim, abatement, deduction, or defense, all costs, relating to its use
and occupancy of the Premises, including, without limitation, its proportionate
share of property taxes, insurance maintained by the Master Lessor, common area
expenses, and all other costs incurred by Sublessor as lessee under the Master
Lease. For purposes of the Sublease, sublessee's proportionate share shall be
deemed to be seventy-two and twenty-one one-hundredths percent (72.21%).
Nothing in this section shall be deemed to relieve Sublessee of its obligations
to satisfy Sublessor's obligations under the Master Lease with respect to the
Premises, including, without limitation, Sublessor's insurance obligations
(Section 8) and maintenance and repair obligations (Section 7) under the Master
Lease.
<PAGE> 7
4. Tenant Improvements.
4.1 Tenant Improvements. Sublessor Improvements. Sublessor, at its
sole expense, shall provide the following improvements to the Premises prior to
the commencement date:
A. Sublessor shall remodel the exterior in substantial
compliance with the plans and renderings approved by the City of Santa Monica, a
copy of which plans are attached hereto as Exhibit "B".
B. Sublessor shall assure that fire (sprinklers) and life safety
systems (emergency exit signage) are installed in the Premises in compliance
with applicable building codes.
C. Sublessor shall assure that electricity is wired to the
Premises in a manner that will generate no less than 15 watts per square foot.
D. Sublessor shall assure that the HVAC system is sufficient for
commercially reasonable use consistent with the permitted use of the Sublease.
Notwithstanding the foregoing, the ducting and distribution of HVAC shall be
performed at Sublessee's sole cost and expense.
E. Sublessor shall grind the concrete floors on the first floor
space of the Premises in accordance with Sublessor's architect's recommendations
and will fill all cracks wider than three-eighths (3/8ths) of an inch with epoxy
resin.
F. Sublessor shall raise the sprinkler heads in a manner
reasonably acceptable to Sublessee.
G. Sublessor shall provide Sublessee evidence reasonably
acceptable to Sublessee that GTE has fiberoptic lines available at 2700
Pennsylvania Avenue.
4.2 Sublessee Improvements. Sublessee shall be responsible for
construction of all tenant improvements necessary to make the Premises suitable
for Sublessee's occupancy and use in accordance with all applicable building
codes of the City of Santa Monica. Sublessor shall have the right to approve the
general contractor selected by the Sublessee to construct the tenant
improvements, such approval not to be unreasonably withheld or delayed.
Sublessor shall (upon occupancy of the Premises by Sublessee) reimburse
Sublessee for the cost of tenant improvements expended by Sublessee that exceeds
twenty dollars ($20) per square foot of the Premises up to a maximum
reimbursement obligation of Sublessor of ten dollars ($10) per square foot of
the Premises. Sublessee shall repay Sublessor the full amount of such
reimbursement in the form of additional rent which amortizes the amount of the
reimbursement over sixty (60) months at a ten percent (10%) annual rate of
interest.
5. Sublessor's Warranties and Representations. Sublessor only warrants and
represents to
<PAGE> 8
Sublessee the following:
5.1 The restrooms are in compliance with the Americans with
Disabilities Act, and the Premises are in compliance with current City of Santa
Monica seismic codes.
5.2 The premises are free of asbestos.
6. Heating, Venting, and Air Conditioning. Sublessor agrees that it will
not impose any restrictions on Sublessee's use and control of the HVAC system
serving the Premises and that to the extent allowed by the Master Lease and the
existing HVAC infrastructure, Sublessee may use the HVAC system twenty-four (24)
hours per day, three hundred sixty-five (365) days per year. Sublessor shall
guarantee the proper working condition of the HVAC system serving the Premises
for the first year of the Sublease term.
7. Parking. Sublessee shall be entitled to the use of forty-three (43)
parking spaces in the surface parking lot in the locations designated by
Sublessor. Sublessee shall pay Sublessor forty-five dollars ($45) per month per
parking space for the initial term of the Sublease and sixty five dollars ($65)
per month per parking space during the Option Term (as described in Section 17
below). Sublessor and Sublessee agree to (i) reasonably cooperate with each
other in devising and implementing a plan whereby five (5) executives of
Sublessor will be assigned five (5) reserved parking spaces and whereby the
balance of the parking spaces under the Master Lease are available to both
Sublessor and Sublessee, and (ii) restripe and reconfigure the parking spaces
under the Master lease to maximize their efficiency. Nothing in the foregoing
sentence shall relieve Sublessee of its obligation to pay for forty-three (43)
parking spaces designated by Sublessor in the event that Sublessor and Sublessee
cannot agree upon or comply with a workable parking plan or cannot agree upon or
comply with a restriping/reconfiguration plan.
8. Broker's Commission. Provided that the Sublease is ultimately
consummated and subject to the provisions of this Section 8, Sublessor shall pay
brokers' commissions as follows: (i) to Lee & Associates, (a) four percent (4%)
of the aggregate value of the Base Rent due in years one (1) through five (5) of
the Sublease term (the "Initial Term Commissions"), and (b) two percent (2%) of
the aggregate value of the Base Rent due in years six (6) through nine (9); and
(ii) to William D. Feldman & Associates, (a) two percent (2%) of the aggregate
value of the Base Rental due in years one (1) through five (5) of the Sublease
term (the "Feldman Initial Term Commissions") and (b) one percent (1%) of the
aggregate value of the Base Rent due in years six (6) through nine (9) of the
Sublease term. For purposes of this section, "Base Rent" shall only include the
amounts described in Section 4.1 of the Sublease and Section 2 of this Addendum.
Fifty percent (50%) of the commissions described in subsections (i)(a) and
(ii)(a) shall be due and payable upon full execution of the Sublease and this
Addendum by all parties hereto, and the remaining fifty percent (50%) shall be
due and payable upon the earlier to occur of Sublessee's occupancy of the
Premises or Sublessee's commencement of monthly payments of Base Rent. The
commissions described in subsections (i)(b) and (ii)(b) above shall be due and
payable in their entirety if and only if Sublessee exercises its option to
extend the term of the Sublease for four years pursuant to and on the terms set
forth in Section 17 below. In the event Sublessor does not exercise its option
to renew the term of the Sublease on the terms set forth in Section 17,
<PAGE> 9
Sublessor shall not be obligated to pay the commissions described in (i)(b) and
(ii)(b).
9. First Right of Negotiation. Sublessee shall have the right of first
negotiation with respect to that portion of the Premises leased by Sublessor
pursuant to the Master Lease and included in the Premises. In the event
Sublessor desires to sublease or assign such portion, Sublessor shall give
Sublessee written notice of its willingness and shall give Sublessee the
reasonable opportunity to negotiate the terms for subleasing or assuming such
portion for its own use (provided, however that any agreement shall be subject
to Sublessor's approval of the terms and conditions of such sublease or
assignment in Sublessor's sole discretion which shall not be unreasonably
withheld). In the event that Sublessor purchases the building in which the
Premises are located, Sublessee shall have a right of first negotiation for any
adjacent portion of the building (pro-rata with Sublessor based on Sublessor
and Sublessee's square footage occupancy in the premises under the Master Lease
at the time the vacancy occurs) that becomes vacant during the initial term of
the Sublease and the Option Term so long as Sublessee is still an occupant in
the Premises.
10. Assignment and Subletting. Without limiting any rights of Sublessor or
obligations of Sublessee incorporated from the Master Lease, Sublessee shall pay
to Sublessor all sums it receives in connection with an assignment or sublease
of all or any part of Sublessee's interest in the Sublease or the Premises to
the extent such sums exceed the amount that Sublessee pays to Sublessor
(including the tenant improvement amortization rent) for the proportionate
amount of space under the Sublease. In the event Sublessee desires to sublease
or assign any of its interest under the Sublease or the Premises for a monthly
rent which exceeds the sum of the monthly Base Rent and Additional Rent payable
under the Sublease (including monthly amortized tenant improvement allowance
reimbursement) for the proportionate amount of space under the Sublease,
Sublessor shall release Sublessee from its obligations under the Sublease with
respect to such space provided that (i) the creditworthiness of the prospective
assignee or sublessee is better than or equal to that of Sublessee, in
Sublessor's sole discretion as reasonably applied, (ii) in the case of an
assignment, the prospective assignee assumes all of Sublessee's obligations
under the Sublease, (iii) in the case of a sublease, the prospective sublessee
signs a sublease directly with Sublessor, under terms reasonably acceptable to
Sublessor, (iv) Master Lessor consents in writing to the proposed assignment or
sublease, and (v) any prospective assignee or sublessee's proposed use of the
Premises is compatible with Sublessor's use in Sublessor's sole discretion,
reasonably applied. Any release by Sublessor shall only apply to Sublessee's
obligations under the Sublease arising after such assignment or sublease.
11. Signage. At its sole cost and expense, Sublessee shall be entitled to
include exterior signage on a monument sign approved by the City of Santa
Monica's Architectural Review Board on March 2, 1998 along with signage of
Sublessor's business entity(ies). In addition, at Sublessee's sole cost and
expense, Sublessor and Sublessee shall reasonably cooperate in seeking approval
from the City of Santa Monica for signage on the Premises' first floor brick
facade facing Pennsylvania Avenue. The design of the signage will be subject to
Sublessor's approval in its sole discretion as reasonably applied, and it will
feature, at Sublessor's option and pro-rata cost, Sublessor's name(s) and
logo(s) along with Sublessee's name(s) and logo(s).
<PAGE> 10
12. Increase in Property Taxes. Sublessor agrees that during the first
four years of the term of the Sublease, Sublessee shall not be responsible for
any increase in taxes resulting from the change of ownership of the building in
which the Premises are located.
13. Master Lease. Sublessee acknowledges that it has received and reviewed
a copy of the Master Lease provided to Sublessee by Sublessor, and that only
such copy shall be incorporated by reference into the Sublease. All provisions
of the Master Lease shall be incorporated into the Sublease as set forth in
Section 7 of the Sublease except for the following sections: All of 1 (except
Section 1.8 which shall be incorporated into the Sublease), 2.2, 3.1, 3.3, 7.2,
9 (only with respect to Sublessor's obligations), 15, 37, 39, and every section
of the Addendum to the Master Lease. Notwithstanding the foregoing, Sublessor
is required under the Sublease to maintain the Master Lease during the entire
term of the Sublease, and Sublessee may require Sublessor to use commercially
reasonable efforts to enforce any of Sublessor's rights under the Master Lease.
14. Consent. In all cases where consent or approval shall be requested of
either Sublessor or Sublessee pursuant to the Sublease, the giving of such
consent shall not be unreasonably withheld, conditioned, or delayed by the
party from whom such consent is required, unless otherwise specified in the
Sublease.
15. Arbitration. Any dispute which may arise between Sublessor and
Sublessee shall be resolved exclusively through binding arbitration in
accordance with the commercial rules of the American Arbitration Association.
16. Non-Disturbance Agreement. Sublessor shall use commercially reasonable
efforts to obtain within ten days of the full execution of the Sublease and
Addendum a non-disturbance agreement from the lienholder on the property on
which the Premises are located.
17. Option. Sublessee shall have the option to extend the term of the
Sublease for one additional four (4) year period (extending the term through
June 30, 2007) (the "Option Term") on the same terms and conditions as the
Sublease (except that there will be no option to further renew the term),
provided that the Base Rent for the first year of the Option Term shall be
Thirty-Nine Thousand One Hundred-Sixty Dollars ($39,160) per month, the Base
Rent for the second year of the Option Term shall increase by eight percent
(8%) over the Base Rent for the first year of the Option Term, the Base Rent
during the third year of the Option Term shall increase by four percent (4%)
over the Base Rent for the second year of the Option Term, and the Base Rent
for the fourth year of the Option Term shall increase by four percent (4%)
over the Base Rent for the third year of the Option Term. The option provided in
this section is personal to Launch Media, Inc. and may not be assigned or
otherwise transferred separate from or as a part of the Sublease. It may only
be exercised by Launch Media, Inc.'s providing Sublessor written notice of its
exercise of the option not less than nine (9) months nor more than twelve (12)
months prior to the end of the initial term of the Sublease.
<PAGE> 11
EXHIBIT A (2/2)
[MAP]
2nd Floor
<PAGE> 12
EXHIBIT A (1/2)
[MAP]
1st Floor
<PAGE> 13
WELK MUSIC ENTRANCE TENANT SIGNAGE
[MAP]
2700 PENNSYLVANIA AVENUE
SANTA MONICA
21,000 SQUARE FEET
3/1,000 SQUARE FEET PARKING
$45 PER SPACE
11' - 15' FEET IN OFFICE
SKYLIGHTS
[MAP]
<PAGE> 1
EXHIBIT 10.13
SUBLEASE AGREEMENT
<TABLE>
<S> <C>
The parties agree as follows:
DATE OF THIS
SUBLEASE: October 1998
PARTIES TO THIS Overtenant: Intershoe, Inc.
SUBLEASE: Address for notices: 156 West 56th Street, New York, NY
You, the Undertenant: Launch Media Inc.
Address for notices: 156 West 56th Street, New York, NY
If there are more than one Overtenant or Undertenant,
the words "Overtenant" and "Undertenant" used in this
Sublease includes them.
INFORMATION FROM Landlord: City Spire Centre LLC
OVER-LEASE: Address for notices: c/o Broadway Management Co., Inc.
39 Broadway, New York, NY 10006
Overtenant: Intershoe, Inc.
Address for notices:
Date of Over-Lease: As of January 22, 1997
Term: 16 yrs. 4 mos. from: February 1, 1997 to: June
30, 2013
A copy of the Over-Lease is attached as an important
part of the Sublease.
TERM: 1. Five(5) years: One (1) month: Beginning December
1, 1998 ending: December 1, 2003
PREMISES RENTED: 2. 2,314 rentable square feet located on the 14th
Floor at 156 West 56th St. New York, NY, as shown
on Schedule A (the "Sublet Premises").
USE OF PREMISES: 3. The premises may be used for
RENT: 4. The yearly rent is $78,676.00 fixed base. You, the
Undertenant, will pay this yearly rent to the
Overtenant in twelve equal monthly payments of
$6,556.33. Payments shall be paid in advance on
the first day of each month during the Term.* See
rider for Additional Rent and other charges.*
SECURITY: 5. The security for the Undertenant's performance is
$28,346.48. Overtenant states that Overtenant has
received it. Overtenant shall hold the security in
accordance with Paragraph ___ of the Over-Lease.
See rider.**
AGREEMENT TO LEASE 6. Overtenant sublets the premises to you, the
AND PAY RENT: Undertenant, for the Term. Overtenant states that
it has the authority to do so. You, the
Undertenant, agree to pay the Rent and other
charges as required in the Sublease. You, the
Undertenant, agree to do everything required of
you in the Sublease.
NOTICES: 7. All notices in the Sublease shall be sent by
certified mail, "return receipt requested".
SUBJECT TO: 8. The Sublease is subject to the Over-Lease. It is
also subject to any agreement to which the
Over-Lease is subject. You, the Undertenant, state
that you have read and initialed the Over-Lease
and will not violate it in any way.
OVERTENANT'S DUTIES: 9. The Over-Lease describes the Landlord's duties.
The Overtenant is not obligated to perform the
Landlord's duties. If the Landlord fails to
perform, you, the Undertenant, must send the
Overtenant a notice. Upon receipt of the notice,
the Overtenant shall then promptly notify the
Landlord and demand that the Over-Lease agreements
be carried out. The Overtenant shall continue the
demands until the Landlord performs.
CONSENT: 10. If the Landlord's consent to the Sublease is
required, this consent must be received within
days from the date of this Sublease. If the
Landlord's consent is not received within this
time, the Sublease will be void. In such event all
parties are automatically released and all
payments shall be refunded to you, the
Undertenant.
ADOPTING THE 11. The provisions of the Over-Lease are part of this
OVER-LEASE AND Sublease. All the provisions of the Over-Lease
EXCEPTIONS: applying to the Overtenant are binding on you, the
Undertenant, except these:
a) These numbered paragraphs of the Over-Lease shall
not apply:
b) These numbered paragraphs of the Over-Lease are
changed as follows:
</TABLE>
---------
* Undertenant shall have one free month of fixed
base rent. Payment of rent due hereunder shall
commence on January 1, 1999.
** which shall be secured by a letter of credit in
such form designated by Overtenant, attached hereto,
issued by a New York City clearinghouse bank.
<PAGE> 2
NO AUTHORITY: 12. You, the Undertenant, have no authority to contact or
make any agreement with the Landlord about the premises
or the Over-Lease. You, the Undertenant, may not pay
rent for other charges to the Landlord, but only to the
Overtenant.
SUCCESSORS: 13. Unless otherwise stated, the Sublease is binding on all
parties who lawfully succeed to the rights or take the
place of the Overtenant or you, the Undertenant.
Examples are an assign, heir, or a legal representative
such as an executor of your will or administrator of
your estate.
CHANGES: 14. This sublease can be changed only by an agreement in
writing signed by the parties to the Sublease.
SIGNATURES: OVERTENANT:
INTERSHOE, INC.
--------------------------------
BY:
--------------------------------
You, the UNDERTENANT:
Witness: LAUNCH MEDIA INC.
--------------------------------
BY:
------------------- --------------------------------
STATE OF_____________ COUNTY OF __________ ss.:
On 19 before me personally appeared to me known and
known to me to be the individual(s) described in and who executed the foregoing
Sublease, and duly acknowledged to me that he executed the same.
--------------------------------
<PAGE> 3
RIDER ANNEXED TO AND MADE A PART OF THE SUBLEASE AGREEMENT BETWEEN
INTERSHOE, INC., OVERTENANT AND LAUNCH MEDIA INC., UNDERTENANT FOR A
PORTION OF THE 14TH FLOOR IN THE PREMISES KNOWN AS 156 WEST 56TH
STREET, NEW YORK, NY, DATED AS OF OCTOBER, 1998.
In the event of any inconsistency between the terms of this Rider
and those contained in the printed form of Sublease Agreement to which this
Rider is annexed, the terms in the Rider shall govern. Capitalized terms used
and not otherwise defined herein shall have the respective meanings ascribed to
those terms in the printed portion of the Sublease Agreement to which this
Rider is Annexed.
15. Supplementing Section 4 of the printed form of Sublease, the
following language is hereby added:
Additional Rent.
(a) For purposes of this Sublease:
"Additional Rent" shall mean Undertenant's proportionate share of
increase in Operating Expenses and Real Estate Taxes over the amount of such
items payable by Landlord in respect of the Base Year (as that term is defined
in the Overlease).
"Base Year" shall have the same meaning as ascribed in the
Overlease, however, with respect to this Sublease, the "Base Year" shall mean
calendar year 1998.
"Tax Base" shall have the same meaning as ascribed in the Overlease,
however, with respect to this Sublease, the "Tax Year" shall mean the 1998/1999
Tax Year.
Undertenant shall also pay to Overtenant, all other additional rent
for the Sublet Premises when billed, as and when the same shall become due
under the Overlease, including but not limited to, additional rents,
escalations, and other charges and costs required to be paid by Overtenant to
Landlord under the Overlease for the entire premises leased thereunder
(collectively, the "Additional Rent"); all of which shall be based on
statements, bills, or invoices of Landlord which will be provided by Overtenant
to Undertenant from time to time on request.
(b) Undertenant shall pay Overtenant real estate tax escalation
as additional rent for the Sublet Premises, in accordance with Overlease, which
shall be based on statements, bills or invoices of Landlord.
(c) Undertenant shall pay to Overtenant as the electrical
inclusion for the Sublet Premises $6,363.50 per annum,
<PAGE> 4
or equal monthly payments of $530.29 (the equivalent of $2.75 per square foot).
16. Improvements.
(a) Undertenant may not make alterations or improvements to the
Sublet Premises without the prior written consent of Landlord and Overtenant.
Any changes, alterations, additions or improvements made by or on behalf of
Undertenant with the prior written consent of Landlord and/or Overtenant shall
be subject to and in accordance with the provisions of the Overlease.
(b) Undertenant shall pay any and all actual fees or charges
Landlord or Overtenant may incur in connection with Undertenant's making any
such changes, alterations, additions or improvements to the Sublet Premises,
other than as set forth in Section 15(c) above. Notwithstanding anything to the
contrary contained herein, on or before the termination of this Sublease,
Undertenant shall, at its sole cost and expense, promptly remove Undertenant's
changes, alterations, additions or improvements to the Sublet Premises and
return the Sublet Premises to its original condition.
(c) Overtenant shall deliver to Undertenant the Sublet Premises
freshly painted and re-carpeted.
17. Supplementing Section 11 of the printed form of Sublease, the
following language is hereby added:
Rights and Obligations: Exceptions.
(a) A copy of the Overlease is attached hereto as Exhibit B.
Undertenant confirms that Undertenant has read the Overlease and is familiar
with the terms and provisions thereof. Except as otherwise expressly provided
herein, all of the terms, provisions, covenants, agreements and conditions of
the Overlease, are incorporated herein by reference and made a part of this
Sublease with the same force and effect as though set forth in full herein.
Undertenant shall conform to, and use the Sublet Premises in accordance with,
all the terms, provisions, covenants, agreements and conditions of the
Overlease, and will do no act which will result in a violation of said terms,
provisions, covenants, agreements and conditions. Undertenant shall perform the
terms, provisions, covenants, agreements and conditions of the Overlease on the
part of the tenant therein named to be performed (except as otherwise may be
expressly provided herein). To the extent there are inconsistencies between any
provision of the Overlease and any provision of this Sublease, this Sublease
shall control unless the use or occupancy of the Sublet Premises by Undertenant
or any action or inaction by Undertenant in accordance with said provision
becomes a
- 2 -
<PAGE> 5
default under the terms of the Overlease, in which event the provisions of the
Overlease shall control.
(b) Notwithstanding anything to the contrary contained in this Sublease:
i) for the purposes of incorporation of the Overlease by reference
in this Sublease, except as otherwise expressly provided herein, and except to
the extent that they are inapplicable or modified by the terms and provisions of
this Sublease (a) references in the Overlease to the "demised premises" or
"premises" shall be deemed to refer to the Sublet Premises, (b) references in
the Overlease to "Landlord" and "Owner" shall be deemed to refer to Overtenant
under this Sublease, (c) references in the Overlease to "Tenant" shall be deemed
to refer to Undertenant under this Sublease, (d) references in the Overlease to
"this Lease" shall be deemed to refer to this Sublease, (e) references in the
Overlease to the "Term" of the Lease shall be deemed to refer to the term of
this Sublease, (f) references in the Overlease to the "expiration date" shall be
deemed to refer to the Sublease Expiration Date, and (g) references in the
Overlease to the "Rent Commencement Date" shall be deemed to refer to the
Sublease Commencement Date in this Sublease;
ii) the Fixed Rent to be paid by Undertenant hereunder shall be
governed by the terms and provisions of Section 4 of this Sublease;
iii) the "Additional Rent" to be paid by the Undertenant shall be
governed by the terms and provisions of Section 4 of the printed form of
Sublease and Section 15 of the Rider.
iv) the time limits contained in the Overlease for the giving of
notices, making of demands or performing of any act, condition or covenant on
the part of the Tenant thereunder, or for the exercise by the Tenant thereunder
of any right, remedy or option, are changed for the purposes of incorporation
herein by reference by shortening the same in each instance by two (2) days, so
that in each instance Undertenant shall have two (2) days less time to observe
or perform hereunder than Overtenant has as the Tenant under the Overlease;
v) the following parts, provisions, exhibits and schedules of the
Overlease are not applicable to this Sublease:
Section 36
Section 37
Section 41
Section 53
Section 57
- 3 -
<PAGE> 6
Section 64
Schedule D
Schedule J
(c) Undertenant, on paying the rents reserved herein and performing
the other terms and conditions hereof on the Undertenant's part to be performed
and observed hereunder, shall peaceably and quietly have, hold and enjoy the
Sublet Premises, during the term hereof, without disturbance of Overtenant, it
successors or assigns, all subject to the terms of this Sublease and the
Overlease.
18. Assignment/Sublease. Undertenant may not assign this Sublease or
sublet the Sublet Premises or any part thereof without the prior written consent
of Overtenant and otherwise subject to the provisions of the Overlease.
Notwithstanding any such subletting or assignment by Undertenant, Undertenant
shall remain liable to Overtenant for the payment of all sums due and to become
due hereunder including, but not limited to, Fixed Rent, Additional Rent (as
defined in the Overlease), and such other charges and/or costs as may be
incurred hereunder and for the performance of all of the terms, covenants,
provisions and agreements contained herein.
19. Default. Undertenant covenants and agrees that in the event that it
shall default in the performance of any of the terms, covenants and conditions
of this Sublease (including those portions of the Overlease incorporated herein
by reference) beyond any applicable notice and grace period provided for in the
Overlease and incorporated herein by reference, Overtenant shall be entitled to
exercise any and all of the rights and remedies to which it is entitled by law,
including, without limitation, the remedy of summary proceeding, and also any
and all of the rights and remedies specifically provided to the Landlord in the
Overlease and incorporated herein by reference. Nothing herein contained shall
be deemed to reduce the applicable time periods for the performance by Landlord
of its obligations, if any, under the Overlease.
20. Condition of the Sublet Premises. The Sublet Premises are demised to
Undertenant in the condition which shall exist on the Sublease Commencement Date
"as is," without additions, alterations or improvements of any kind whatsoever,
except as otherwise hereinafter provided. Undertenant is subleasing the Sublet
Premises from the Overtenant after having an opportunity to fully inspect the
Sublet Premises and the right not to execute this Sublease if the results of
said inspection are unacceptable. Therefore, except as otherwise hereinafter
provided, Undertenant hereby agrees that the term "as is" means that upon
approving or having been deemed to have approved said inspection, it will
sublease the Sublet Premises, without warranty or representation,
- 4 -
<PAGE> 7
either oral or written, or expressed or implied, as to the physical condition of
the Sublet Premises and/or the compliance of same with building, fire, health
and zoning codes and other applicable laws, ordinances and regulations.
Overtenant hereby expressly disclaims any and all warranties or representations
made to Undertenant, whether same were made by any officer, director or employee
of Overtenant or any other agent of same, such as a broker, unless such warranty
or representation is contained in writing as a part of this Sublease. Except as
otherwise provided for herein (i) Overtenant shall not incur any greater
obligation, financial or otherwise, in connection with the Sublet Premises than
it would have had but for this Sublease, and (ii) Undertenant shall be solely
responsible for all costs which may be imposed on Overtenant or Undertenant
under the Overlease in connection with the condition of the Sublet Premises.
21. Attornment. In the event of termination, re-entry or dispossession of
Overtenant by Landlord under the Overlease, the Landlord may, at its option,
take over all of the right, title and interest of Overtenant, as sublessor,
under this Sublease, and Undertenant shall, at Landlord's option, attorn to
Landlord pursuant to the then executory provisions of this Sublease, except that
Landlord shall not (i) be liable for any previous act or omission of Overtenant
under this Sublease, which heretofore has accrued to Undertenant against
Overtenant, or (ii) be bound by any previous modification of this Sublease not
consented to by Landlord or by any previous prepayment of more than one month's
rent. Undertenant hereby waives all rights under any present or future laws or
otherwise to elect, by reason of the termination of the Overlease, to terminate
this Sublease or surrender possession of the Sublet Premises demised hereby.
22. Subordination. This Sublease is and shall be subject and subordinate
to all present and future mortgages and leases affecting the property of which
the Sublet Premises form a part. The provisions of this paragraph shall be self
operative and require no further instrument of subordination.
23. Representations and Warranties.
(a) Undertenant covenants, warrants and represents:
(i) that Undertenant has delivered to Overtenant a description
of the identity of Undertenant, the nature of its business, and the identity of
its officers and directors;
(ii) that Undertenant has delivered to Overtenant a true, correct
and complete copy of its most recent financials prepared by an independent
certified public accountant and certified by an officer of Undertenant for its
most recent fiscal year;
- 5 -
<PAGE> 8
iii) that Undertenant has full corporate authority to execute this
Sublease;
iv) that Undertenant shall perform all of its obligations under this
Sublease (including, without limitation, all of the obligations relating to the
Sublet Premises arising under the Overlease which are incorporated herein by
reference);
v) that Undertenant will not do or omit to do anything which would
constitute a default under the provisions of the Overlease incorporated herein
by reference; and
vi) that Undertenant is not a person with whom Landlord is currently
negotiating or has been in the last six (6) month period with whom Landlord has
negotiated to lease space in the Unit.
(b) Overtenant and Undertenant each covenants, warrants, and represents:
i) that each party shall indemnify, defend and hold harmless the
other party and its agents and employees from and against any and all claims,
liabilities, damages, losses or expenses (including, without limitation,
reasonable attorneys' fees) which may be imposed upon or incurred by or asserted
against the other and/or its agents or employees by reason of (a) such party's
failure to comply with the provisions of this Sublease, (b) the negligent or
improper use or occupancy of the Sublet Premises by such party or its successors
or assigns, (c) any work or thing done whatsoever by or at the instance of such
party, its agents, contractors, subcontractors, employees, licensees,
successors, or assigns, or any condition created by such party, its agents,
contractors, subcontractors, employees, licensees, successors or assigns in, on
or about the Sublet Premises, (d) any negligence or other wrongful act or
omission on the part of such party or any of its agents, contractors,
subcontractors, employees, licensees, successors or assigns on the Sublet
Premises, or (e) any accident, injury or damage to any person or property
occurring in, on or about the Sublet Premises or any part thereof, except to
the extent caused by the negligence or willful misconduct of such party.
(c) Overtenant and Undertenant agree that in case any action or
proceeding is brought against Undertenant and/or its agents and employees by
reason of any claim arising out of any activity set forth in subparagraph (b)
above, Undertenant shall not settle the same without Overtenant's written
consent and Undertenant, upon written notice from Overtenant, shall at
Undertenant's expense resist and defend such action or proceeding by counsel
approved by Overtenant in writing. Overtenant agrees to act reasonably in the
approval of Undertenant's counsel.
- 6 -
<PAGE> 9
24. Estoppel. Overtenant warrants and represents to Undertenant that (i)
it has paid all rent and additional rent payable pursuant to the Overlease as
of the date of this Sublease, (ii) it is currently the tenant under the
Overlease, and (iii) the Overlease, a copy of which has been examined by
Undertenant, represents the entire agreement with respect to the Sublet
Premises between the Landlord and Overtenant.
25. Brokerage. Undertenant represents and warrants that it neither
consulted nor negotiated with any broker or finder with regard to this
Agreement other than Cushman & Wakefield, Inc. and Legacy Real Estate.
Undertenant agrees to indemnify, defend and save Landlord and Overtenant
harmless from and against any claim for fees or commission from anyone other
than the Broker with whom Tenant has dealt in connection with the Sublet
Premises of this Agreement. Undertenant and Overtenant shall indemnify and hold
harmless each other and Landlord from and against any and all claims,
liabilities, costs and expenses of any kind and nature (including attorneys'
fees) arising from or related to a breach of the foregoing representations.
26. Security Deposit.
As security for the full and punctual performance by Undertenant of all
of the terms of this Sublease, Undertenant shall deliver to Overtenant on
the Commencement Date a Clean Irrevocable Standby Letter of Credit drawn on a
New York City Clearinghouse bank or such other banking institution as may be
deemed acceptable to Overtenant, in its sole discretion in the amount of
$28,346.48 in the form attached hereto as Exhibit C.
(a) In the event Undertenant defaults in the performance of any of the
terms of this Sublease, including the payment of Fixed Rent or any Additional
Rent, Overtenant may use, apply or retain so much of the security as is
required for the payment of any Fixed Rent, Additional Rent, or for any sum
which Overtenant may expend or may be required to expend by reason of
Undertenant's default in respect of any of the terms of this Sublease,
including any damages or deficiency in the re-letting of the Sublet Premises,
whether accruing before or after summary proceedings. In the case of every such
use, application or retention, Undertenant shall on demand, deposit such
additional amounts so that the security deposit shall be replenished to its
former amount.
27. Nonliability for Landlord's Failure to Consent: Disclaimer of
Liability. In any instance where the consent of Landlord is required hereunder
or under the Overlease, Overtenant shall have no liability for any failure of
Landlord to grant its consent for any reason whatsoever, including whether or
not Landlord's consent was unreasonably withheld. Except as otherwise expressly
provided herein, in any case where Landlord
- 7 -
<PAGE> 10
reserves a right or disclaims any liability under the Overlease, said right or
disclaimer shall inure to the benefit of Overtenant as well as to Landlord, and
any rights or disclaimers inuring to Overtenant as tenant under the Overlease
shall likewise inure to the benefit of Undertenant.
28. Notices. Supplementary section of all notices, requests, demands and
other communications hereunder shall be in writing, shall be delivered
personally or sent by registered or certified mail, return receipt requested,
or reputable overnight courier (against signed receipt) and shall be deemed to
have been given or made when received at the following addresses:
If to Overtenant: Intershoe, Inc.
156 West 56th Street, 14th Floor
New York, New York 10019
With a copy to:
Werbel & Carnelutti,
711 Fifth Avenue,
New York, New York 10022
(212) 832-8300
Attention: Paul D. Downs
If to Undertenant: Launch Media Inc.
156 West 56th Street, 14th Floor
New York, New York 10019
Any of the above addresses may be changed on ten (10) days written
notice, given as above provided.
29. Insurance. Undertenant shall maintain all insurance required of
Overtenant as tenant in accordance with and pursuant to the Overlease, which
insurance shall name both Landlord and Overtenant as additional insureds. Prior
to possession of the Sublet Premises, Undertenant shall furnish Overtenant with
a certificate of insurance evidencing such coverage which shall not be
cancelable without the giving of thirty (30) days prior written notice to
Overtenant.
30. Entire Agreement. This sublease constitutes the entire agreement
between Overtenant and Undertenant with respect to the subject matter hereof.
This sublease cannot be changed in any manner except by a written agreement
signed by Overtenant and Undertenant and consented to by Landlord where
required under the Overlease.
31. Successors and Assigns. The provisions of this sublease, except as
herein otherwise specifically provided, shall extend to, bind and inure to the
benefit of the parties hereto and their respective personal representatives,
heirs, successors
- 8 -
<PAGE> 11
and permitted assigns. In the event of any assignment or transfer of the
leasehold estate under the Overlease, the transferor or assignor, as the case
may be, shall be and hereby is entirely relieved and freed of all obligations
under this Sublease.
32. Landlord's Consent. This Sublease shall be binding upon the parties
hereto upon Landlord's consent to this Sublease pursuant to the Overlease and
no possession of Premises shall occur until such consent has been received.
33. Undertenant's Federal Taxpayer Identification Number. Undertenant's
Federal Taxpayer Identification Number is ___________________.
- 9 -
<PAGE> 12
IN WITNESS WHEREOF, this Sublease has been duly executed as of the date
first set forth above.
Overtenant:
INTERSHOE, INC.
By:
------------------------------------
Name:
Title:
Undertenant:
LAUNCH MEDIA INC.
By:
------------------------------------
Name:
Title:
AGREED TO AND CONSENTED TO BY:
CITY SPIRE CENTRE LLC
By:
--------------------------------
Name:
Title:
- 10 -
<PAGE> 13
EXHIBIT A
Floor Plan
- 11 -
<PAGE> 14
156 WEST 56TH STREET
14TH FLOOR
SCALE: 1/8"-1'-0"
[LEASE SPACE]
<PAGE> 15
EXHIBIT B
Overlease
- 12 -
<PAGE> 1
EXHIBIT 10.14
2WAY MEDIA, INC.
SECURITIES PURCHASE AGREEMENT
February 27, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Authorization and Sale of Series C Stock............................................1
1.1 Authorization................................................................1
1.2 Sale of Series D Shares......................................................1
2. Closing; Delivery...................................................................1
2.1 Closing......................................................................1
2.2 Representations and Warranties at Additional Closing.........................2
2.3 Delivery.....................................................................2
3. Representations and Warranties of the Company.......................................2
3.1 Organization and Standing; Certificate and Bylaws............................3
3.2 Corporate Power..............................................................3
3.3 Capitalization...............................................................3
3.4 Subsidiaries.................................................................4
3.5 Authorization................................................................4
3.6 Outstanding Indebtedness.....................................................5
3.7 Financial Statements.........................................................5
3.8 Certain Actions..............................................................5
3.9 Changes......................................................................6
3.10 Title to Properties and Assets...............................................7
3.11 Patents, Trademarks..........................................................7
3.12 Compliance with Other Instruments, None Burdensome...........................8
3.13 Litigation...................................................................8
3.14 Compliance with Laws.........................................................8
3.15 Tax Returns..................................................................8
3.16 Employees....................................................................9
3.17 Insurance....................................................................9
3.18 Registration Rights..........................................................9
3.19 Governmental Consents........................................................9
3.20 Securities Law Exemption.....................................................9
3.21 Conflict of Interest........................................................10
3.22 Brokers or Finders; Other Offers............................................10
3.23 Permits and Licenses........................................................10
3.24 Real Property Holding Company...............................................10
3.25 Employee Benefit Plans......................................................10
3.26 Minutes.....................................................................11
3.27 Accounting..................................................................11
3.28 Disclosure..................................................................11
3.29 Undisclosed Liabilities.....................................................11
3.30 Knowledge of the Investors..................................................11
3.31 Year 2000...................................................................11
3.32 Material Agreements.........................................................11
4. Representations and Warranties of the Investors....................................12
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
4.1 Authorization...............................................................12
4.2 Experience..................................................................12
4.3 Investment..................................................................12
4.4 Rule 144....................................................................12
4.5 Rule 144A...................................................................12
4.6 No Public Market............................................................12
4.7 Access to Data..............................................................13
4.8 Brokers or Finders..........................................................13
5. Conditions To Closing Of Investors.................................................13
5.1 Conditions to Investors' Obligations at a Closing...........................13
6. Conditions to Company's Obligations................................................15
6.1 Conditions to Company's Obligations at a Closing............................15
7. Other Agreements and Covenants.....................................................16
7.1 Use of Proceeds.............................................................16
7.2 Financial Information.......................................................16
7.3 Additional Information......................................................17
7.4 Assignment of Rights to Financial Information...............................18
7.5 Corporate Existence, Licenses and Permits; Maintenance of Properties........18
7.6 Taxes.......................................................................18
7.7 Insurance...................................................................18
7.8 Books and Accounts..........................................................19
7.9 Stock Vesting and Related Covenants.........................................19
7.10 Termination of Covenants....................................................19
7.11 Compensation................................................................19
8. Indemnification....................................................................19
8.1 Company Indemnification.....................................................19
8.2 Procedure...................................................................20
8.3 Indemnification Non-Exclusive...............................................21
9. Miscellaneous......................................................................21
9.1 Governing Law...............................................................21
9.2 Survival....................................................................21
9.3 Finder's Fee................................................................21
9.4 Successors and Assigns......................................................21
9.5 Entire Agreement............................................................21
9.6 Severability................................................................21
9.7 Amendment and Waiver........................................................22
9.8 Delays or Omissions.........................................................22
9.9 Notices.....................................................................22
9.10 Expenses....................................................................22
9.11 Titles and Subtitles........................................................23
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
9.12 Counterparts................................................................23
9.13 Press Releases..............................................................23
</TABLE>
EXHIBIT A Schedule of Investors
EXHIBIT B Second Amended and Restated Certificate of Incorporation of 2Way
Media, Inc
EXHIBIT C Schedule of Exceptions
EXHIBIT D Second Amended and Restated Investors Rights Agreement
EXHIBIT E Opinion of Gray Cary Ware & Freidenrich LLP
EXHIBIT F Indemnification Agreement
EXHIBIT G Second Amended and Restated Co-Sale Agreement
EXHIBIT H Proprietary Information and Nonsolicitation Agreement
EXHIBIT I NBC Strategic Alliance Agreement
EXHIBIT J NBC Strategic Alliance Agreement
iii
<PAGE> 5
2WAY MEDIA, INC.
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement is made as of February 27, 1998, by
and among 2Way Media, Inc., a Delaware corporation (the "Company"), and the
investors listed on the Schedule of Investors attached as Exhibit A (the
"Investors").
1. Authorization and Sale of Series D Stock.
1.1 Authorization. The Company has authorized the issuance and sale
pursuant to this Agreement of up to an aggregate of 17,614,379 shares of its
Series D Stock (the "Series D Shares") and warrants to purchase an aggregate of
up to 2,242,187 Series D Shares (to be adjusted for any additional closing). The
Series D Shares shall have the rights, restrictions, privileges and preferences
set forth in the Company's Second Amended and Restated Certificate of
Incorporation attached as Exhibit B (the "Restated Certificate"). The total
number of shares of Common Stock or other securities issuable upon conversion of
the Series D Shares (including Series D Shares issuable upon exercise of the
warrants purchased hereunder) is referred to as the "Conversion Stock."
1.2 Sale of Series D Shares and the Warrants. Subject to the terms
and conditions hereof, at the Closing the Company will issue and sell to the
Investors, and each Investor will purchase from the Company, severally and not
jointly, the total number of Series D Shares and the warrants for shares of
Series D Stock (as adjusted for any additional closing) (the "Warrants")
specified opposite such Investor's name on the Schedule of Investors for the
purchase price of $1.53 per Series D Share, free and clear of claims, nominee or
trust arrangements, pledges, security interests, liens, rights of first refusal
or similar rights, options, contractual commitments, restrictions, charges and
encumbrances of any nature whatsoever; provided, however, that the consideration
for the Series D Shares and the Warrant issued and sold to NBC Multimedia, Inc.
("NBC") shall be the execution and delivery of the Strategic Alliance Agreements
by and between NBC and the Company (the "NBC Agreements"), provided, further,
that the consideration for the Warrant issued and sold to General Electric
Capital Corporation ("GE Capital") shall be the execution and delivery of this
Agreement and the Investors Rights Agreement.
2. Closing; Delivery.
2.1 Closing. The closing of the sale and purchase of the Series D
Shares under this Agreement (the "Closing") shall be held at 10:00 a.m. on
February 27, 1998 (the "Closing Date"), at the offices of Gray Cary Ware &
Freidenrich, 400 Hamilton Avenue, Palo Alto, CA 94301 or at such other time and
place as the Company and the Investors may agree in writing. If the full amount
of Series D Stock authorized for sale (less the shares of Series D Stock
reserved for issuance upon exercise of the Warrants) in Section 1.1 above is not
sold at the Closing, the Company shall have the right any time prior to May 31,
1998 at an additional closing (the "Additional Closing"), to sell (with the
approval of the Board of Directors) the remaining shares of Series D Stock to
one or more additional investors at the price and on
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<PAGE> 6
the terms set forth herein, and such investors shall be added to Exhibit A and
be considered "Investors" for purposes of this Agreement. If the Closing is not
completed by March 31, 1998, this Agreement is no longer binding on the Company
or the Investors. Each additional purchaser of Series D Stock after the date
hereof shall, concurrent with such purchase, execute and deliver to the Company
a counterpart of the Investors Rights Agreement and the Second Amended and
Restated Co-Sale Agreement of even date herewith by and among the Company and
certain stockholders of the Company. If the Company issued any Series D Stock to
any additional investor at an Additional Closing, then at such Additional
Closing, the Company shall issue a warrant (the "Additional NBC Warrant") to NBC
to purchase such number of shares of Series D Stock, on an as-converted basis,
equal to five percent (5%) of (a) the total of (x) the issued and outstanding
shares of Common Stock, (y) the shares of Common Stock issuable upon conversion
of all issued and outstanding Series A, Series B, Series C and Series D Stock,
after giving effect to the issuance of Series D Stock at such Additional
Closing, and (z) all shares of Common Stock issuable upon exercise of all
outstanding options and warrants and other securities convertible into or
exchangeable for Common Stock, less (b) the shares of Common Stock issuable upon
conversion of the Series D Stock as issuable upon exercise of the Warrant issued
to NBC on the Closing Date pursuant to this Agreement. The Additional NBC
Warrant shall be issued on the same terms and conditions as the Warrant issued
to NBC pursuant to this Agreement on the Closing Date, with the exception of the
number of shares of Series D Stock issuable upon exercise of such warrant.
Furthermore, the Additional NBC Warrant, for purposes of this Agreement when and
if issued, shall constitute a "Warrant" as defined in this Agreement.
2.2 Representations and Warranties at Additional Closing. Concurrent
with the issuance of the Additional NBC Warrant, the Company shall execute and
deliver to NBC and the additional investors purchasing Series D Stock at the
Additional Closing a certificate of the President of the Company, dated as of
the date of the Additional Closing, certifying that the representations and
warranties of the Company contained in Section 3 of this Agreement are true and
correct in all material respects as of the date of the Additional Closing with
the same force and effect as if made on the date of the Additional Closing, with
only such exceptions thereto as NBC and such additional investors purchasing
Series D Stock at the Additional Closing shall approve in writing, which
certificate shall also include a summary of the calculation of the number of
shares of Series D Stock issuable upon exercise of any Additional NBC Warrant
issued in connection with any Additional Closing.
2.3 Delivery. At the Closing, subject to the terms and conditions
hereof, the Company shall deliver to each Investor certificates representing the
Series D Shares purchased by the Investor, all of which shall be dated the date
of the Closing, against payment of the purchase price therefor by wire transfer
or a check made payable to the order of the Company or cancellation of
indebtedness (or any combination of the foregoing), together with the Warrant
purchased hereby (as applicable), dated the date of the Closing. With respect to
the outstanding bridge loans that will be converted into Series D Stock pursuant
to this Agreement, the principal of all such bridge loans as of the Closing
Date, will be so converted and the accrued interest through February 20, 1998
will be payable in stock with the balance of any accrued interest subsequent to
February 20, 1998, if any, payable in cash.
2
<PAGE> 7
3. Representations and Warranties of the Company. Except as otherwise
set forth on the Schedule of Exceptions attached as Exhibit C hereto setting
forth the exceptions which correspond to the numbered sections contained in this
Section 3, the Company represents and warrants to the Investors on the date
hereof and the Closing Date as follows:
3.1 Organization and Standing; Certificate and Bylaws. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware. The Company has all requisite corporate power
and authority to own and operate its properties and assets and to carry on its
business as presently conducted and as proposed to be conducted. The Company is
qualified to do business as a foreign corporation in the State of California.
The Company is not so qualified in any other jurisdiction and the failure to be
so qualified will not have a material adverse effect on the Company's business
as now conducted or as proposed to be conducted. The Company has furnished the
Investors with copies of its Certificate of Incorporation and Bylaws as
currently in effect. Said copies are true, correct and complete and contain all
amendments through the Closing Date.
3.2 Corporate Power. The Company has now, and will have at the
Closing Date, all requisite legal and corporate power and authority to execute
and deliver this Agreement, the Second Amended and Restated Investors Rights
Agreement in the form attached as Exhibit D hereto (the "Investors Rights
Agreement") and the ancillary agreements in the forms attached as exhibits
hereto (the "Company Ancillary Agreements") to sell and issue the Series D
Shares and the Warrants hereunder, to issue the Conversion Stock, and to carry
out and perform its obligations under the terms of this Agreement, the Investors
Rights Agreement and the Company Ancillary Agreements.
3.3 Capitalization.
(a) The entire duly authorized capital stock of the Company
consists of 45,000,000 shares of Common Stock, $0.001 par value, and 32,902,029
shares of Preferred Stock, $0.001 par value, of which 1,900,800 shares have been
designated Series A Stock, 3,064,102 shares have been designated Series B Stock,
7,900,117 shares have been designated Series C Stock and 20,037,010 shares have
been designated Series D Stock.
(b) Immediately prior to the Closing, 4,663,358 shares of Common
Stock, 1,900,800 shares of Series A Stock, 3,064,102 shares of Series B Stock,
7,900,117 shares of Series C Stock and no shares of Series D Stock will be
issued and outstanding.
(c) Except for (i) the conversion privileges of the Series A,
Series B, Series C and Series D Stock (ii) 1,868,562 shares of Common Stock
reserved for issuance pursuant to the Company's 1994 Stock Option Plan, as
amended (the "Incentive Plan"), of which 1,066,500 shares are subject to
outstanding options and 802,062 shares are available for future grant, (iii)
options to purchase 47,000 shares of Common Stock of the Company issued
separately from the Incentive Plan, (iv) Warrants to purchase 2,719,062 shares
of Common Stock issued pursuant to an Agreement with Allen & Company,
Incorporated, (v) an obligation in connection with a bridge financing to issue
1,046,307 shares of Series D Stock pursuant to a Note Purchase Agreement dated
May 23, 1997 by and between the Company and Digital
3
<PAGE> 8
Ventures Limited, (vi) an obligation in connection with a bridge financing to
issue 936,183 shares of Series D Stock pursuant to a Note Purchase Agreement
dated November 13, 1997 by and among the Company and various note purchasers
thereto, (vii) an obligation in connection with a bridge financing to pay
$102,038.36 to Island Trading Co., Inc. in lieu of Series D Stock pursuant to a
Note Purchase Agreement dated November 20, 1997, (viii) an obligation in
connection with a bridge financing to issue 363,795 shares of Series D Stock at
$1.377 per share pursuant to two notes dated February 6, 1998 by and between the
Company and Digital Ventures Limited and the Phoenix Partners IV Limited
Partnership, respectively, (ix) an obligation in connection with the Series D
Financing to issue warrants to purchase 1,942,187 shares of Series D Stock (as
adjusted for any Additional Closing) to NBC and warrants to purchase 300,000
shares of Series D Stock to GE Capital, respectively and (x) the rights provided
in the Investors Rights Agreement, there are no other outstanding shares of
capital stock, options, warrants or rights or outstanding rights of first
refusal, preemptive rights or other rights, options, warrants, conversion
rights, or other agreements either directly or indirectly for the purchase or
acquisition from the Company of any shares of its capital stock. The rights,
privileges and preferences of the Series A, Series B, Series C and Series D
Stock will be as set forth in the Restated Certificate.
(d) Except as set forth in the Investors Rights Agreement, there
are no agreements or instruments between the Company and/or any other persons in
effect regarding the voting of securities of the Company or the giving of
written shareholder consents with respect to election of directors or other
matters requiring shareholder approval.
(e) Section 3.3(e) of the Schedule of Exceptions contains a
true, complete and correct list of the holders of, and the amount of securities
held by each such holder, the outstanding Series A, Series B, Series C and
Series D Stock, Common Stock, options and warrants of the Company.
(f) All shares of the Company's capital stock have been duly
authorized, were validly issued and are fully paid and non-assessable, and have
been issued in compliance with applicable federal and state securities laws.
(g) The Conversion Stock has been properly reserved for
issuance. The issuance of the Conversion Stock upon the conversion of the Series
D Shares is not subject to any preemptive rights, rights of first refusal or
similar rights that have not been waived.
3.4 Subsidiaries. The Company has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
equity or voting interest in any corporation, association or business entity.
3.5 Authorization. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution, delivery and performance by the Company of this Agreement, the
Investors Rights Agreement and Company Ancillary Agreements (as defined herein),
the authorization, issuance, sale and delivery of the Series D Shares, and the
Conversion Stock, and the performance of all of the Company's obligations
hereunder and thereunder has been taken or will be taken prior to the Closing.
This
4
<PAGE> 9
Agreement, the Investors Rights Agreement and the Company Ancillary Agreements,
when executed and delivered by the Company, shall constitute valid and legally
binding obligations of the Company enforceable in accordance with their
respective terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies. The Series D Shares
and the Conversion Stock, when issued in compliance with the provisions of this
Agreement, will be duly authorized and validly issued, fully paid and
nonassessable, will be issued in compliance with applicable federal and state
securities laws, and will have the rights, preferences and privileges described
in the Restated Certificate; and the Series D Shares, and the Conversion Stock
will be free of any liens or encumbrances; provided, however, that the Series D
Shares and the Conversion Stock may be subject to restrictions on transfer under
applicable securities laws as set forth herein. The Warrants, when issued in
compliance with the provisions of this Agreement, will be duly authorized and
validly issued, will be issued in compliance with applicable federal and state
securities laws, and will be free of any liens or encumbrances; provided,
however, that the Warrants may be subject to restrictions on transfer under
applicable securities laws as set forth herein. The issuance of the Series D
Shares and the Warrants pursuant to this Agreement is not subject to any
preemptive rights, rights of first refusal or similar rights that have not been
waived.
3.6 Outstanding Indebtedness. The Company has no indebtedness for
borrowed money which the Company has directly or indirectly created, incurred,
assumed or guaranteed, or with respect to which the Company has become directly
or indirectly liable. The Company has no liability or obligation, absolute or
contingent, other than liabilities or obligations of less than $25,000 each and
in the aggregate less than $100,000, under purchase orders, sales contracts,
real property leases, equipment leases or similar obligations, all incurred in
the ordinary course of business.
3.7 Financial Statements. The Company has delivered to each
Purchaser its unaudited balance sheets and statements of shareholder's equity at
December 31, 1996 and at December 31, 1997, its unaudited statements of
operations and cash flows for the years ended December 31, 1996 and December 31,
1997 (collectively, the "Financial Statements"). The Financial Statements are
set forth as Attachment 3.7 to the Schedule of Exceptions. The Financial
Statements are complete and correct in all material respects, have been prepared
from, and are consistent with, the books and records of the Company, fairly
present the financial condition of the Company on such dates and the results of
operations for the periods designated therein and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated. The Financial Statements accurately set
out and describe the financial condition and operating results of the Company as
of the dates, and during the periods, indicated therein (subject, in the case of
unaudited financial statements, to normal non-material year-end audit
adjustments and the omission of footnotes). Since December 31, 1997, there has
been no material adverse change in the business, financial condition or results
of operations of the Company.
3.8 Certain Actions.
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<PAGE> 10
(a) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) made any advances to any person other than ordinary
course advances for travel expenses, (iii) sold, exchanged or otherwise disposed
of any of its assets or rights other than in the ordinary course of business or
(iv) redeemed or obligated itself to redeem any of its capital stock.
(b) The Company is not a party to and is not bound by any
contract, agreement, or instrument, or subject to any restrictions under its
Certificate of Incorporation or Bylaws, which materially and adversely affects
its business as now conducted and as now proposed to be conducted.
3.9 Changes.
(a) Since December 31, 1997, there has not been:
(i) any waiver by the Company of a valuable right or of a
material debt owed to it;
(ii) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and which is not material to the assets, properties,
financial condition, operating results, prospects or business of the Company (as
such business is presently conducted and as it is now proposed to be conducted);
(iii) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(iv) any change in any compensation arrangement or agreement
with any executive officer or any material change in any compensation
arrangement or agreement with any other employee of the Company;
(v) any change in the assets, liabilities, financial
condition or operations of the Company, except changes in the ordinary course of
business which have not been, either in any case or in the aggregate, materially
adverse to the Company;
(vi) any change, except in the ordinary course of business,
in the contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(vii) any declaration or payment of any dividend or other
distribution of assets of the Company or the adoption or consideration of any
plan or arrangement with respect thereto;
(viii) any resignation or termination of employment of any
key employee, executive officer or director of the Company (other than
terminations of temporary employment during university leaves of absence), or to
the Company's knowledge any plans with respect thereto;
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<PAGE> 11
(ix) to the Company's knowledge, any other event or
condition of any character which might materially and adversely affect the
assets, properties, financial condition, operating results prospects or business
of the Company (as such business is currently conducted and as it is proposed to
be conducted); or
(x) any material change in the Company's accounting or
internal control procedures and practices.
(b) Since December 31, 1997 the Company has not:
(i) mortgaged, pledged or made subject to, or agreed to
mortgage, pledge or make subject to any lien, charge, security interest any of
the assets or the business of the Company;
(ii) sold or otherwise disposed of or agreed to sell or
otherwise dispose of any of the assets of the Company;
(iii) suffered any damage or loss affecting any of the
assets of the Company;
(iv) incurred or became subject to or agreed to incur or
become subject to any material obligation or liability or issued or agreed to
issue any securities of the Company (other than the Series D Shares and the
Warrants); or
(v) had any change in the relationship or course of dealing
with any of its suppliers, distributors, consultants, customers or creditors.
3.10 Title to Properties and Assets. The Company has good and
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
loan, encumbrance or charge, except (i) the lien of current taxes not yet due
and payable, and (ii) possible minor liens and encumbrances (of which the
Company has no knowledge) which do not in any case materially detract from the
value of the property subject thereto or materially impair the Company's
operations, and which have not arisen otherwise than in the ordinary course of
business. With respect to property it leases, the Company is in compliance with
such leases in all material respects.
3.11 Patents, Trademarks. The Company has sufficient title and
ownership of all patents, patent applications, licenses, trademarks, service
marks, trade names, inventions, franchises, copyrights, trade secrets,
information and other proprietary rights necessary for the operation of its
business as now conducted and, to the best of its knowledge, with no known
infringement of the rights of others. There are no outstanding options,
licenses, or agreements of any kind related to the foregoing, nor is the Company
bound by or a party to any options, licenses or agreements with respect to the
patents, patent applications, licenses, trade marks, service marks, trade names,
inventions, franchises, copyrights, trade secrets, information, proprietary
rights or processes of any other person or entity except as set forth with
respect to Section 3.11 on the Schedule of Exceptions attached as Exhibit C
hereto. The Company has not received any communications alleging that the
Company has violated, or by conducting its
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<PAGE> 12
business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights, trade secrets or other proprietary rights of any
other person or entity. The Company, after reasonable inquiry, is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of the employee's best efforts to promote the interests
of the Company or that would conflict with the Company's business as conducted
or as proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the operation of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under, any contract, covenant or instrument under which any
of such employees is now obligated.
3.12 Compliance with Other Instruments, None Burdensome. The Company
is not in violation of any term of its Certificate of Incorporation or Bylaws or
any contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree, order or, to the best knowledge of the Company, any statute,
rule or regulation applicable to the Company. The execution, delivery, and
performance of and compliance with this Agreement, the Investors Rights
Agreement and the Company Ancillary Agreements and the consummation of the
transactions contemplated hereby and thereby, have not resulted and will not
result in any such violation, or be in conflict with or constitute a default
under any such term, or result in the creation of any lien, mortgage, pledge,
encumbrance or charge upon any of the properties or assets of the Company; and
there is no such violation or default which materially or adversely affects the
Company's business or any of its properties or assets. The Company is not a
party to any contract, agreement or instrument or subject to any judgment,
order, injunction, rule or regulation which, in the good faith judgment of the
Company, materially and adversely affects its business, operations or financial
condition.
3.13 Litigation. There are no actions, suits, proceedings or
investigations pending against the Company or any of its properties or any of
its officers, directors or employees in connection with their relationship with
or actions taken on behalf of the Company before any court or governmental
agency (nor, to the best of the Company's best knowledge, is there any
reasonable basis therefor or threat thereof). The foregoing includes, without
limitation, actions pending or threatened (or any basis therefor known to the
Company after reasonable inquiry) involving the prior employment of any of the
Company's employees or former employees or their obligations under any
agreements with prior employers. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment, or decree of any court or
governmental agency or instrumentality. There is no action, suit, proceeding, or
investigation by the Company currently pending or that the Company intends to
initiate.
3.14 Compliance with Laws. The Company has complied in all material
respects with all applicable laws, statutes, ordinances, codes, rules,
regulations, judgments, orders, writs or decrees of any federal, state, local or
foreign court or governmental or regulatory body or agency thereof.
8
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3.15 Tax Returns. The Company has filed or obtained appropriate
extensions for all federal, state and other tax returns which are required to be
filed and has paid all taxes which have become due and payable. The Company has
adequately provided for all taxes which are not yet due and payable. The Company
has properly withheld or collected from each payment made to its employees the
amount of all taxes that it is required to withhold or collect therefrom. The
Company has not been advised that any of its returns, federal, state or other,
have been or are being audited as of the date thereof. All tax returns which the
Company was required to file prior to the date hereof or appropriate extensions
thereto have been properly filed and are correct and complete in all material
respects.
3.16 Employees. To the Company's best knowledge after due inquiry,
no employee of the Company is in violation of any term of any employment
contract, patent disclosure agreement, invention assignment agreement,
proprietary information agreement or other contract or agreement relating to the
relationship of such employee with the Company or any other party. The Company
does not have any employment contracts, deferred compensation agreements or
bonus, incentive or profit sharing plans, either currently in effect or
proposed, except the Company's Incentive Plan adopted by the Company's Board of
Directors and stockholders covering the sale of up to 1,868,562 shares of Common
Stock to employees, consultants and directors. The Company has no collective
bargaining agreements with any of its employees, and there is no labor union
organizing activity pending or threatened with respect to the Company. All
employees of the Company have signed a Proprietary Information and
Nonsolicitation Agreement in the form set forth as Exhibit E hereto. The Company
has complied at all times with the U.S. laws, statutes, rules and regulations
(including without limitation relating to occupational health and safety)
applicable with respect to its employees. There are no obligations of the
Company to any of its officers, directors, stockholders or employees, other than
for payment of salary for services rendered, reimbursement for reasonable
expenses incurred on behalf of the Company, and for other standard employee
benefits made generally available to all employees.
3.17 Insurance. The Company has fire and casualty insurance
policies, with extended coverage, sufficient in amount (subject to reasonable
deductibles) to allow it to replace any of its properties that might be damaged
or destroyed.
3.18 Registration Rights. Except as provided in the Investors Rights
Agreement, the Company, as of the Closing Date, will not be under any
contractual obligation to register any of its presently outstanding securities
or any of its securities which may hereafter be issued.
3.19 Governmental Consents. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, the Investors Rights Agreement or the Company
Ancillary Agreements, or the offer, sale or issuance of the Series D Shares and
the Warrants (and the Conversion Stock), or the consummation of any other
transaction contemplated hereby or thereby, except qualification or registration
(or taking such action as may be necessary to secure an exemption from
qualification or registration, if available) of the offer and sale of the Series
D Shares and the Warrants (and the Conversion Stock) under
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<PAGE> 14
applicable Blue Sky laws, which filings and qualifications, if required, will be
accomplished in a timely manner.
3.20 Securities Law Exemption. Subject to the accuracy of the
Investors' representations in Section 4 of this Agreement, the offer, sale and
issuance of the Series D Shares, the Warrants and the issuance of the Conversion
Stock constitute transactions exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended (the "1933 Act"
or the "Act"), and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
3.21 Conflict of Interest. Except for agreements explicitly
contemplated hereby (including the NBC Strategic Alliance Agreements attached
hereto as Exhibits I and J (the "NBC Agreement")), there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates, or any affiliate thereof. The Company and, to
the Company's knowledge after having made due inquiry, its officers, have no
interest (other than as holders of less than 1% of any class of securities of a
publicly-traded company), either directly or indirectly, in any entity,
including without limitation thereto, any corporation, partnership, joint
venture, proprietorship, firm, licensee, business or association (whether as an
employee, officer, director, shareholder, agent, independent contractor,
security holder, creditor, consultant or otherwise) that presently (i) provides
any services or designs, produces and/or sells any products or product lines, or
engages in any activity which is the same, similar to or competitive with any
activity or business in which it is now engaged; (ii) is a supplier, customer,
creditor, or has an existing contractual relationship with any of its managing
employees; (iii) has any direct or indirect interest in any asset or property,
real or personal, tangible, or intangible, of the Company or any property, real
or personal, tangible or intangible, that is necessary or desirable for the
conduct of its business.
3.22 Brokers or Finders; Other Offers. Other than as set forth in
the Company's Agreement with Allen & Company, Incorporated, the Company has not
incurred, and will not incur, directly or indirectly, as a result of any action
taken by or on behalf of the Company, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement and the consummation of the transactions contemplated hereby.
3.23 Permits and Licenses. The Company has all licenses and permits
necessary to the conduct of its business as currently being conducted (federal,
state, foreign and local), the failure to obtain which would have a material
adverse effect on the Company's business or properties, and such licenses and
permits are in full force and effect.
3.24 Real Property Holding Company. The Company is not and has not
been at any time a "United States real property holding corporation" as defined
in Section 897 of the Internal Revenue Code of 1986, as amended.
3.25 Employee Benefit Plans. Neither the Company nor any entity
required to be aggregated with the Company under Section 414(b), (c), (m) or (o)
of the Code maintains,
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contributes to or has any liability with respect to any Employee Benefit Plan as
defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The transactions contemplated hereby will not involve any Prohibited
Transaction (as defined in Section 4975 of the Code) or Section 406 of ERISA. To
the extent that any Employee Benefit Plans are described in the Schedules
hereto, such Employee Benefit Plans are in compliance in all material respects
with all applicable sections of the Code and ERISA.
3.26 Minutes. The minute books of the Company provided to special
counsel for the Investors contain an accurate and complete summary of all
meetings of directors and shareholders since the time of incorporation of the
Company.
3.27 Accounting. The Company maintains a system of accounting
established and administered in accordance with generally accepted accounting
principles and has in place reasonable internal controls which are adequate and
appropriate for the Company.
3.28 Disclosure. Neither this Agreement, the Investors Rights
Agreement, any Company Ancillary Agreement, nor any information in the Exhibits
hereto or otherwise furnished to the Investors pursuant to or in connection with
the transactions contemplated hereby or thereby contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading in light of the
circumstances under which such statements were made.
3.29 Undisclosed Liabilities. Except as expressly set forth in the
Schedule of Exceptions and except to the extent reflected or reserved against in
the December 31, 1997 balance sheet or for liabilities and obligations incurred
in the ordinary course of business (which the aggregate will not exceed $100,000
on the Closing Date), all of which are properly reflected in the books and
records of the Company, the Company does not have any liabilities or obligations
of any nature.
3.30 Knowledge of the Investors. The representations and warranties
of the Company are made by the Company with the knowledge and expectation that
the Investors are placing complete reliance thereon in entering into and
performing their obligations under this Agreement and shall not be affected in
any respect whatsoever by any investigation heretofore or hereafter conducted by
or on behalf of the Investors. All representations and warranties of the Company
which are qualified to the Company's best knowledge or words of similar import
shall be deemed to mean that the Company has conducted a due inquiry with
respect to the matter so qualified thereby, regardless of whether the phrase
"after due inquiry" or words of similar import are so included therein.
3.31 Year 2000. The computer systems and software owned or licensed
by the Company are able to accurately process date data, including but not
limited to, calculating, comparing and sequencing from, into and between the
twentieth century (through year 1999), the year 2000 and the twenty-first
century, including leap year calculations.
3.32 Material Agreements. There are no agreements, understandings,
instruments, contracts or proposed transactions to which the Company is a party
or to its
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<PAGE> 16
knowledge by which it is bound which may involve (i) obligations (contingent or
otherwise) of, or payments to, the Company in excess of $10,000 (other than
obligations of, or payments to, the Company arising from purchase or sale
agreements entered into in the ordinary course of business), or (ii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's products or services, or (iii) indemnification by with respect to
infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale agreements entered into in the ordinary course of
business).
4. Representations and Warranties of the Investors. Each Investor, as
to itself only, hereby represents and warrants to the Company as follows:
4.1 Authorization. This Agreement when executed and delivered by
such Investor will constitute a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency, reorganization, moratorium,
relief of debtors, other laws relating to or affecting enforcement of creditors'
rights and rules of law governing specific performance, injunctive relief or
other equitable remedies.
4.2 Experience. Such Investor is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests.
4.3 Investment. Such Investor is acquiring the Series D Shares and
the Conversion Stock for investment for its own account, not as a nominee or
agent, and not with the view to, or for resale in connection with, any
distribution thereof. The Investor understands that the Series D Shares, a
Warrant (if applicable) and the Conversion Stock have not been, and will not be,
registered under the Securities Act by reason of a specific exemption from the
registration provisions of the Securities Act, the availability of which depends
upon, among other things, the bona fide nature of the investment intent and the
accuracy of such Investor's representations as expressed herein.
4.4 Rule 144. The Investor acknowledges that the Series D Shares, a
Warrant (if applicable) and the Conversion Stock must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from such registration is available. The Investor is aware of the provisions of
Rule 144 promulgated under the Securities Act which permit limited resale of
shares purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the Shares, the availability of certain current public information about the
Company, the resale occurring not less than at least one year after a party has
purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations.
4.5 Rule 144A. The Investor acknowledges that it is familiar with
the provisions of Rule 144A promulgated under the Securities Act, which permits
resales of securities acquired in a non-public offering to certain qualified
institutional buyers, subject to the satisfaction of certain conditions. The
Investor understands that the conditions under Rule 144A
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<PAGE> 17
include, among other things, the right of the Purchaser and subsequent
transferees of the Investor to obtain from the Company certain information about
the Company, if the Company has not been required to file periodic reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The
Investor's right to obtain such information shall be as set forth in Section 7.1
of this Agreement.
4.6 No Public Market. The Investor understands that no public market
now exists for any of the securities issued by the Company and that the Company
has made no assurances that a public market will ever exist for the Company's
securities.
4.7 Access to Data. The Investor has had an opportunity to discuss
the Company's business, management and financial affairs with the Company's
management and has also had an opportunity to ask questions of the Company's
officers, which questions were answered to its satisfaction.
4.8 Brokers or Finders. The Investor has not engaged any brokers,
finders, or agents and will not incur, directly or indirectly, any liability for
brokerage or finder's fee or agents' commissions or any similar charges in
connection with this Agreement and the transactions contemplated hereby.
5. Conditions To Closing Of Investors.
5.1 Conditions to Investors' Obligations at a Closing. Each
Investor's obligation to purchase Series D Shares or Warrant (if applicable) at
a Closing under this Agreement is subject to the fulfillment on or prior to the
Closing Date of the following conditions, any of which may be waived in whole or
in part by such Investor:
(a) Representations and Warranties True. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of said date.
(b) Covenants. All covenants, agreements and conditions
contained in this Agreement to be performed by the Company on or prior to the
Closing Date shall have been performed or complied with.
(c) Consents. The Company shall have obtained all consents,
permits and waivers necessary to consummate the transactions contemplated by
this Agreement.
(d) Opinion of the Company's Counsel. The Investors shall have
received from Gray Cary Ware & Freidenrich, counsel to the Company, an opinion
letter addressed to the Investors in the form attached as Exhibit E.
(e) Compliance Certificate. The Company shall have delivered to
the Investors a certificate of the Company, executed by the Chief Executive
Officer, President or a Vice President of the Company and dated as of the
Closing Date, certifying to the fulfillment of the conditions specified in
Sections 5.1(a), (b) and (c) and stating that there has been no material
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<PAGE> 18
adverse change in the business, financial condition or results of operations,
assets or prospects of the Company since December 31, 1997.
(f) Certificate of Incorporation. The Second Amended and
Restated Certificate of Incorporation in the form attached as Exhibit B shall
have been filed with the Secretary of State of the State of Delaware.
(g) Government Consents. All material government consents and
licenses, permits, authorizations, approvals, and filings with and notifications
to any governmental or regulatory body required to be made or obtained by the
Investors in connection with the consummation of the transactions contemplated
by this Agreement, the Investors Rights Agreement and the Company Ancillary
Agreements shall have been made or obtained.
(h) Third Party Consents. All material consents of third parties
required to be obtained by the Investors in connection with the consummation of
such transactions shall have been obtained.
(i) Governmental Authority. No statute, law, regulation or order
shall have been enacted by any governmental authority which would make the
transactions contemplated by this Agreement, the Investors Rights Agreement and
the Company Ancillary Agreements illegal or otherwise prevent the consummation
thereof.
(j) Injunctions or Orders. No injunction or order of any court
or administrative agency of competent jurisdiction shall be in effect as of the
Closing which restrains or prohibits the consummation of the transactions
contemplated by this Agreement.
(k) Actions or Proceedings. No action or proceeding before any
governmental, regulatory or administrative agency, authority or commission of
any court of competent jurisdiction shall have been instituted (and be pending)
which seeks to prevent the consummation of the transactions contemplated by this
Agreement.
(l) Other Agreements. The Company shall have executed and
delivered the documents to be executed by it specified in subparagraph (m) and
(n) below.
(m) Company Ancillary Agreements. The following documents as
well as the Indemnification Agreement set forth in Exhibit F hereto shall
constitute the "Company Ancillary Agreements."
(i) The Investors Rights Agreement in the form attached as
Exhibit D shall have been executed by the Company, the Investors and the holders
of the outstanding shares of Series A, Series B and Series C Stock.
(ii) The Second Amended and Restated Co-Sale Agreement in
the form set forth as Exhibit G hereto shall have been executed by the Investors
and David Goldberg and Robert Roback (each a "Founder" and collectively the
"Founders").
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(iii) Each employee of the Company shall have executed a
Proprietary Information and Nonsolicitation Agreement in the form attached
hereto as Exhibit H or an employment agreement which contains representations
and covenants similar to such Proprietary Information and Nonsolicitation
Agreement.
(iv) Each employee of the Company who holds shares of the
Company's Common Stock or options under the Incentive Plan shall have signed an
agreement (i) granting the Company a right of first refusal on transfers of
shares (which right shall terminate upon a Qualifying Public Offering as defined
in Section 7.10) and (ii) providing that such employee shall not engage in
public resales of Common Stock for a period of two years following the Company's
initial public offering without approval by the Board of Directors (such
agreement shall be on the terms set forth in Section 4 of the Co-Sale
Agreement).
(v) The NBC Agreements in the form attached hereto as
Exhibit I and J shall have been executed by the Company and NBC.
(vi) The Warrant to purchase Series D Stock in the form
attached hereto shall have been issued to NBC and executed by the Company.
(vii) The Warrant to purchase Series D Stock in the form
attached hereto shall have been issued to GE Capital and executed by the
Company.
(n) Director Indemnification Agreements. The Company shall have
authorized indemnification agreements with its directors, which agreements shall
be substantially in the form set forth as Exhibit F hereto, and shall have
entered into such agreements with each of the directors referenced in Section
5(o) below.
(o) Board of Directors. Immediately after the Closing Date, the
Company shall have a seven-member board of directors consisting of David
Johnston, Susanna Kim, Lawrence Mestel, William Woodward, David Goldberg, Robert
Roback and Richard D. Snyder.
(p) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
hereby and all documents and instruments incident to such transactions shall
have been reasonably approved by special counsel to the Investors, and the
Investors and their respective special counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.
(q) Compliance with Laws. The purchase of the Series D Shares by
the Investors hereunder shall be legally permitted by all laws and regulations
to which the Investors or the Company are subject.
(r) Minimum Purchase. All of the Series D Shares shall be
purchased on the Closing Date (other than shares reserved for issuance upon
exercise of the Warrants), except for such number, which shall not exceed in the
aggregate 3,614,379 Series D Shares, for which the Company provides to the
Investors an explanation of the reason why such Series D
15
<PAGE> 20
Shares will not be purchased on the Closing Date, which explanation is
reasonably acceptable to the Investors.
6. Conditions to Company's Obligations.
6.1 Conditions to Company's Obligations at a Closing. The Company's
obligation to sell and issue the Series D Shares and the Warrants at a Closing
is subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived in whole or in part by the Company
(unless the Company shall have contributed in whole or in part to the
nonoccurrence or nonfulfillment of such condition):
(a) Representations and Warranties True. The representations and
warranties made by the Investors herein shall be true and correct on the Closing
Date with the same force and effect as if they had been made on and as of the
same date.
(b) Consents. The Company shall have obtained all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the Closing.
(c) Company Ancillary Agreements.
(i) The Investors Rights Agreement in the form set forth as
Exhibit D hereto shall have been executed by the Company, the Investors and the
holders of the outstanding shares of Series A, Series B and Series C Stock.
(ii) The Second Amended and Restated Co-Sale Agreement in
the form set forth as Exhibit G hereto shall have been executed by the Investors
and the Founders.
(iii) Each employee of the Company shall have executed a
Proprietary Information and Nonsolicitation Agreement in the form attached
hereto as Exhibit H or an employment agreement which contains representations
similar to such Proprietary Information and Nonsolicitation Agreement.
(iv) Each employee of the Company who holds shares of the
Company's Common Stock or options under the Incentive Plan shall have signed an
agreement (i) granting the Company a right of first refusal on transfers of
shares (which right shall terminate upon a Qualifying Public Offering as defined
therein) and (ii) providing that such employee shall not engage in public
resales of Common Stock for a period of two years following the Company's
initial public offering without approval by the Board of Directors (such
agreement shall be on the terms set forth in Section 4 of the Co-Sale
Agreement).
(v) The NBC Agreements in the form attached hereto as
Exhibits I and J shall have been executed by the Company and NBC.
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<PAGE> 21
(d) Compliance with all Laws. At the Closing, the purchase of
the Series D Shares and the Warrants by the Investors hereunder shall be legally
permitted by all laws and regulations to which the Investors or the Company are
subject.
7. Other Agreements and Covenants.
7.1 Use of Proceeds. The Company shall use the proceeds from the
sale of the Series D Stock and the Warrants hereunder for (a) the repayment of
that certain Convertible Subordinated Promissory Note dated November 20, 1997 in
the principal amount of $100,000, made by the Company in favor of Island Trading
Co., Inc. and (b) working capital and general corporate purposes.
7.2 Financial Information. The Company will provide each Investor
with the reports specified in subsection (a), (d) and (e) below and, for so long
as such Investor is a holder of a minimum of 250,000 Series D Shares, Warrants
for Series D Stock or an equivalent amount of Conversion Stock or of a
combination of Series D Shares, Warrants for Series D Stock and Conversion
Stock, including for purposes of this Section 7 any such Series D Shares,
Warrants for Series D Stock or Conversion Stock transferred to a constituent
partner, affiliate or limited liability company member of an Investor, the
reports specified in subsections (b) and (c) below:
(a) As soon as practicable after the end of each fiscal year,
and in any event within ninety (90) days thereafter, consolidated balance sheets
of the Company and its subsidiaries, if any, as of the end of such fiscal year,
and consolidated statements of operations, stockholders' equity and cash flows
of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles consistently applied,
all in reasonable detail and audited by independent auditors of national
standing selected by the Company and reasonably acceptable to the Investors.
(b) As soon as practicable after the end of each month and in
any event within thirty (30) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as of the end of each such month, and
consolidated statements of operations and cash flows of the Company and its
subsidiaries for such period and for the current fiscal year to date, prepared
in accordance with generally accepted accounting principles consistently applied
(other than for accompanying notes), subject to changes resulting from year-end
audit adjustments, all in reasonable detail and signed by the principal
financial or principal accounting officer of the Company.
(c) A copy of the annual operating plan of the Company for the
next fiscal year and an annual budget for the next fiscal year of the Company
containing profit and loss projections, cash flow projections and capital
expenditures, all on a monthly basis, as soon as it is available but in any
event prior to thirty (30) days before the end of the current fiscal year.
(d) As soon as practicable after the end of each quarter and in
any event within forty five (45) days thereafter, a schedule of all stockholders
of the Company by certificate number, class and series and a schedule of all
outstanding interests in the Incentive
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<PAGE> 22
Plan and any other stock option, stock purchase or similar equity incentive plan
hereafter adopted by the Company with the approval of its Board of Directors.
(e) The obligation of the Company to furnish financial
information under this Section 7.2 shall terminate upon a public offering or
when the Company becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended. Notwithstanding such termination, for a period
of three years following the closing of such public offering, the Company shall
deliver to the Investors copies of the Company's 10-Ks, 10-Qs, 8-Ks and Annual
Reports to Stockholders promptly after such documents are filed with the
Securities and Exchange Commission.
7.3 Additional Information. For so long as an Investor is a holder
of at least 250,000 Series D Shares, Warrants for Series D Stock, Conversion
Stock or a combination thereof including for the purposes of this Section 7 any
such Series D Shares, Warrants for Series D Stock or Conversion Stock
transferred to a constituent partner, affiliate or limited liability company
member of such Investor, the Company will deliver or provide to such Investor
and its representatives (i.e. attorneys and/or accountants) with reasonable
promptness, such other information and data, including access to books, records,
officers and accountants, with respect to the Company and its subsidiaries as
any such Investor may from time to time reasonably request.
7.4 Assignment of Rights to Financial Information. Subject to the
limitations set forth in Sections 7.2 and 7.3, the rights granted pursuant to
Sections 7.2 and 7.3 may be assigned or otherwise conveyed by the Investors or
by any subsequent transferee to a general or limited partner, member or
affiliate of such Investor, a limited partnership, corporation or limited
liability company or investment fund under common management and control with
such Investor or any other investor who acquires a minimum of 250,000 Series D
Shares, Warrants for Series D Stock or Conversion Stock, or a combination
thereof, other than a competitor of the Company, as reasonably determined by the
Board of Directors of the Company, excluding any director with an interest in
such transferee, provided that written notice of such assignment or conveyance
is given to the Company.
7.5 Corporate Existence, Licenses and Permits; Maintenance of
Properties. The Company will at all times cause to be done all things necessary
to maintain, preserve and renew its existence as a corporation organized under
the laws of a state of the United States of America (except in connection with a
merger or consolidation in which the Company is not the surviving corporation)
and will do all things reasonably necessary to preserve and keep in force and
effect, and cause each of its subsidiaries (if any) to preserve and keep in
force and effect, all patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights, licenses and permits necessary
and material to the conduct of its and their respective businesses, and will
maintain and keep, and cause each of its subsidiaries (if any) to maintain and
keep, its and their properties in good repair, working order and condition
(except for normal wear and tear), and from time to time make all needful and
proper repairs, renewals and replacements.
7.6 Taxes. The Company will duly pay and discharge, and will cause
each of its subsidiaries (if any) duly to pay and discharge, all taxes,
assessments and governmental
18
<PAGE> 23
charges upon or against the Company, its subsidiaries (if any) or their
respective properties, in each case before the same become delinquent and before
penalties accrue thereon, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and the Company and its
subsidiaries (if any) shall have set aside on its books adequate reserves with
respect thereto. The Company will file all tax returns or appropriate extensions
thereto which it is required to file prior to the dates due thereto, which tax
returns or extensions will be properly filed and correct and complete in all
material respects.
7.7 Insurance.
(a) The Company will apply for and continue in full force and
effect adequate insurance covering the respective risks of the Company and its
subsidiaries (if any) of such types and in at least such amounts and with such
deductibles as are customary for other corporations engaged in similar lines of
business and with good and responsible insurance companies.
(b) The Company shall maintain a key-person life insurance
policy on the life of David Goldberg, the Company's Chief Executive Officer,
naming the Company as sole beneficiary and for an amount of $2,000,000.00.
(c) The Company will use its best efforts to obtain $2,000,000
of directors and officers liability insurance within ninety (90) days of the
Closing Date.
7.8 Books and Accounts. The Company will, and will cause each
subsidiary (if any) to, maintain proper books of record and account in which
full, true and correct entries shall be made of its transactions and set aside
on its books from its earnings for each fiscal year all such proper reserves as
in each case shall be required in accordance with generally accepted accounting
principles consistently applied.
7.9 Stock Vesting and Related Covenants. All options, stock purchase
and similar rights granted under the Incentive Plan shall, unless approved by
the Board of Directors, be subject to the following vesting arrangements: shares
will vest in equal monthly installments over 60 months (except that new
employees shall vest in 3/60ths of their shares after three months of
employment). In addition, all stock purchase, option or similar agreements
relating to future issuances of equity securities to any employee shall contain
such employee's written agreement (i) granting the Company a right of first
refusal on transfers of shares (which right shall terminate upon a Qualifying
Public Offering as defined therein), and (ii) providing that such employee shall
not engage in public resales of Common Stock for a period of two years following
the Company's initial public offering without approval by the Board of
Directors.
7.10 Termination of Covenants. The covenants set forth in this
Section 7 (other than those in 7.5, 7.6, 7.7, 7.8, and 7.11 and those covenants
under Section 7.2(e) which by their terms apply after an initial public
offering) shall terminate and be of no further force or effect upon the closing
of the Company's initial underwritten public offering pursuant to an effective
registration statement filed by the Company under the Securities Act and
resulting in the automatic conversion of all outstanding shares of Series A,
Series B, Series C and Series D Stock
19
<PAGE> 24
in accordance with the Company's certificate of incorporation (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan) (a "Qualifying Public Offering").
7.11 Compensation. Any increase or change in the compensation of any
employee or officer of the Company who is also a member of the Company's Board
of Directors must be unanimously approved by the directors who are not employees
or officers of the Company.
8. Indemnification.
8.1 Company Indemnification. The Company covenants and agrees to
defend, indemnify and save and hold harmless each Investor, together with its
officers, directors, partners, stockhholders, employees, trustees, attorneys and
representatives and each person who controls each Investor within the meaning of
the Securities Act or the Exchange Act, from and against any and all losses,
costs, expenses, liabilities, claims or legal damages (including, without
limitation, reasonble fees and disbursements of counsel and accountants and
other costs and expenses incident to any actual or threatened claim, suit,
action or proceeding, whether incurred in connection with a claim against the
Company or a third party claim) (collectively, "Losses") arising out of or
resulting from: (i) any inaccuracy in or breach of any representation, warranty,
covenant or agreement made by the Company in this Agreement, the Investors
Rights Agreement or any Company Ancillary Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; (ii) the failure of the Company to
perform or observe fully any covenant, agreement or provision to be performed or
observed by it pursuant to this Agreement, the Investors Rights Agreement or any
Company Ancillary Agreement; (iii) any legal, administrative or other
proceedings brought by a third party arising out of the transactions
contemplated by this Agreement, the Investors Rights Agreement or any Company
Ancillary Agreement; or (iv) any actual or threatened claim, suit, action or
proceeding arising out of or resulting from the conduct by the Company of its
business or operations, or the Company's occupancy or use of its properties or
assets, on or prior to the Closing Date; other than, with respect to an
Investor, Losses resulting directly from the gross negligence or willful
misconduct of such Investor or any of its respective officers, directors,
employees, or any person who controls such Investor within the meaning of the
Securities Act or the Exchange Act; provided, however, that, if and to the
extent that such indemnification is uneforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of such
indemnified liability which shall be permissible under applicable laws.
8.2 Procedure. Each party entitled to be indemnified pursuant to
Section 8.1 (each, an "Indemnified Party") shall notify the Company in writing
of any action against such Indemnified Party in respect of which the Company is
or may be obligated to provide indemnification on account of Section 8.1,
promptly after the receipt of notice of the commencement thereof. The failure of
any Indemnified Party to so notify the Company of any such action shall not
relieve the Company from any liability which the Company may have to such
Indemnified Party except to the extent the Company shall have been materially
prejudiced by the omission of such Indemnified Party so to notify the Company,
pursuant to this Section 8.2. In case any such action shall be brought against
any Indemnified Party and it shall
20
<PAGE> 25
notify the Company of the commencement thereof, the Company shall be entitled to
participate therein and, to the extent that the Company may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such Indemnified Party,
and after notice from the Company to such Indemnified Party of its election so
to assume the defense thereof, the Company will not be liable to such
Indemnified Party under Section 8.1 for any legal or other expense subsequently
incurred by such Indemnified Party in connection with the defense thereof nor
for any settlement thereof entered into without the consent of the Company;
provided, however, that (i) if the Company shall elect not to asume the defense
of such claim or action or (ii) if the Indemnified Party reasonably determines
(x) that there may be a conflict between the positions of the Company and of the
Indemnified Party in defending such claim or action or (y) that there may be
legal defenses available to such Indemnified Party different from or in addition
to those available to the Company, then separate counsel for the Indemnified
Party shall be entitled to participate in and conduct the defense, in the case
of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the
Company shall be liable for any reasonable legal or other expenses incurred by
the Indemnified Party in connection with the defense.
8.3 Indemnification Non-Exclusive. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable or common-law remedy any party may have for breach of representation,
warranty, covenant or agreement.
9. Miscellaneous.
9.1 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents, made and to be performed entirely within the State of
California.
9.2 Survival. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by the Investors and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder as of the date of such certificate or instrument.
9.3 Finder's Fee. Each party represents, as to itself only, that it
neither is nor will be obligated for any finder's fee or commission in
connection with this transaction. The Investors (severally but not jointly) and
the Company agree to indemnify and hold harmless the other party from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Investors or the Company is responsible.
Notwithstanding this Section 9.3, the Company agrees to indemnify the Investors
for such fees payable to Allen & Company Incorporated.
9.4 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto. Any Investor may assign its rights hereunder to any Investor,
any transferee of such Investor that is a general or limited partner or
affiliate of such Investor or a limited partnership, corporation or limited
liability company or
21
<PAGE> 26
investment fund under common management and control with such Investor or to any
other investor who acquires a minimum of 250,000 Series D Shares, Warrants for
Series D Stock or Conversion Stock.
9.5 Entire Agreement. This Agreement, the Exhibits and the other
documents delivered pursuant to this Agreement or contemplated hereby constitute
the full and entire understanding and agreement among the parties with regard to
the subjects hereof and thereof and no party shall be liable or bound to any
other party in any manner by any representations, warranties, covenants, or
agreements except as specifically set forth herein or therein. Nothing in this
Agreement, express or implied, is intended to confer upon any party, other than
the parties hereto and their respective successors and assigns, any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided herein.
9.6 Severability. In case any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided, however, that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
9.7 Amendment and Waiver. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Investors holding at least
eighty percent (80%) of the Series D Shares issued pursuant to this Agreement
(including the Warrants for Series D Shares which have become exercisable
according to their terms on an as-converted basis). Any amendment or waiver
effected in accordance with this Section 9.7 shall be binding upon each holder
of any Series D Shares, Warrants for Series D Stock or Conversion Stock
purchased under this Agreement at the time outstanding, each future holder of
all such securities and the Company provided, however, that no such amendment or
waiver shall adversely affect the rights of any Warrant, the Series D Stock
issuable upon exercise of any Warrant or any shares of Series D Stock issued
hereunder in a manner different from any other holder of Series D Stock without
the prior written consent of the holder of such Warrant or Series D Stock.
Notwithstanding the foregoing, no such amendment, waiver or other instrument
effected in accordance with this Section 9.7 shall increase the obligations of
any Investor or holder of Series D Shares or Warrants for Series D Stock unless
such Investor or holder shall have consented thereto in writing.
9.8 Delays or Omissions. No delay or omission to exercise any right,
power, or remedy accruing to the Investors or any subsequent holder of any
Series D Shares upon any breach, default or noncompliance of the Company under
this Agreement or under the Certificate of Incorporation, shall impair any such
right, power, or remedy, nor shall it be construed to be a waiver of any such
breach, default or noncompliance, or any acquiescence therein, or of any similar
breach, default or noncompliance thereafter occurring. It is further agreed that
any waiver, permit, consent, or approval of any kind or character on the
Investors' part of any breach, default or noncompliance under this Agreement or
under the Certificate of Incorporation or any waiver on the Investors' part of
any provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing, and that
all
22
<PAGE> 27
remedies, either under this Agreement, the Certificate of Incorporation, by law,
or otherwise afforded to the Investors, shall be cumulative and not alternative.
9.9 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given or delivered when sent if delivered by express delivery service or via
facsimile, in either case followed by confirmation of receipt: (a) if to the
Investors, at the Investors' address as set forth on the Schedule of Investors,
or at such other address as the Investors shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth at the end of
this Agreement, or at such other address as the Company shall have furnished to
the Investors in writing. Any other notice or other communication shall be
deemed effective only upon actual receipt.
9.10 Expenses. The Company and the Investors shall each bear all of
their own costs and expenses incurred with respect to the negotiation,
execution, delivery and performance of this Agreement, as well as the fees and
reasonable out-of-pocket expenses of their respective counsel, except that the
Company shall bear all reasonable costs and expenses incurred by one firm of
counsel which such costs and expenses shall not exceed $10,000.
9.11 Titles and Subtitles. The titles of the sections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
9.13 Press Releases. Any press release relating to this Agreement,
the Investors Rights Agreement or any Company Ancillary Agreement or any of the
transactions contemplated herein or therein using any Investor's name or any of
its trademarks, logos, trade names or other intellectual property or otherwise
referring to any Investor shall be subject to the prior written approval of such
Investor. The Company understands and agrees that it may not use or deploy in
any manner or for any purpose any logo, trade name, trademark or other
intellectual property of any Investor or any of its wholly-owned subsidiaries,
without such Investor's express prior written consent.
23
<PAGE> 28
The foregoing Securities Purchase Agreement is executed as of the date
first above written.
COMPANY:
2WAY MEDIA, INC.
By: /s/ Robert D. Roback
------------------------------------
Title: President
----------------------------------
Address:
1632 Fifth Street #330
Santa Monica, CA 90401
INVESTORS:
THE PHOENIX PARTNERS III
LIMITED PARTNERSHIP
By: The Phoenix Management
Partners, III
Its: General Partner
By: /s/ David B. Johnston
------------------------------------
David B. Johnston
General Partner
THE PHOENIX PARTNERS IV
LIMITED PARTNERSHIP
By: The Phoenix Management IV, L.L.C.
Its: General Partner
By: /s/ David B. Johnston
------------------------------------
David B. Johnston
Member
<PAGE> 29
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SERIES D SECURITIES PURCHASE AGREEMENT
DATED FEBRUARY 27, 1998
INTEL CORPORATION
By: Arvind Sodhani
------------------------------------
Title: Vice President and Treasurer
---------------------------------
Signature: /s/ Arvind Sodhani
-----------------------------
ISLAND TRADING CO., INC.
By: N/A
------------------------------------
Title:
---------------------------------
Signature:
-----------------------------
SOFTBANK VENTURES INC.
By: Yoshitaka Kitao
-------------------------------------
Title: President and CEO
----------------------------------
Signature: /s/ Yoshitaka Kitao
------------------------------
<PAGE> 30
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SERIES D SECURITIES PURCHASE AGREEMENT
DATED FEBRUARY 27, 1998
GENERAL ELECTRIC CAPITAL CORPORATION
By: Russell W. Howard
------------------------------------
Title: Regional Operations Manager
---------------------------------
Signature: /s/ Russell W. Howard
-----------------------------
NBC MULTIMEDIA, INC.
By: Edmund Santos
------------------------------------
Title: V.P.
---------------------------------
Signature: /s/ Edmund Santos
-----------------------------
GATEWAY 2000, INC.
By: N/A
------------------------------------
Title:
---------------------------------
Signature:
-----------------------------
<PAGE> 31
COUNTERPART SIGNATURE PAGE
TO THE
2WAY MEDIA, INC.
SERIES D SECURITIES PURCHASE AGREEMENT
DATED FEBRUARY 27, 1998
AVALON TECHNOLOGY LLC
By: Richard D. Snyder
------------------------------------
Title: President
---------------------------------
Signature: /s/ Richard D. Snyder
-----------------------------
DIGITAL VENTURES LIMITED
By: Grange Trustees Limited
------------------------------------
Title: Secretary
---------------------------------
Signature: For and on behalf of
Grange Trustees Limited
-----------------------------
<PAGE> 32
EXHIBIT A
Schedule of Investors
First Closing:
<TABLE>
<CAPTION>
Total Cash and No. of
No. of Shares Price Per Other Warrants
Investor of Series D Share Consideration Purchased
- -------- ------------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
The Phoenix Partners III Limited 1,906,317 $ 1.53 $ 2,916,665.01 --
Partnership(1)
The Phoenix Partners III Limited 181,972 $ 1.377 $ 250,575.44 --
Partnership(2)
The Phoenix Partners IV Limited 526,090 $ 1.53 $ 804,917.70 --
Partnership(3)
Intel Corporation(4)(5) 2,908,497 $ 1.53 $ 4,450,000.41 --
General Electric Capital Corporation 1,960,784 $ 1.53 $ 2,999,999.52 300,000
NBC Multimedia, Inc.(6) 1,960,784 $ 1.53 $ 2,999,999.52 1,942,187
Avalon Technology LLC 2,941,176 $ 1.53 $ 4,499,999.28 --
Digital Ventures Limited(7) 1,871,108 $ 1.53 $ 2,862,795.24 --
Digital Ventures Limited(8) 181,823 $ 1.377 $ 250,370.27 --
========= ============== =========
Totals: 14,438,551 $22,035,322.39 2,242,187
</TABLE>
(1) Of the 1,906317 shares reflected on the chart above, 272,330 shares
represent shares granted upon conversion of existing bridge loans and
interest thereon assuming a stock accruing interest cut-off date of
February 20, 1998.
(2) All 181,972 shares reflected on the chart above represent shares granted
upon conversion of existing bridge loans and interest thereon assuming a
stock accruing interest cut-off date of February 20, 1998. The Purchase
Price Per Share of $1.377 reflects the issuance of shares at ninety
percent (90%) of the Series D Stock purchase price as set forth in the
terms of the Note under which such shares are being issued.
(3) Of the 526,090 shares reflected on the chart above, 28,620 shares
represent shares granted upon conversion of existing bridge loans and
interest thereon assuming a stock accruing interest cut-off date of
February 20, 1998.
<PAGE> 33
(4) Of the 2,908,497 shares reflected on the chart above, 300,629 shares
represent shares granted upon conversion of existing bridge loans and
interest thereon assuming a stock accruing interest cut-off date of
February 20, 1998.
(5) The consideration for 326,797 shares of Intel Corporation's purchase of
2,908,497 shares of Series D Stock is the execution of the Intel
Software License and Development Agreement.
(6) The consideration for the shares of Series D Stock for NBC Multimedia,
Inc. is the execution of the NBC Strategic Alliance Agreements attached
as Exhibits I and J to the Series D Securities Purchase Agreement, which
is valued by the Company at $2,999,999.52.
(7) Of the 1,871,108 shares reflected on the chart above, 1,380,911 shares
represent shares granted upon conversion of existing bridge loans and
interest thereon assuming a stock accruing interest cut-off date of
February 20, 1998.
(8) All 181,823 shares reflected on the chart above represent shares granted
upon conversion of existing bridge loans and interest thereon assuming a
stock accruing interest cut-off date of February 20, 1998. The Purchase
Price Per Share of $1.377 reflects the issuance of shares at ninety
percent (90%) of the Series D Stock purchase price as set forth in the
terms of the Note under which such shares are being issued.
<PAGE> 34
EXHIBIT B
Second Amended and Restated Certificate of Incorporation
of 2Way Media, Inc.
<PAGE> 35
EXHIBIT C
Schedule of Exceptions
The following are the exceptions to the representations and warranties
made by 2Way Media, Inc. ("Company") in Section 3 of the Series D Securities
Purchase Agreement dated February ___, 1998 (the "Agreement") at and as of the
Closing. Capitalized terms used in this exhibit, unless otherwise specified,
have the same meaning given them in the Agreement. The section references used
herein are to particular subsections in Section 3 of the Agreement. The numbers
below correspond to the Sections in the Agreement modified by the disclosures.
<PAGE> 36
EXHIBIT D
Second Amended and Restated Investors Rights Agreement
<PAGE> 37
EXHIBIT E
Opinion of Gray Cary Ware & Freidenrich LLP
<PAGE> 38
EXHIBIT F
Indemnification Agreement
<PAGE> 39
EXHIBIT G
Second Amended and Restated Co-Sale Agreement
<PAGE> 40
EXHIBIT H
Proprietary Information and Nonsolicitation Agreement
<PAGE> 41
EXHIBIT I
NBC Strategic Alliance Agreement
<PAGE> 42
EXHIBIT J
NBC Strategic Alliance Agreement
<PAGE> 43
LAUNCH MEDIA, INC.
AMENDMENT NO. 1 TO SERIES D SECURITIES PURCHASE AGREEMENT
This Amendment No. 1 (the "Amendment"), dated as of May 29, 1998, to the
Series D Securities Purchase Agreement dated February 27, 1998 (the "Securities
Purchase Agreement"), by and among Launch Media, Inc., a Delaware corporation
(the "Company"), the purchasers (the "Investors") of the issued and outstanding
Series D Shares (as defined in the Securities Purchase Agreement) and the New
Investor set forth on Exhibit A-1 attached hereto (the "New Investor").
Capitalized terms used herein and not otherwise defined herein shall have the
same meanings as in the Securities Purchase Agreement.
RECITALS
A. The Board of Directors of the Company has determined that it is in
the best interests of the Company to amend the Securities Purchase Agreement to
provide for revised stock option vesting and related covenants and to add the
New Investor as a party to the Securities Purchase Agreement, as amended hereby
and to provide for the sale and issuance to the New Investor of the amount of
Series D stock set forth on Exhibit A-1 attached hereto.
B. It is intended that by its signature hereto the New Investor becomes
a party to the Securities Purchase Agreement, as amended by this Agreement,
effective as of the date upon which it purchases shares of Series D Stock and be
included in the definition of "Investors" as that term is defined in the
Securities Purchase Agreement.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Section 7.9 of the Securities Purchase Agreement is deleted in its
entirety and is amended to read as follows:
"7.9. Stock Vesting and Related Covenants. All options, stock
purchase and similar rights granted under the Incentive Plan shall, unless
approved by the Board of Directors, be subject to the following vesting
arrangements: shares will vest in equal monthly installments over 48 months
(except that new employees shall vest twenty five percent (25%) of their shares
after twelve months of employment). In addition, all stock purchase, option or
similar agreements relating to future issuances of equity securities to any
employee shall contain such employee's written agreement granting the Company a
right of first refusal on transfers of shares (which right shall terminate upon
a Qualifying Public Offering as defined therein)."
2. A new Exhibit A-1 is added to the Securities Purchase Agreement in
the form attached hereto as Exhibit A-1.
1
<PAGE> 44
3. By its signature hereto, the New Purchaser becomes a party to the
Series D Securities Purchase Agreement, as amended by this Agreement, and is
included for all purposes in the definition of "Investors" as that term is
defined in the Series D Securities Purchase Agreement.
2
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
"COMPANY"
LAUNCH MEDIA, INC.
By: /s/ Robert D. Roback
------------------------------------
Name: Robert D. Roback
Title: President
3
<PAGE> 46
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SERIES D SECURITIES PURCHASE AGREEMENT
DATED AS OF MAY 29, 1998
"NEW INVESTOR"
GORAN ENTERPRISES LIMITED
By: Grange Trustees Limited
--------------------------------
Title: Secretary
--------------------------------
Signature: For and on behalf of
Grange Trustees Limited
--------------------------------
"INVESTORS"
DIGITAL VENTURES LIMITED
By: Grange Trustees Limited
--------------------------------
Title: Secretary
--------------------------------
Signature: For and on behalf of
Grange Trustees
--------------------------------
THE PHOENIX PARTNERS III
LIMITED PARTNERSHIP
By: The Phoenix Management Partners III
Its: General Partner
By: /s/ David B. Johnston
--------------------------------
David B. Johnston
General Partner
THE PHOENIX PARTNERS IV LIMITED PARTNERSHIP
By: The Phoenix Management IV, L.L.C.
Its: General Partner
By: /s/ David B. Johnston
--------------------------------
David B. Johnston
Member
4
<PAGE> 47
COUNTERPART SIGNATURE PAGE TO
LAUNCH MEDIA, INC. AMENDMENT NO. 1 TO
SERIES D SECURITIES PURCHASE AGREEMENT
DATED AS OF MAY 29, 1998
INTEL CORPORATION
By: Arvind Sodhani
--------------------------------
Title: Vice President and Treasurer
--------------------------------
Signature: /s/ Arvind Sodhani
--------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By: Russell W. Howard
--------------------------------
Title: Region Operations Manager
--------------------------------
Signature: /s/ Russell W. Howard
--------------------------------
NBC MULTIMEDIA, INC.
By: C. Glowachi
--------------------------------
Title: V.P.
--------------------------------
Signature: /s/ C. Glowachi
--------------------------------
AVALON TECHNOLOGY LLC
By: Richard D. Snyder
--------------------------------
Title: Managing Member,
Avalon Ventures LLC
--------------------------------
Signature: /s/ Richard D. Snyder
--------------------------------
5
<PAGE> 48
EXHIBIT A-1
LAUNCH MEDIA SERIES D
AGREEMENT CONCERNING AMENDMENT NO. 1
TO SERIES D SECURITIES PURCHASE AGREEMENT
DATED AS OF MAY 29, 1998
SCHEDULE OF INVESTORS
SECOND CLOSING
<TABLE>
<CAPTION>
Investor No. of Shares Price Per Purchase
of Series D Share Price
------------- ------------- -------------
<S> <C> <C> <C>
Goran Enterprises Limited 2,287,582 $ 1.53 $3,500,000.46
============= ============= =============
Second Closing Total: 2,287,582 $ 1.53 $3,500,000.46
</TABLE>
6
<PAGE> 1
EXHIBIT 10.15
SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
No. 1
WARRANT TO PURCHASE SERIES D PREFERRED STOCK
of
2 WAY MEDIA, INC.
(void after February 27, 2003)
1. Number of Shares Subject to Warrant. FOR VALUE RECEIVED, on and
after the date hereof, and subject to the terms and conditions herein set forth,
Holder (as defined below) is entitled to purchase from 2 Way Media, Inc., a
Delaware corporation (the "Company"), at any time (subject to Section 6.1
hereof) before the Termination Date (as defined below), at a price per share
equal to the Warrant Price (as defined below and subject to adjustments as
described below), the Warrant Stock (as defined below and subject to adjustments
as described below) upon exercise of this Warrant pursuant to Section 6.2
hereof.
2. Definitions. As used in this Warrant, the following terms shall have
the definitions ascribed to them below:
(a) "Definitive Agreement" shall mean the Strategic Alliance Agreement
concerning NBC.com between Company and Holder dated the date hereof.
(b) "Equity Financing" shall mean an equity financing in which the
Company issues shares of Series D convertible preferred stock and receives an
aggregate of at least $5,000,000 in consideration of such issuance.
(c) "Holder" shall mean NBC Multimedia, Inc. ("NBC") or its assigns.
(d) "Securities" shall mean fully paid and non-assessable shares of
Series D Stock of the Company.
(e) "Termination Date" shall mean the earlier to occur of (i) 5:00
p.m. California time on February 27, 2003 and (ii) the consummation of the
Company's initial underwritten public offering of Common Stock of the Company in
which the Company issues shares of Common Stock with a sales price per share of
Common Stock (as adjusted for combinations, stock dividends, subdivisions or
split-ups) of at least $3.00 and receives an aggregate of at least, $15,000,000
in consideration of such issuance ("IPO").
1
<PAGE> 2
(f) "Warrant Price" shall be equal to the lower of (i) $4.59 and (ii)
the per share proceeds to the Company for shares of Common Stock of the Company
that are issued in connection with the Company's IPO.
(g) "Warrant Stock" shall mean the Securities purchasable upon
exercise of this Warrant or issuable upon conversion of this Warrant. The total
number of shares to be issued upon exercise of the Warrant, subject to
adjustment as described in Section 3 below, shall equal 1,942,187.
3. Adjustments and Notices. The Warrant Price shall be subject to
adjustment from time to time in accordance with the following provisions:
(a) Subdivision, Stock Dividends or Combinations. In case the Company
shall at any time subdivide the outstanding shares of the Securities or shall
issue a stock dividend with respect to the Securities, the Warrant Stock and the
Warrant Price in effect immediately prior to such subdivision or the issuance of
such dividend shall be proportionately increased and decreased, respectively and
in case the Company shall at any time combine the outstanding shares of the
Securities, the Warrant Stock and Warrant Price in effect immediately prior to
such combination shall be proportionately decreased and increased, respectively,
effective at the close of business on the date of such subdivision, dividend or
combination, as the case may be.
(b) Reclassification, Exchange, Substitution, In-Kind Distribution. In
the case of any reclassifications, exchange, substitution, or other event that
results in a change of the number and/or class of the securities issuable upon
exercise or conversion of this Warrant or upon the payment of a dividend in
cash, securities or property other than Securities, the Holder shall be entitled
to receive, upon exercise or conversion of this Warrant, the amount of cash and
number and kind of securities and property that Holder would have received for
the Warrant Stock if this Warrant had been exercised immediately before the
record date for such reclassification, exchange, substitution, or other event or
immediately prior to the record date for such dividend. The Company or its
successor shall promptly issue to Holder a new Warrant for such new securities
or other property. The new Warrant shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 3 including, without limitation, adjustments to the Warrant Price
and to the number of securities or property issuable upon exercise the new
Warrant. The provisions of this Section 3(b) shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events and successive
dividends.
(c) Reorganization, Merger etc. In case of any (i) merger or
consolidation of the Company into or with another corporation where the Company
is not the surviving corporation, (ii) sale, transfer or lease (but not
including a transfer or lease by pledge or mortgage to a bona fide lender) of
all or substantially all of the assets of the Company, or (iii) sale by the
Company's stockholders of 50% or more of the Company's outstanding securities in
one or more related transactions ("Transfer of Control") from and after the
occurrence thereof, the Holder shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Warrant, and in lieu of the shares of the Securities theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reorganization, merger
or sale by the Holder to which the Holder would have been entitled if this
Warrant had been exercised immediately prior to the record date for such
reorganization, merger of sale. The provisions of this subparagraph (c) shall
similarly apply to successive reorganizations, mergers and sales.
2
<PAGE> 3
(d) Dilutive Issuances. The Warrant Price and the number of shares of
Warrant Stock shall be entitled to the same antidilution protection as provided
for the Securities in the Company's Certificate of Incorporation with respect to
dilutive issuances (as such provisions exist on the date hereof and as though
such provisions were set forth in full herein) during the period commencing on
the date this Warrant is issued and ending on the date it is fully exercised.
(e) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, 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 under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Section 3 and in taking all such action as may be necessary or appropriate
to protect the Holder's rights under this Section 3 against impairment. If the
Company takes any action affecting the Securities other than as described above
that adversely affects Holder's rights under this Warrant, the Warrant Price
shall be adjusted downward.
(f) Notice. Upon any adjustment of the Warrant Price and any increase
or decrease in the number of shares of the Securities purchasable upon the
exercise or conversion of this Warrant, then, and in each such case, the
Company, as promptly as practicable thereafter, shall give written notice
thereof to the Holder of this Warrant at the address of such Holder as shown on
the books of the Company which notice shall state the Warrant Price as adjusted
and the increased or decreased number of shares purchasable upon the exercise or
conversion of this Warrant, setting forth in reasonable detail the method of
calculation of each. The Company further agrees to notify the Holder of this
Warrant in writing of a reorganization, merger or sale in accordance with
Section 3(c) hereof at least forty-five (45) days prior to the effective date
thereof. The Company also agrees to notify the Holder of this Warrant in writing
of a proposed public offering at least thirty (30) days prior to the effective
date thereof.
(g) Fractional Shares. No fractional shares shall be issuable upon
exercise or conversion of the Warrant and the number of shares to be issued
shall be rounded down to the nearest whole share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying the Holder an amount computed
by multiplying the fractional interest by the fair market value of a full share.
4. No Stockholder Rights. This Warrant, by itself, as distinguished from
any shares purchased hereunder, shall not entitle its Holder to any of the
rights of a stockholder of the Company.
5. Reservation of Stock. On and after the date hereof, the Company will
reserve from its authorized and unissued Securities a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise or
conversion of this Warrant and shall reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the conversion of the Warrant Stock. Issuance of this Warrant shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Warrant Stock issuable upon the exercise or
conversion of this Warrant.
6. Exercise of Warrant.
6.1 Conditions to Exercise of Warrant. Holder may not exercise this
Warrant unless NBC is entitled to, and has actually offered to extend (whether
or not the Company has chosen to accept), the term of the Definitive Agreement
for an additional two years in accordance with Section 12
3
<PAGE> 4
thereof; provided that, notwithstanding anything to the contrary contained
herein, Holder may exercise this Warrant (i) in connection with the Company's
IPO, in the event that (A) such IPO occurs before the end of the initial term of
the Definitive Agreement, (B) as of the date of the exercise by Holder, NBC and
its affiliates have provided a total amount of on-air music-related promotions
for NBC.com (the "Total Required Promotions") equal to fifteen seconds
multiplied by the number of complete calendar months between April 27, 1998 and
the date of exercise by Holder and (C) NBC has agreed to extend the term of the
Definitive Agreement for an additional two (2) years in accordance with the
terms of the Definitive Agreement; (ii) following the termination of the
Definitive Agreement by Company for any reason other than in accordance with
Section 13(d) of the Definitive Agreement or pursuant to a material breach of a
material provision of the Definitive Agreement by NBC; (iii) following a
Transfer of Control or any transfer of the type described in Section 13(b) of
the Definitive Agreement or (iv)following termination of the Definitive
Agreement by NBC pursuant to a material breach of a material provision of the
Definitive Agreement. Notwithstanding the foregoing, if NBC is not entitled to
extend the term of the Definitive Agreement in accordance with the terms of the
Definitive Agreement, but the term of the Definitive Agreement is nevertheless
extended, then the number of shares of Warrant Stock that may be purchased under
this Warrant shall be adjusted to a number determined by multiplying the total
number of shares of Warrant Stock which may be purchased by Holder at the time
of such adjustment by a fraction, the numerator of which shall be the actual
aggregate amount of promotions (as measured in seconds) provided by Holder and
the denominator of which shall be 360. The Company shall provide written notice
to Holder of the occurrence of any event described in Section 6.1(i)(B) or (C),
(ii), (iii), or (iv) within three (3) business days of the occurrence thereof.
6.2 Warrant Exercise. Subject to Section 6.1 hereof, this Warrant may
be exercised in whole or part by the Holder, at any time after the date hereof
prior to the termination of this Warrant, by the surrender of this Warrant,
together with the Notice of Exercise and Investment Representation Statement in
the forms attached hereto as Attachments 1 and 2, respectively, duly completed
and executed at the principal office of the Company, specifying the portion of
the Warrant to be exercised and accompanied by payment in full of the Warrant
Price in cash or by check with respect to the shares of Warrant Stock being
purchased. This Warrant shall be deemed to have been exercised immediately prior
to the close of business on the date of its surrender for exercise as provided
above, and the person entitled to receive the shares of Warrant Stock issuable
upon such exercise shall be treated for all purposes as Holder of such shares of
record as of the close of business on such date. As promptly as practicable
after such date, the Company shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Warrant Stock issuable upon such exercise. If the Warrant shall
be exercised for less than the total number of shares of Warrant Stock then
issuable upon exercise, promptly after surrender of the Warrant upon such
exercise, the Company will execute and deliver a new Warrant, dated the date
hereof, evidencing the right of the Holder to the balance of the Warrant Stock
purchasable hereunder upon the same terms and conditions set forth herein. All
of the Warrant Stock issuable upon exercise of the rights represented by this
Warrant will, upon issuance and receipt of the Warrant Price thereof, be fully
paid and non-assessable, and free of all taxes, liens and charges with respect
to the issuance thereof and any preemptive or similar rights. The Company shall
pay all taxes and any and all United States federal, state and local taxes and
other charges that may be payable in connection with the preparation, issuance
and delivery of the certificates representing the Warrant Stock.
7. Conversion. In lieu of exercising this Warrant or any portion hereof,
the Holder hereof shall have the right to convert this Warrant or any portion
hereof into Warrant Stock by executing and delivering to the Company at its
principal office the written Notice of Conversion and Investment Representation
Statement in the forms attached hereto as Attachments 2 and 3, specifying the
portion of
4
<PAGE> 5
the Warrant to be converted, and accompanied by this Warrant. The number of
shares of Warrant Stock to be issued to Holder upon such conversion shall be
computed using the following formula:
X = (P)(Y)(A-B)/A
where X = the number of shares of Securities to be issued to the
Holder for the portion of the Warrant being converted.
P = the portion of the Warrant being converted expressed as
a decimal fraction not greater than 1.00.
Y = the total number of shares of Securities issuable upon
exercise of the Warrant in full.
A = the fair market value of one share of Warrant Stock which
shall mean (i) the fair market value of the Company's
stock issuable upon conversion of such share as of the
last business day immediately prior to the date the notice
of conversion is received by the Company, as determined in
good faith by the Company's Board of Directors, or (ii) if
this Warrant is being converted in conjunction with a
public offering of stock the proceeds to the Company per
share pursuant to the offering.
B = the Warrant Price on the date of conversion.
Any portion of this Warrant that is converted shall be immediately canceled.
This Warrant or any portion hereof shall be deemed to have been converted
immediately prior to the close of business on the date of its surrender for
conversion as provided above, and the person entitled to receive the shares of
Warrant Stock issuable upon such conversion shall be treated for all purposes as
Holder of such shares of record as of the close of business on such date. As
promptly as practicable after such date, the Company shall issue and deliver to
the person or persons entitled to receive the same a certificate or certificates
for the number of full shares of Warrant Stock issuable upon such conversion. If
the Warrant shall be converted for less than the total number of shares of
Warrant Stock then issuable upon conversion, promptly after surrender of the
Warrant upon such conversion, the Company will execute and deliver a new
Warrant, dated the date hereof, evidencing the right of the Holder to the
balance of the Warrant Stock purchasable hereunder upon the same terms and
conditions set forth herein.
8. Transfer of Warrant. This Warrant may be transferred or assigned by the
Holder hereof in whole or in part, provided that the transferor provides, at the
Company's request, an opinion of counsel reasonably satisfactory to the Company
that such transfer does not require registration under the Act and the
securities law applicable with respect to any other applicable jurisdiction.
Notwithstanding the foregoing, no opinion of counsel shall be necessary for (i)
a transfer not involving a change in beneficial ownership, or (ii) a transfer by
Holder to any of its partners, or retired partners, limited liability company
members, affiliates or to the estate of any of its partners or retired partners,
or (iii) transfers in compliance with Rule 144, so long as the Company is
furnished with reasonably satisfactory evidence of compliance with such Rule.
9. Termination. This Warrant shall terminate on the first to occur of 5:00
p.m. California time on the Termination Date.
5
<PAGE> 6
10. Miscellaneous. This Warrant shall be governed by the laws of the State
of California, as such laws are applied to contracts to be entered into and
performed entirely in California. The headings in this Warrant are for purposes
of convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed or waived
orally, but only by an instrument in writing signed by the Company and the
Holder of this Warrant. All notices and other communications from the Company to
the Holder of this Warrant shall be delivered personally or mailed by first
class mail, postage prepaid, to the address furnished to the Company in writing
by the last Holder of this Warrant who shall have furnished an address to the
Company in writing, and if mailed shall be deemed given three days after deposit
in the United States mail.
ISSUED: February 27, 1998
2 WAY MEDIA, INC.
By: /s/ Robert D. Roback
--------------------------
Name: Robert D. Roback
------------------------
Title: President
-----------------------
6
<PAGE> 7
Attachment 1
NOTICE OF EXERCISE
TO: 2 WAY MEDIA, INC.
1. The undersigned hereby elects to purchase shares of the Warrant
Stock of 2 Way Media, Inc. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Warrant Stock in the name of the undersigned or in such other name as is
specified below:
----------------------------------------
(Name)
----------------------------------------
(Address)
- ---------------------------------- ----------------------------------
(Date) (Name of Warrant Holder)
By:
-------------------------------
Title:
----------------------------
7
<PAGE> 8
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of the Securities
(as defined in the attached Warrant) of
2 WAY MEDIA, INC.
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to 2 Way Media, Inc. (the "Company") as follows:
(a) The securities to be received upon the exercise of the Warrant
(the "Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof.
(b) The undersigned understands that the Securities issuable upon
exercise of the Warrant at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
laws, on the ground that the issuance of such securities is exempt pursuant to
Section 4(2) of the Act and state law exemptions relating to offers and sales
not by means of a public offering, and that the Company's reliance on such
exemptions is predicated on the undersigned's representations set forth herein.
(c) The undersigned represents that it has had the opportunity to ask
questions of the Company concerning the Company's business and assets and has
had all questions which have been asked by it satisfactorily answered by the
Company.
(d) The undersigned acknowledges that the Securities issuable upon
exercise of the Warrant must be held indefinitely unless subsequently registered
under the Act or an exemption from such registration is available. The
undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than one
year after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:
------------------------------------
(Typed or Printed Name)
By:
---------------------------------
(Signature)
------------------------------------
(Title)
8
<PAGE> 9
Attachment 3
NOTICE OF CONVERSION
TO: 2 WAY MEDIA, INC.
1. The undersigned hereby elects to acquire shares of the Securities
of 2 Way Media, Inc. pursuant to the terms of the attached Warrant, by
conversion of percent ( %) of the Warrant.
2. Please issue a certificate or certificates representing said shares of
Securities in the name of the undersigned or in such other name as is specified
below:
------------------------------------
(Name)
------------------------------------
(Address)
Dated:
---------------------------
------------------------------------
(Typed or Printed Name)
By:
---------------------------------
(Signature)
------------------------------------
(Title)
9
<PAGE> 1
EXHIBIT 10.16
SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
No. 1
WARRANT TO PURCHASE SERIES D PREFERRED STOCK
of
2 WAY MEDIA, INC.
(void after February 27, 2003)
1. Number of Shares Subject to Warrant. FOR VALUE RECEIVED, on and after
the date hereof, and subject to the terms and conditions herein set forth,
Holder (as defined below) is entitled to purchase from 2 Way Media, Inc., a
Delaware corporation (the "Company"), at any time (subject to Section 6.1
hereof) before the Termination Date (as defined below), at a price per share
equal to the Warrant Price (as defined below and subject to adjustments as
described below), the Warrant Stock (as defined below and subject to adjustments
as described below) upon exercise of this Warrant pursuant to Section 6.2
hereof.
2. Definitions. As used in this Warrant, the following terms shall have
the definitions ascribed to them below:
(a) "Definitive Agreement" shall mean the Strategic Alliance Agreement
concerning NBC.com between Company and NBC Multimedia, Inc. ("NBC") dated the
date hereof.
(b) "Equity Financing" shall mean an equity financing in which the
Company issues shares of Series D convertible preferred stock and receives an
aggregate of at least $5,000,000 in consideration of such issuance.
(c) "Holder" shall mean General Electric Capital Corporation ("GE
Capital") or its assigns.
(d) "Securities" shall mean fully paid and non-assessable shares of
Series D Stock, par value $.001 per share, of the Company.
(e) "Termination Date" shall mean the earlier to occur of (i) 5:00
p.m. California time on February 27, 2003 and (ii) the consummation of the
Company's initial underwritten public offering of Common Stock of the Company in
which the Company issues shares of Common Stock with a sales price per share of
Common Stock (as adjusted for combinations, stock dividends, subdivisions or
split-ups) of at least $3.00 and receives an aggregate of at least, $15,000,000
in consideration of such issuance ("IPO").
1
<PAGE> 2
(f) "Warrant Price" shall be equal to the lower of (i) $4.59 and (ii)
the per share proceeds to the Company for shares of Common Stock of the Company
that are issued in connection with the Company's IPO.
(g) "Warrant Stock" shall mean the Securities purchasable upon
exercise of this Warrant or issuable upon conversion of this Warrant. The total
number of shares to be issued upon exercise of the Warrant, subject to
adjustment as described in Section 3 below, shall equal 300,000.
3. Adjustments and Notices. The Warrant Price shall be subject to
adjustment from time to time in accordance with the following provisions:
(a) Subdivision, Stock Dividends or Combinations. In case the Company
shall at any time subdivide the outstanding shares of the Securities or shall
issue a stock dividend with respect to the Securities, the Warrant Stock and the
Warrant Price in effect immediately prior to such subdivision or the issuance of
such dividend shall be proportionately increased and decreased, respectively and
in case the Company shall at any time combine the outstanding shares of the
Securities, the Warrant Stock and Warrant Price in effect immediately prior to
such combination shall be proportionately decreased and increased, respectively,
effective at the close of business on the date of such subdivision, dividend or
combination, as the case may be.
(b) Reclassification, Exchange, Substitution, In-Kind Distribution. In
the case of any reclassifications, exchange, substitution, or other event that
results in a change of the number and/or class of the securities issuable upon
exercise or conversion of this Warrant or upon the payment of a dividend in
cash, securities or property other than Securities, the Holder shall be entitled
to receive, upon exercise or conversion of this Warrant, the amount of cash and
the number and kind of securities and property that Holder would have received
for the Warrant Stock if this Warrant had been exercised immediately before the
record date for such reclassification, exchange, substitution, or other event or
immediately prior to the record date for such dividend. The Company or its
successor shall promptly issue to Holder a new Warrant for such new securities
or other property. The new Warrant shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 3 including, without limitation, adjustments to the Warrant Price
and to the number of securities or property issuable upon exercise the new
Warrant. The provisions of this Section 3(b) shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events and successive
dividends.
(c) Reorganization, Merger etc. In case of any (i) merger or
consolidation of the Company into or with another corporation where the Company
is not the surviving corporation, (ii) sale, transfer or lease (but not
including a transfer or lease by pledge or mortgage to a bona fide lender) of
all or substantially all of the assets of the Company, or (iii) sale by the
Company's stockholders of 50% or more of the Company's outstanding securities in
one or more related transactions ("Transfer of Control"), from and after the
occurrence thereof the Holder shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Warrant, and in lieu of the shares of the Securities theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reorganization, merger
or sale by the Holder to which the Holder would have been entitled if this
Warrant had been exercised immediately prior to the record date for such
reorganization, merger of sale. The provisions of this subparagraph (c) shall
similarly apply to successive reorganizations, mergers and sales.
2
<PAGE> 3
(d) Dilutive Issuances. The Warrant Price and the number of shares of
Warrant Stock shall be entitled to the same antidilution protection as provided
for the Securities in the Company's Certificate of Incorporation with respect to
dilutive issuances (as such provisions exist on the date hereof and as though
such provisions were set forth in full herein) during the period commencing on
the date this Warrant is issued and ending on the date it is fully exercised.
(e) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, 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 under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Section 3 and in taking all such action as may be necessary or appropriate
to protect the Holder's rights under this Section 3 against impairment. If the
Company takes any action affecting the Securities other than as described above
that adversely affects Holder's rights under this Warrant, the Warrant Price
shall be adjusted downward.
(f) Notice. Upon any adjustment of the Warrant Price and any increase
or decrease in the number of shares of the Securities purchasable upon the
exercise or conversion of this Warrant, then, and in each such case, the
Company, as promptly as practicable thereafter, shall give written notice
thereof to the Holder of this Warrant at the address of such Holder as shown on
the books of the Company which notice shall state the Warrant Price as adjusted
and the increased or decreased number of shares purchasable upon the exercise or
conversion of this Warrant, setting forth in reasonable detail the method of
calculation of each. The Company further agrees to notify the Holder of this
Warrant in writing of a reorganization, merger or sale in accordance with
Section 3(c) hereof at least forty-five (45) days prior to the effective date
thereof. The Company also agrees to notify the Holder of this Warrant in writing
of a proposed public offering at least thirty (30) days prior to the effective
date thereof.
(g) Fractional Shares. No fractional shares shall be issuable upon
exercise or conversion of the Warrant and the number of shares to be issued
shall be rounded down to the nearest whole share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying the Holder an amount computed
by multiplying the fractional interest by the fair market value of a full share.
4. No Stockholder Rights. This Warrant, by itself, as distinguished from
any shares purchased hereunder, shall not entitle its Holder to any of the
rights of a stockholder of the Company.
5. Reservation of Stock. On and after the date hereof, the Company will
reserve from its authorized and unissued Securities a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise or
conversion of this Warrant and shall reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the conversion of the Warrant Stock. Issuance of this Warrant shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Warrant Stock issuable upon the exercise or
conversion of this Warrant.
6. Exercise of Warrant.
6.1 Conditions to Exercise of Warrant. Holder may not exercise this
Warrant unless NBC is entitled to, and has actually offered to extend (whether
or not the Company has chosen to accept), the term of the Definitive Agreement
for an additional two years in accordance with Section 12
3
<PAGE> 4
thereof; provided that, notwithstanding anything to the contrary contained
herein, Holder may exercise this Warrant (i) in connection with the Company's
IPO, in the event that (A) such IPO occurs before the end of the initial term of
the Definitive Agreement, (B) as of the date of the exercise by Holder, NBC and
its affiliates have provided a total amount of on-air music-related promotions
for NBC.com (the "Total Required Promotions") equal to fifteen seconds
multiplied by the number of complete calendar months between April 27, 1998 and
the date of exercise by Holder and (C) NBC has agreed to extend the term of the
Definitive Agreement for an additional two (2) years in accordance with the
terms of the Definitive Agreement; (ii) following the termination of the
Definitive Agreement by Company for any reason other than in accordance with
Section 13(d) of the Definitive Agreement or pursuant to a material breach of a
material provision of the Definitive Agreement by NBC; (iii) following a
Transfer of Control or any transfer of the type described in Section 13(b) of
the Definitive Agreement or (iv) following termination of the Definitive
Agreement by NBC pursuant to a material breach of a material provision of the
Definitive Agreement. Notwithstanding the foregoing, if NBC is not entitled to
extend the term of the Definitive Agreement in accordance with the terms of the
Definitive Agreement, but the term of the Definitive Agreement is nevertheless
extended, then the number of shares of Warrant Stock that may be purchased under
this Warrant shall be adjusted to a number determined by multiplying the total
number of shares of Warrant Stock which may be purchased by Holder at the time
of such adjustment by a fraction, the numerator of which shall be the actual
aggregate amount of promotions (as measured in seconds) provided by NBC and the
denominator of which shall be 360. The Company shall provide written notice to
Holder of the occurrence of any event described in Section 6.1(i)(B) or (C),
(ii), (iii), or (iv) within three (3) business days of the occurrence thereof.
6.2 Warrant Exercise. Subject to Section 6.1 hereof, this Warrant may
be exercised in whole or part by the Holder, at any time after the date hereof
prior to the termination of this Warrant, by the surrender of this Warrant,
together with the Notice of Exercise and Investment Representation Statement in
the forms attached hereto as Attachments 1 and 2, respectively, duly completed
and executed at the principal office of the Company, specifying the portion of
the Warrant to be exercised and accompanied by payment in full of the Warrant
Price in cash or by check with respect to the shares of Warrant Stock being
purchased. This Warrant shall be deemed to have been exercised immediately prior
to the close of business on the date of its surrender for exercise as provided
above, and the person entitled to receive the shares of Warrant Stock issuable
upon such exercise shall be treated for all purposes as Holder of such shares of
record as of the close of business on such date. As promptly as practicable
after such date, the Company shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Warrant Stock issuable upon such exercise. If the Warrant shall
be exercised for less than the total number of shares of Warrant Stock then
issuable upon exercise, promptly after surrender of the Warrant upon such
exercise, the Company will execute and deliver a new Warrant, dated the date
hereof, evidencing the right of the Holder to the balance of the Warrant Stock
purchasable hereunder upon the same terms and conditions set forth herein. All
of the Warrant Stock issuable upon exercise of the rights represented by this
Warrant will, upon issuance and receipt of the Warrant Price thereof, be fully
paid and non-assessable, and free of all taxes, liens and charges with respect
to the issuance thereof and any preemptive or similar rights. The Company shall
pay all taxes and any and all United States federal, state and local taxes and
other charges that may be payable in connection with the preparation, issuance
and delivery of the certificates representing the Warrant Stock.
7. Conversion. In lieu of exercising this Warrant or any portion
hereof, the Holder hereof shall have the right to convert this Warrant or any
portion hereof into Warrant Stock by executing and delivering to the Company at
its principal office the written Notice of Conversion and Investment
Representation Statement in the forms attached hereto as Attachments 2 and 3,
specifying the portion of
4
<PAGE> 5
the Warrant to be converted, and accompanied by this Warrant. The number of
shares of Warrant Stock to be issued to Holder upon such conversion shall be
computed using the following formula:
X = (P)(Y)(A-B)/A
where X = the number of shares of Securities to be issued to the
Holder for the portion of the Warrant being converted.
P = the portion of the Warrant being converted expressed as
a decimal fraction not greater than 1.00.
Y = the total number of shares of Securities issuable upon
exercise of the Warrant in full.
A = the fair market value of one share of Warrant Stock which
shall mean (i) the fair market value of the Company's
stock issuable upon conversion of such share as of the
last business day immediately prior to the date the notice
of conversion is received by the Company, as determined in
good faith by the Company's Board of Directors, or (ii) if
this Warrant is being converted in conjunction with a
public offering of stock the proceeds to the Company per
share pursuant to the offering.
B = the Warrant Price on the date of conversion.
Any portion of this Warrant that is converted shall be immediately canceled.
This Warrant or any portion hereof shall be deemed to have been converted
immediately prior to the close of business on the date of its surrender for
conversion as provided above, and the person entitled to receive the shares of
Warrant Stock issuable upon such conversion shall be treated for all purposes as
Holder of such shares of record as of the close of business on such date. As
promptly as practicable after such date, the Company shall issue and deliver to
the person or persons entitled to receive the same a certificate or certificates
for the number of full shares of Warrant Stock issuable upon such conversion. If
the Warrant shall be converted for less than the total number of shares of
Warrant Stock then issuable upon conversion, promptly after surrender of the
Warrant upon such conversion, the Company will execute and deliver a new
Warrant, dated the date hereof, evidencing the right of the Holder to the
balance of the Warrant Stock purchasable hereunder upon the same terms and
conditions set forth herein.
8. Transfer of Warrant. This Warrant may be transferred or assigned by the
Holder hereof in whole or in part, provided that the transferor provides, at the
Company's request, an opinion of counsel reasonably satisfactory to the Company
that such transfer does not require registration under the Act and the
securities law applicable with respect to any other applicable jurisdiction.
Notwithstanding the foregoing, no opinion of counsel shall be necessary for (i)
a transfer not involving a change in beneficial ownership, or (ii) a transfer by
Holder to any of its partners, or retired partners, limited liability company
members, affiliates or to the estate of any of its partners or retired partners,
or (iii) transfers in compliance with Rule 144, so long as the Company is
furnished with reasonably satisfactory evidence of compliance with such Rule.
9. Termination. This Warrant shall terminate on the first to occur of 5:00 p.m.
California time on the Termination Date.
5
<PAGE> 6
10. Miscellaneous. This Warrant shall be governed by the laws of the State
of California, as such laws are applied to contracts to be entered into and
performed entirely in California. The headings in this Warrant are for purposes
of convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed or waived
orally, but only by an instrument in writing signed by the Company and the
Holder of this Warrant. All notices and other communications from the Company to
the Holder of this Warrant shall be delivered personally or mailed by first
class mail, postage prepaid, to the address furnished to the Company in writing
by the last Holder of this Warrant who shall have furnished an address to the
Company in writing, and if mailed shall be deemed given three days after deposit
in the United States mail.
ISSUED: February 27, 1998
2 WAY MEDIA, INC.
By: /s/ Robert D. Roback
------------------------------
Name: Robert D. Roback
----------------------------
Title: President
---------------------------
6
<PAGE> 7
Attachment 1
NOTICE OF EXERCISE
TO: 2 WAY MEDIA, INC.
1. The undersigned hereby elects to purchase shares of the Warrant
Stock of 2 Way Media, Inc. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Warrant Stock in the name of the undersigned or in such other name as is
specified below:
----------------------------------------
(Name)
----------------------------------------
(Address)
- ----------------------------- -----------------------------------
(Date) (Name of Warrant Holder)
By:
--------------------------------
Title:
-----------------------------
7
<PAGE> 8
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of the Securities
(as defined in the attached Warrant) of
2 WAY MEDIA, INC.
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to 2 Way Media, Inc. (the "Company") as follows:
(a) The securities to be received upon the exercise of the Warrant
(the "Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof.
(b) The undersigned understands that the Securities issuable upon
exercise of the Warrant at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
laws, on the ground that the issuance of such securities is exempt pursuant to
Section 4(2) of the Act and state law exemptions relating to offers and sales
not by means of a public offering, and that the Company's reliance on such
exemptions is predicated on the undersigned's representations set forth herein.
(c) The undersigned represents that it has had the opportunity to ask
questions of the Company concerning the Company's business and assets and has
had all questions which have been asked by it satisfactorily answered by the
Company.
(d) The undersigned acknowledges that the Securities issuable upon
exercise of the Warrant must be held indefinitely unless subsequently registered
under the Act or an exemption from such registration is available. The
undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than one
year after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:
-----------------------
------------------------------------
(Typed or Printed Name)
By:
---------------------------------
(Signature)
------------------------------------
(Title)
8
<PAGE> 9
Attachment 3
NOTICE OF CONVERSION
TO: 2 WAY MEDIA, INC.
1. The undersigned hereby elects to acquire _________ shares of the
Securities of 2 Way Media, Inc. pursuant to the terms of the attached Warrant,
by conversion of percent ( %) of the Warrant.
2. Please issue a certificate or certificates representing said shares of
Securities in the name of the undersigned or in such other name as is specified
below:
------------------------------------
(Name)
------------------------------------
(Address)
Dated:
------------------------------
------------------------------------
(Typed or Printed Name)
By:
---------------------------------
(Signature)
------------------------------------
(Title)
9
<PAGE> 1
Exhibit 10.17
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
1,463,522 Warrants
2WAY MEDIA, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received in consideration for certain services rendered pursuant to that
certain letter agreement dated as of September 8, 1997 by and between Allen &
Company Incorporated and 2Way Media, Inc. (the "Engagement Letter") Allen &
Company Incorporated or registered assigns (the "Holder") is the owner of the
number of warrants ("Warrants") specified above, each of which entitles the
Holder thereof to purchase, at any time on or before the Expiration Date
(hereinafter defined), one fully paid and non-assessable share of Common Stock,
$0.25 par value ("Common Stock"), of 2Way Media, Inc., a Delaware Corporation
(the "Company"), at a purchase price of $0.25 per share of Common Stock in
lawful money of the United States of America in cash or by certified or
cashier's check or a combination of cash and certified or cashier's check,
subject to adjustment as hereinafter provided.
1. Warrant; Purchase Price
Each Warrant shall entitle the Holder to purchase one share of
Common Stock of the Company and the purchase price payable upon exercise of the
Warrants shall initially be $0.25 per share of Common Stock, subject to
adjustment as hereinafter provided (the "Purchase Price"). The Purchase Price
and number of shares of Common Stock issuable upon exercise of each Warrant
are subject to adjustment as provided in Article 6.
2. Exercise; Expiration Date
2.1 The Warrants are exercisable, at the option of the Holder, at
any time after issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company, together with a duly completed Notice
of Exercise, in the form attached hereto as Exhibit A, and payment of an amount
equal to the Purchase Price times the number of Warrants to be exercised. In the
case of exercise of less than all the
<PAGE> 2
Warrants represented by this Warrant Certificate, the Company shall cancel the
Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m. New York time on
September 8, 2002, or if such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then 5:00 p.m. New York time
the next following date which in the State of New York is not a holiday or a
day on which banks are authorized to close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and transfer of
the Warrants and the registration and transfer of the shares of Common Stock
issued upon exercise of the Warrants.
3.2 Prior to due presentment for registration of transfer of this Warrant
Certificate, or the shares of Common Stock issued upon exercise of the
Warrants, the Company may deem and treat the registered Holder as the absolute
owner thereof.
3.3 Neither this Warrant Certificate, nor the Warrants represented
hereby, may be sold, assigned or otherwise transferred voluntarily by the
Holder, other than to officers or directors of the Holder, without the consent
of the Company. The Company shall register upon its books any transfer of a
Warrant Certificate, upon surrender of same to the Company with a written
instrument of transfer duly executed by the registered Holder or by a duly
authorized attorney. Upon any such registration of transfer, new Warrant
Certificate(s) shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be canceled by the Company. A Warrant Certificate may also be
exchanged, at the option of the Holder, for new Warrant Certificates
representing, in the aggregate, the number of Warrants evidenced by the Warrant
Certificate surrendered.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep available
out of its authorized Common Stock, solely for the purpose of issue upon
exercise of the Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof, and that upon issuance, such shares shall be listed on each
national securities exchange, if
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<PAGE> 3
any, on which the other shares of outstanding Common Stock of the Company are
then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the ownership of
and the loss, theft, destruction or mutilation of any Warrant Certificate and,
in the case of loss, theft or destruction, of indemnity reasonably satisfactory
to the Company, or, in the case of mutilation, upon surrender and cancellation
of the mutilated Warrant Certificate, the Company shall execute and deliver in
lieu thereof a new Warrant Certificate representing an equal number of Warrants.
6. Adjustment of Purchase Price and Number of Shares Deliverable
6.1 The number of shares of Common Stock purchasable upon the exercise
of each Warrant (such shares being referred to in this Section 6 as the
"Warrant Shares") and the Purchase Price with respect to the Warrant Shares
shall be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock payable in shares of its capital
stock, (ii) subdivide its outstanding shares of Common Stock through
stock split or otherwise, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv)
issue by reclassification in connection with a consolidation or merger
in which the Company is the continuing corporation) other securities of
the Company, the number and/or nature of Warrant Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be
adjusted so that the Holder shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive after the happening
of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this Paragraph
(a) shall become effective retroactively as of the record date of such
event.
(b) Intentionally Deleted.
(c) In case the Company shall distribute to all holders of its
shares of Common Stock, or all holders of Common Stock shall otherwise
become entitled to receive shares of capital stock of the Company
(other than dividends or distributions on its Common Stock referred to
in Paragraph (a) above), evidences of its indebtedness or
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<PAGE> 4
rights, options, warrants or convertible securities providing the right to
subscribe for or purchase any shares of the Company's capital stock or
evidences of its indebtedness (other than any rights, options, warrants or
convertible securities referred to in Paragraph (b) above), then in each
case the number of Warrant Shares thereafter purchasable upon the exercise
of each Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon the exercise of each Warrant by a
fraction of which the numerator shall be the then Market Price Per Share of
Common Stock (as determined pursuant to Section 9(b)) on the record date
mentioned below in this Paragraph (c), and of which the denominator shall
be the then Market Price Per Share of Common Stock on such record date,
less the then fair value (as determined by the Board of Directors of the
Company, in good faith) of the portion of the shares of the Company's
capital stock other than Common Stock, evidences of indebtedness, or of
such rights, options, warrants or convertible securities, distributable
with respect to each share of Common Stock. Such adjustment shall be made
whenever any such distribution is made, and shall become effective
retroactively as of the record date for the determination of shareholders
entitled to receive such distribution.
(d) In the event of any capital reorganization or any
reclassification of the capital stock of the Company, or in case of the
consolidation or merger of the Company with another corporation (other than
a consolidation or merger in which the outstanding shares of the Company's
Common Stock are not converted into or exchanged for other rights or
interests), or in the case of any sale, transfer or other disposition to
another corporation of all or substantially all the properties and assets
of the Company, the Holder of each Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition that appropriate provisions shall be made so that such
Holder shall thereafter be entitled to purchase) the kind and amount of
shares of stock and other securities and property (including cash) which
the Holder would have been entitled to receive had such Warrants been
exercised immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, sale, transfer or other
disposition; and in any such case, appropriate adjustments shall be made in
the application of the provisions of this Article 6 with respect to rights
and interest thereafter of the Holder of the Warrants to the end that the
provisions of this Article 6 shall thereafter be applicable, as near as
reasonably may be, in relation to any shares or other property thereafter
purchasable upon the exercise of the Warrants. The
- 4 -
<PAGE> 5
provisions of this Section 6.1(d) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales,
transfers or other dispositions.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as provided in this Section 6.1, the
Purchase Price with respect to the Warrant Shares shall be adjusted by
multiplying such Purchase Price immediately prior to such adjustment by a
fraction of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
6.2 In the event the Company shall declare a dividend, or make a
distribution to the holders of its Common Stock generally, whether in cash,
property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding regularly
payable cash dividends declared from time to time by the Company's Board of
Directors or any dividend or distribution referred to in Section 6.1(a) or (c)
above), the Purchase Price of each Warrant shall be reduced, without any
further action by the parties hereto, by the Per Share Value (as hereinafter
defined) of the dividend. For purposes of this Section 6.2, the "Per Share
Value" of a cash dividend or other distribution shall be the dollar amount of
the distribution on each share of Common Stock and the "Per Share Value" of any
dividend or distribution other than cash shall be equal to the fair market
value of such non-cash distribution on each share of Common Stock as determined
in good faith by the Board of Directors of the Company.
6.3 Intentionally Deleted.
6.4 Upon the issuance by the Company of any shares of Common Stock
or any rights, options or warrants or securities convertible into Common Stock
in connection with the currently contemplated private placement of Series D
Preferred Stock or other capital stock of the Company, then, forthwith upon such
issue, the number of Warrant Shares purchasable under each Warrant shall be
increased by multiplying such number of Warrant Shares by a number determined
by dividing (x) the number of shares of Common Stock of the Company (including
shares of Common Stock issuable upon exercise, conversion or exchange of any
rights, options, warrants or securities convertible into or exchangeable for
shares of Common Stock of the Company) outstanding after the issuance of any
such Private Placement Shares multiplied by 0.07 by (y) the number of Warrant
Shares issuable to the Holder under this Warrant Certificate immediately prior
to the issuance of any such Private Placement Shares. For
- 5 -
<PAGE> 6
the purpose of the above determination, the following provisions shall be
applicable:
(a) In case the Company shall in any manner issue any options,
warrants or other rights to subscribe for or to purchase shares of Common
Stock, then, for the purposes of this Section 6.4, (i) all shares which
the holders of such rights shall be entitled thereby to subscribe for or
purchase shall be deemed to be issued as of the date of issue of such
rights, and (ii) the minimum aggregate consideration payable pursuant to
such rights for the shares covered thereby, plus the consideration, if
any, received by the Company for such rights, shall be deemed to be the
consideration actually received by the Company (as of the date of the
issue of such rights) for the issue of the total number of shares
underlying such rights.
(b) In case the Company shall in any manner issue any securities
or obligations directly or indirectly convertible into or exchangeable
for shares of Common Stock, then, for the purposes of this Section 6.4,
(i) all shares to which holders of such securities or obligations shall
thereby be entitled upon conversion or exchange shall be deemed to be
issued as of the date of issue of such securities or obligations, and
(ii) the aggregate amount received or receivable by the Company in
consideration for the issue of such securities or obligations, plus the
minimum aggregate amount of additional consideration, if any, payable
upon conversion or exchange of such securities or obligations, shall be
deemed to be the consideration actually received (as of the date of the
issue of such securities or obligations) for the issue of the total
number of shares issuable upon conversion or exchange of such securities
or obligations.
(c) The consideration received by the Company for any shares of
Common Stock, or rights to acquire Common Stock, shall be deemed to be the
proceeds received for such shares or rights, excluding cash received on
account of accrued interest or accrued dividends and after deducting
therefrom any and all commissions and expenses paid or incurred by the
Company for any underwriting of, or otherwise in connection with, the
issue of such shares or rights.
(d) No adjustment of the Purchase Price of the Warrants Shares
shall be made as a result of, or in connection with, the issuance of such
number of shares of Common Stock or options to purchase Common Stock
issued in connection with any currently existing duly authorized employee
stock option plan of the Company.
- 6 -
<PAGE> 7
(e) For the purposes of this Section 6.4, (i) the term "issue" of
shares or securities by the Company shall be deemed to include any
issuance, sale or other disposition of shares or securities of the Company,
including shares held in the treasury of the Company, (ii) the term "Common
Stock" shall include any capital stock of the Company other than preferred
stock with a fixed limit on dividends and a fixed amount payable in the
event of any liquidation and (iii) in no event shall the Purchase Price
with respect to the Warrant Shares be increased, or the number of Warrant
Shares purchasable under any Warrant be decreased, as a result of the
provisions of this Section 6.4.
6.5 No adjustment in the number of Warrant Shares purchasable under
the Warrants, or in the Purchase Price with respect to the Warrant Shares,
shall be required unless such adjustment would require an increase or decrease
of at least 1% in the number of Warrant Shares issuable upon the exercise of
such Warrant, or in the Purchase Price thereof; provided, however, that any
adjustments which by reason of this Section 6.5 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All final results of adjustments to the number of Warrant Shares and the
Purchase Price thereof shall be rounded to the nearest one thousandth of a
share or the nearest cent, as the case may be. Anything in this Section 6 to
the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the number of Warrant Shares purchasable upon
the exercise of each Warrant, or in the Purchase Price thereof, in addition to
those required by such Section, as it is in its discretion shall determine to
be advisable in order that any dividend or distribution in shares of Common
Stock, subdivision, reclassification or combination of shares of Common Stock,
issuance of rights, warrants or options to purchase Common Stock, or
distribution of shares of stock other than Common Stock, evidences of
indebtedness or assets (other than distributions of cash out of retained
earnings) or convertible or exchangeable securities hereafter made by the
Company to the holders of its Common Stock shall not result in any tax to the
holders of its Common Stock or securities convertible into Common Stock.
6.6 Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant or the Purchase Price of such Warrant Shares is
adjusted, as herein provided, the Company shall mail to the Holder, at the
address of the Holder shown on the books of the Company, a notice of such
adjustment or adjustments, prepared and signed by the Chief Financial Officer
or Secretary of the Company, which sets forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Purchase Price of such
Warrant Shares after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
- 7 -
<PAGE> 8
6.7 In the event that at any time prior to the expiration of the Warrants
and prior to their exercise:
(a) the Company shall declare any distribution (other than a cash
dividend or a dividend payable in securities of the Company with respect
to the Common Stock); or
(b) the Company shall offer for subscription to the holders of the
Common Stock any additional shares of stock of any class or any other
securities convertible into Common Stock or any rights to subscribe
thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the
outstanding number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a dividend
payable in shares of the Company's own Common Stock; or
(e) there shall be any capital change in the Company as set forth in
Section 6.1(d); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection with a
consolidation, merger, or sale of all or substantially all of its
property, assets and business as an entity); or
(g) the Company shall issue any shares of Common Stock, or rights,
options or warrants or securities convertible into Common Stock, for a
consideration per share less than the Purchase Price as provided in
Subsection 6.3 hereof; or
(h) the Company shall issue any shares of Common Stock, or rights,
options or warrants or securities convertible into Common Stock, in
connection with the next private placement of capital stock of the Company.
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event.
Such notice shall also set forth facts indicating the effect of such action (to
the extent such effect
- 8 -
<PAGE> 9
may be known at the date of such notice) on the Purchase Price and the kind and
amount of the shares of stock or other securities or property deliverable upon
exercise of the Warrants.
6.8 The form of Warrant Certificate need not be changed because of any
change in the Purchase Price, the number of Warrant Shares issuable upon the
exercise of a Warrant or the number of Warrants outstanding pursuant to this
Section 6, and Warrant Certificates issued before or after such change may state
the same Purchase Price, the same number of Warrants, and the same number of
Warrant Shares issuable upon exercise of Warrants pursuant to this Agreement.
The Company may, however, at any time, in its sole discretion, make any change
in the form of Warrant Certificate that it may deem appropriate and that does
not affect the substance thereof, and any Warrant Certificates thereafter issued
or countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrants as provided in
Section 2.1 hereof, the Warrants represented by this Warrant Certificate (or any
portion thereof) may, at the election of the Holder, be converted into the
nearest whole number of shares of Common Stock equal to: (1) the product of (a)
the number of Warrants to be so converted, (b) the number of shares of Common
stock then issuable upon the exercise of each Warrant and (c) the excess, if
any, of (i) the Market Price Per Share (as determined pursuant to Section 9(b))
with respect to the date of conversion over (ii) the Purchase Price in effect on
the business day next preceding the date of conversion, divided by (2) the
Market Price Per Share with respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate,
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit B. The Warrants (or so much thereof as shall have been surrendered
for conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
- 9 -
<PAGE> 10
only, a new certificate in principal amount equal to the unconverted portion of
the Warrant Certificate.
8. Voluntary Adjustment by the Company
The Company may, at its option, at any time during the term of the
Warrants, reduce the then current Purchase Price to any amount deemed
appropriate by the Board of Directors of the Company and/or extend the date of
the expiration of the Warrants.
9. Fractional Shares and Warrants; Determination of
Market Price Per Share
9.1 Anything contained herein to the contrary notwithstanding, the
Company shall not be required to issue any fraction of a share of Common Stock
in connection with the exercise of Warrants. Warrants may not be exercised in
such number as would result (except for the provisions of this paragraph) in
the issuance of a fraction of a share of Common Stock unless the Holder is
exercising all Warrants then owned by the Holder. In such event, the Company
shall, upon the exercise of all of such Warrants, issue to the Holder the
largest aggregate whole number of shares of Common Stock called for thereby
upon receipt of the Purchase Price for all of such Warrants and pay a sum in
cash equal to the remaining fraction of a share of Common Stock, multiplied by
its Market Price Per Share (as determined pursuant to Section 9(b) below) as of
the last business day preceding the date on which the Warrants are presented
for exercise.
9.2 As used herein, the "Market Price Per share" with respect to any date
shall mean the closing price per share of Company's Common Stock for the
trading day immediately preceding such date. The closing price for each such
day shall be the last sale price regular way or, in case no such sale takes
place on such day, the average of the closing bid and asked prices regular way,
in either case on the principal securities exchange on which the shares of
Common Stock of the Company are listed or admitted to trading or, if
applicable, the last sale price, or in case no sale takes place on such day,
the average of the closing bid and asked prices of the Common Stock on NASDAQ
or any comparable system, or if the Common Stock is not reported on NASDAQ, or
a comparable system, the average of the closing bid and asked prices as
furnished by two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose. If such bid
and asked prices are not available, then "Market Price Per Share" shall be
equal to the fair market value of the Company's Common Stock as determined in
good faith by the Board of Directors of the Company.
- 10 -
<PAGE> 11
10. Additional Rights
10.1 The Holder hereof shall be entitled to all rights as provided in that
certain Amended and Restated Investors Rights Agreement, attached hereto as
Exhibit C.
11. Governing Law
This Warrant Certificate shall be governed by, and construed in accordance
with, the laws of the State of New York.
- 11 -
<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed by its officers thereunto duly authorized and its corporate seal
to be affixed hereon, as of this eighth day of September, 1997.
2WAY MEDIA, INC.
By: /s/ Robert D. Roback
-------------------------------
Name: Robert D. Roback
Title: President
[SEAL]
Attest:
/s/ Jeffrey M. Mickeal
- ------------------------------
Name: Jeffrey M. Mickeal
Title: Secretary
- 12 -
<PAGE> 13
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to Section
2 of the Warrant Certificate accompanying this Notice of Exercise, ________
Warrants of the total number of Warrants owned by the undersigned pursuant to
the accompanying Warrant Certificate, and herewith makes payment of the
Purchase Price of such shares in full.
---------------------------------
Name of Holder
---------------------------------
Signature
Address:
---------------------------------
---------------------------------
---------------------------------
<PAGE> 14
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to Section
7 of the Warrant Certificate accompanying this Notice of Conversion, ________
Warrants of the total number of Warrants owned by the undersigned pursuant to
the accompanying Warrant Certificate into shares of the Common Stock of the
Company (the "Shares").
The number of Shares to be received by the undersigned shall be calculated
in accordance with the provisions of Section 7.1 of the accompanying Warrant
Certificate.
---------------------------------
Name of Holder
---------------------------------
Signature
Address:
---------------------------------
---------------------------------
---------------------------------
<PAGE> 15
EXHIBIT C
AMENDED AND RESTATED
INVESTORS RIGHTS AGREEMENT
- 15 -
<PAGE> 16
June 1, 1998
To: Allen & Company Incorporated
Re: Adjustment of Warrants to purchase shares of Launch Media, Inc.
(the "Company") Common Stock
Gentlemen:
As you know, on February 27, 1998 and May 29, 1998, the Company completed the
first and second closings, respectively, of its Series D Stock Financing in
which the Company issued an aggregate of 16,726,133 shares of its Series D
Stock and warrants to purchase up to 2,242,187 shares of its Series D Stock. As
such, and in connection with Sections 6.4 and 6.6 of the Warrant Certificate
executed by the Company on September 8, 1997 in which the Company issued you
Warrants to purchase 1,463,522 shares of the Company's Common Stock (the
"Warrant"), the Company hereby adjusts the number of shares of Common Stock
issuable upon exercise of the Warrants from 1,463,522 (the number of shares of
Common Stock issuable upon exercise of the Warrants prior to the first closing
of the Company's Series D Stock financing) to 2,901,028 (the "Adjustment"). The
Adjustment has been calculated according to the computation set forth on Annex
1 hereto. Pursuant to Section 6.4(b) of the Warrant, please note that there
will be no adjustment to the purchase price of the Warrants which will remain
at $0.25 per share. In addition, please note that notwithstanding anything to
the contrary herein or in the Warrant Agreement, the right to purchase 178,549
shares under the Warrants will only accrue and become exercisable to the extent
that (i) the warrant issued to NBC Multimedia, Inc. on February 27, 1998
becomes exercisable and (ii) the warrant issued to General Electric Capital
Corporation on February 27, 1998 becomes exercisable.
LAUNCH MEDIA, INC.
Signature: /s/ JEFFREY M. MICKEAL
----------------------------
By: Jeffrey M. Mickeal
Title: Chief Financial Officer
<PAGE> 17
ANNEX 1
WARRANT ADJUSTMENT
<TABLE>
<CAPTION>
Contingent
Prior to Pref D Closing Post Pref D Closing Without NBC/GE Warrants Warrants
----------------------- ------------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Common Stock:
Officers & Directors 3,446,843 16.49% 3,446,843 8.32% 3,446,843 8.86%
Other 1,228,432 5.88% 1,228,432 2.96% 1,228,432 3.16%
Preferred Stock:
Series A 1,900,800 9.09% 1,900,800 4.59% 1,900,800 4.89%
Series B 3,064,102 14.66% 3,064,102 7.39% 3,064,102 7.88%
Series C 7,900,117 37.79% 7,900,117 19.06% 7,900,117 20.31%
Series D 0.00% 16,726,133 40.36% 16,726,133 43.01%
Warrants:
General Electric Capital Corporation 0.00% 300,000 0.72% 0.00%
NBC Multimedia, Inc. 0.00% 2,072,163 5.00% 0.00%
Allen & Company Incorporated 1,463,522 7.00% 2,901,028 7.00% 2,722,479 7.00% 178,549
Options:
Outstanding 1,406,000 6.72% 1,406,000 3.39% 1,406,000 3.62%
Reserved 450,645 2.16% 450,645 1.09% 450,645 1.16%
Other 47,000 0.22% 47,000 0.11% 47,000 0.12%
---------- ---------- ----------
20,907,461 100.00% 41,443,263 100.00% 38,892,551 100.00%
========== ========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 10.18
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement, dated as of February 15, 1999 (this
"Agreement"), is entered into by and among Launch Media, Inc., a Delaware
corporation, with an address at 2700 Pennsylvania Avenue, Santa Monica,
California 90404 (the "Company"), and each of the undersigned purchasers
(collectively the "Purchasers" and individually a "Purchaser") listed on the
Schedule of Purchasers attached hereto as Exhibit A (the "Schedule of
Purchasers").
RECITAL
A. On the terms and subject to the conditions set forth herein, Purchasers
are willing to purchase from Company and Company is willing to sell to
Purchasers, an aggregate of up to $1,500,000 of Convertible Subordinated
Promissory Notes (the "Notes") to be issued by the Company in the principal
amounts set forth opposite each Purchaser's name on the Schedule of Purchasers.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the
representations, warranties, and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. The Note.
(a) Issuance of Notes. In reliance upon the representations,
warranties and covenants of the parties set forth herein, the Company agrees to
issue, sell and deliver to the Purchasers, and the Purchasers agree to purchase
from the Company, the Notes. The purchase price for the Notes shall be payable
in immediately available funds.
(b) Terms of the Note. The terms and conditions of the Notes are set
forth in the form of Note attached as Exhibit B hereto. Capitalized terms not
otherwise defined herein shall have the meaning set forth in Exhibit B attached
hereto.
(c) Delivery. The Company will deliver to each Purchaser the Notes
to be purchased by such Purchaser against receipt by Company of the purchase
price for such Note.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser that the statements contained in the
following paragraphs of this Section 2 are all true and correct as of the time
of issuance of the Note:
(a) Organization and Standing: Articles and Bylaws. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and proposed to be conducted.
1
<PAGE> 2
(b) Corporate Power. The Company has all requisite legal and
corporate power to enter into, execute and deliver this Agreement and the Note.
This Agreement, and upon this issuance the Note, will be, valid and binding
obligations of the Company, enforceable in accordance with their respective
terms, except as the same may be limited by bankruptcy, insolvency, moratorium,
and other laws of general application affecting the enforcement of creditors'
rights.
(c) Authorization.
(1) Corporate Action. Other than obtaining the waiver of the
right to notice and right of first refusal granted to each of the holders of
Series A, Series B, Series C and/or Series D Stock of the Company under Section
3.1 of the Second Amended and Restated Investors Rights Agreement, dated
February 27, 1998, as amended, by and among the Company and certain stockholders
of the Company (the "Rights Agreement"), which such waiver shall be obtained
prior to any borrowing hereunder and issuance of the Note, all corporate and
legal action on the part of the Company, its officers, directors and
stockholders necessary for the execution and delivery of this Agreement and the
Note, the sale and issuance of the Note and the performance of the Company's
obligations hereunder and under the Note, have been taken.
(2) Valid Issuance. The Note, any shares of Common Stock or
Preferred Stock issued upon conversion or exercise of the Note, and any shares
of Common Stock issued upon conversion of such Preferred Stock (collectively,
the "Securities"), when issued in compliance with the provisions of this
Agreement, the Note or the terms of the Common Stock or Preferred Stock, as the
case may be, will be validly issued, fully paid and nonassessable and will be
free of any liens or encumbrances, provided, however, that the Securities may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein, and as may be required by future changes in such laws.
(d) Government Consent, Etc. No consent, approval, order or
authorization of, or designation, registration, declaration or filing with, any
federal, state, local or provincial or other governmental authority on the part
of the Company is required in connection with the valid execution and delivery
of this Agreement, the Note, or the offer, sale or issuance of the Securities,
other than, if required, filings or qualifications under the California
Corporate Securities Law of 1968, as amended (the "California Law"), or other
applicable blue sky laws, which filings or qualifications, if required, will be
timely filed or obtained by the Company.
(e) Litigation. There is no action, suit, proceeding or arbitration
("Action") pending, and there is no Action, claim or investigation currently
threatened, against the Company, its activities, properties or assets, or
against any officer, director or employee of the Company in connection with such
officer's, director's or employee's relationship with or actions taken on behalf
of the Company. The Company is not a party to or subject to the provisions of
any material order, writ, injunction, judgment or decree of any court or
governmental agency or instrumentality and there is no Action or claim by the
Company currently pending or which the Company intends to initiate.
2
<PAGE> 3
(f) Taxes. The Company has fully and timely, properly and accurately
filed or obtained appropriate extensions for all tax returns and reports
required to be filed by it, including all federal, foreign, state and local tax
returns and estimates for all years and periods (and portions thereof) for which
any such returns, reports or estimates were due. All such returns, reports and
estimates were prepared in the manner required by applicable law. All income,
sales, use, occupation, property or other taxes or assessments due from the
Company have been paid. There are no pending assessments, asserted deficiencies
or claims for additional taxes that have not been paid. The reserves for taxes,
if any, reflected on the Company Financial Statements are adequate and there are
no tax liens on any property or assets of Company. There have been no audits or
examinations of any tax returns or reports by any applicable governmental
agency. No state of facts exists or has existed which would constitute grounds
for the assessment of any penalty or of any further tax liability beyond that
shown on the respective tax reports, returns or estimates. There are no
outstanding agreements or waivers extending the statutory period of limitation
applicable to any federal, state or local income tax return or report for any
period. All taxes which Company has been required to collect or withhold have
been duly withheld or collected and, to the extent required, have been paid to
the proper taxing authority.
(g) Capitalization.
(1) The entire duly authorized capital stock of the Company
consists of 45,000,000 shares of Common Stock, $0.001 par value, and 32,902,029
shares of Preferred Stock, $0.001 par value, of which 1,900,800 shares have been
designated Series A Stock, 3,064,102 shares have been designated Series B Stock,
7,900,117 shares have been designated Series C Stock and 20,037,010 shares have
been designated Series D Stock.
(2) Immediately prior to the Closing, 4,676,882 shares of
Common Stock, 1,900,800 shares of Series A Stock, 3,064,102 shares of Series B
Stock, 7,900,117 shares of Series C Stock and 16,726,133 shares of Series D
Stock will be issued and outstanding.
(3) Except for (i) the conversion privileges of the Series A,
Series B, Series C and Series D Stock, (ii) 5,401,512 shares of Common Stock
reserved for issuance pursuant to the Company's 1994 and 1998 Stock Option
Plans, as amended (the "Incentive Plan"), of which 2,614,749 shares are subject
to outstanding options and 2,786,763 shares are available for future grant,
(iii) options to purchase 47,000 shares of Common Stock of the Company issued
separately from the Incentive Plan, (iv) warrants to purchase 2,901,028 shares
of Common Stock issued to Allen & Company Incorporated, (v) warrants to purchase
an aggregate of 2,242,187 shares of Series D Stock issued to General Electric
Capital Corporation and NBC Multimedia, Inc., (vi) 4,377,782 shares of Common
Stock to be issued in connection with the Company's acquisition of
AreohveeOnline Partnership, d.b.a. musicvideos.com, and (vii) the rights
provided in the Rights Agreement, there are no other outstanding shares of
capital stock, options, warrants or rights or outstanding rights of first
refusal, preemptive rights or other rights, options, warrants, conversion
rights, or other agreements either directly or indirectly for the purchase or
acquisition from the Company of any shares of its capital stock.
3
<PAGE> 4
(4) All shares of the Company's capital stock have been duly
authorized, were validly issued and are fully paid and non-assessable.
(h) Disclosure. The Company has fully provided the Purchaser with
all information which the Purchaser has requested for deciding whether to
purchase the Note and all information which the Company believes is reasonably
necessary to enable the Purchaser to make such a decision. Neither this
Agreement nor any other statement or certificate made or delivered in connection
with the Agreement and the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein not misleading.
3. Representations and Warranties by the Purchaser. The Purchaser
represents and warrants to the Company as of the time of issuance of the Note as
follows:
(a) Investment Intent: Authority. This Agreement is made with the
Purchaser in reliance upon such Purchaser's representation to the Company,
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the Notes for investment for such Purchaser's own account, not as
nominee or agent, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act or the California Law. Purchaser has the full right,
power, authority and capacity to enter into and perform this Agreement and the
Agreement will constitute a valid and binding obligation upon Purchaser, except
as the same may be limited by bankruptcy, insolvency, moratorium, and other laws
of general application affecting the enforcement of creditors' rights.
(b) Securities Not Registered. Purchaser understands and
acknowledges that the offering of the Note pursuant to this Agreement will not
be registered under the Securities Act or qualified under the California law on
the grounds that the offering and sale of securities contemplated by this
Agreement are exempt from registration under the Securities Act and exempt from
qualification pursuant to section 25102(f) of the California law, and that the
Company's reliance upon such exemptions is predicated upon such Purchaser's
representations set forth in this Agreement. The Purchaser acknowledges and
understands that resale of the Securities may be restricted indefinitely unless
the Securities are subsequently registered under the Securities Act and
qualified under the California law or an exemption from such registration and
such qualification is available.
(c) No Transfer. Purchaser covenants that in no event will it
dispose of any of the Securities other than in conjunction with an effective
registration statement for the Securities under the Securities Act or pursuant
to an exemption therefrom, or in compliance with Rule 144 promulgated under the
Securities Act or to an entity affiliated with said Purchaser and other than in
compliance with the applicable securities regulation laws of any state.
(d) Knowledge and Experience. Purchaser (i) has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of such Purchaser's prospective investment in the Securities;
(ii) has the ability to bear the economic risks of such Purchaser's prospective
investment; (iii) has had all questions which have been asked by such Purchaser
satisfactorily answered by the Company; and (iv) has not been
4
<PAGE> 5
offered the Securities by any form of advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any such media.
4. Waiver of Right of First Refusal. Each of the undersigned holders of
Series A, Series B, Series C and/or Series D Stock of the Company hereby waives
its right to notice and right of first refusal (the "Waiver") granted under
Section 3.1 of the Rights Agreement, solely with respect to the sale and
issuance of the additional shares of stock issuable upon conversion of the Notes
being issued hereunder. The Waiver shall not apply to any other shares of stock
issued by the Company in connection with a subsequent equity financing.
Notwithstanding anything else to the contrary herein, any shares of Common Stock
or Preferred Stock issued upon conversion or exercise of the Note, and any
shares of Common Stock issued upon conversion of such Preferred Stock, shall
receive the same registration rights as the Registrable Securities (as such term
is defined in the Rights Agreement).
5. Miscellaneous.
(a) Waivers and Amendments. Any provision of this Agreement may be
amended, waived or modified upon the written consent of the Company and the
Purchaser.
(b) Governing Law. This Agreement and all actions arising out of or
in connection with this Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
conflicts of law provisions of the State of Delaware or of any other state.
(c) Entire Agreement. This Agreement together with the Exhibit A
attached hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
(d) Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to a Purchaser, at
the address or facsimile number of the Purchaser set forth below such party's
name on Exhibit A, or at such other address or number as the Purchaser shall
have furnished to the Company in writing, or (b) if to the Company, at 2700
Pennsylvania Avenue, Santa Monica, California 90404, telecopy: (310) 526-4400 or
at such other address or number as the Company shall have furnished to the
Purchasers in writing.
(e) Validity. If any provision of this Agreement or the Note shall
be judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
(f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.
5
<PAGE> 6
(g) Protection of Confidential Information. Confidential or
proprietary information disclosed by either party under this Agreement, as well
as the existence and terms of this Agreement (subject to Section 5(h) below),
shall be considered confidential information (the "Confidential Information")
and shall not be disclosed by the Company or any Purchaser to any third party.
The Company or any Purchaser shall immediately notify the other parties of any
information that comes to its attention which might indicate that there has been
a loss of confidentiality with respect to the Confidential Information. In the
event that the Company or any Purchaser is requested or becomes legally
compelled (by statute or regulation or by oral questions, interrogatories,
request for information or documents, subpoena, criminal or civil investigative
demand or similar process, including without limitation, in connection with any
public or private offering of the Company's capital stock) to disclose any of
the Confidential Information, such party (the "Disclosing Party") shall provide
the other parties (the "Non-Disclosing Parties") with prompt written notice of
that fact so that the other parties may seek (with the cooperation and
reasonable efforts of the Disclosing Party) a protective order, confidential
treatment or other appropriate remedy. In such event, the Disclosing Party shall
furnish only that portion of the Confidential Information which is legally
required and shall exercise reasonable efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information to the
extent reasonably requested by the Non-Disclosing Parties. The provisions of
this Section 5(g) shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by the parties
hereto with respect to the transaction contemplated hereby.
(h) Disclosure of Terms; Press Releases. Notwithstanding the
provisions of Section 5(g) above, from and after the Closing, the Company and
each Purchaser may disclose the existence of this Agreement and Purchasers'
investment in the Company solely to such party's investors, investment bankers,
lenders, accountants, legal counsel, business partners, and bona fide
prospective investors, employees, lenders and business partners, in each case
only where such persons or entities are under appropriate nondisclosure
obligations. The Company shall not issue any press release or make any other
announcement to the general public or in any professional or trade publication
regarding this Agreement or any of the terms hereof without the prior written
consent of each of the Purchasers, which consent may be withheld at the sole
discretion of the Investors. If the Company or any Purchaser determines that any
disclosure not otherwise authorized by this Agreement is required by law or
regulation, then the provisions of Section 5(g) regarding disclosure of
Confidential Information by a Disclosing Party shall govern.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Note Purchase Agreement
dated February 15, 1999, to be duly executed and delivered by their proper and
duly authorized officers as of the date and year first written above.
COMPANY:
LAUNCH MEDIA, INC., a Delaware
corporation
By: /s/ JEFFREY MICKEAL
--------------------------------
Jeffrey Mickeal
Chief Financial Officer
PURCHASERS:
AVALON TECHNOLOGY LLC
By: /s/ RICHARD D. SNYDER
--------------------------------
Name: Richard D. Snyder
--------------------------------
Title: President
--------------------------------
GORAN ENTERPRISES LIMITED
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
<PAGE> 8
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
PURCHASERS AMOUNT OF NOTE
---------- --------------
<S> <C>
Avalon Technology LLC $1,000,000
Goran Enterprises Limited 500,000
----------
TOTAL: $1,500,000
</TABLE>
<PAGE> 9
EXHIBIT B
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
<PAGE> 10
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$__________ February _____, 1999
Santa Monica, California
FOR VALUE RECEIVED, Launch Media, Inc., a Delaware corporation
("Company"), promises to pay to ____________________ (the "Holder"), or its
registered assigns, the principal sum of $__________, or such lesser amount as
shall then equal the outstanding principal amount hereof, together with interest
from the date of this Note on the unpaid principal balance at a rate equal to
eight and one-half percent (8.5%) per annum. The interest rate shall be computed
on the basis of the actual number of days elapsed and a year of 365 days. All
unpaid principal, together with the balance of unpaid and accrued interest and
other amounts payable hereunder, if not converted by the provisions of Section 5
below, shall be due and payable on demand at any time after the earlier of (i)
February 29, 2000 (the "Maturity Date"), or (ii) when such amounts are declared
due and payable by the Holder upon or after the occurrence of an Event of
Default (as defined below).
The following is a statement of the rights of the Holder and the
conditions to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees:
1. Definitions. As used in this Note, the following capitalized terms have
the following meanings:
(a) "Obligations" shall mean all principal and accrued interest due
hereunder.
(b) "Conversion Shares" means (i) if the Company consummates the IPO
(as defined in Section 5(a) below) prior to August 31, 1999, shares of Common
Stock, or (ii) if the Company does not consummate the IPO by August 31, 1999, or
in the event of a merger or consolidation of the Company into or with another
corporation in which the stockholders of the Company shall own less than fifty
percent (50%) of the voting securities of the surviving corporation or the sale,
transfer or other disposition (but not including a transfer or disposition by
pledge or mortgage to a bona fide lender) of all or substantially all of the
assets of the Company (an "Acquisition Transaction"), shares of the Company's
Series D Stock.
(c) "Senior Indebtedness" shall mean, unless expressly subordinated
to or made on a parity with the amounts due under this Note, the principal of
(and premium, if any), unpaid interest on and amounts reimbursed, fees,
expenses, costs of enforcement and other amounts due in connection with, (i)
indebtedness of Company, or with respect to which
1
<PAGE> 11
Company is a guarantor, to banks, commercial finance lenders, insurance
companies, leasing or equipment financing institutions or other lending
institutions regularly engaged in the business of lending money (excluding
venture capital, investment banking or similar institutions which sometimes
engage in lending activities but which are primarily engaged in investments in
equity securities), which is for money borrowed, or purchase or leasing of
equipment in the case of lease or other equipment financing, by Company, whether
or not secured, and (ii) any debentures, notes or other evidence of indebtedness
issued in exchange for such Senior Indebtedness, or any indebtedness arising
from the satisfaction of such Senior Indebtedness by a guarantor.
2. Events of Default. The occurrence of any of the following shall
constitute an "Event of Default" under this Note:
(a) Failure to Pay. Company shall fail to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due and such payment
shall not have been made within fifteen (15) days of Company's receipt of
Holder's written notice to Company of such failure to pay;
(b) Voluntary Bankruptcy or Insolvency Proceedings. The Company
shall (i) apply for or consent to the appointment of a receiver, trustee,
liquidator or custodian of itself or of all or a substantial part of its
property, (ii) be unable, or admit in writing its inability, to pay its debts
generally as they mature, (iii) make a general assignment for the benefit of its
or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v)
become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or
(c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
thirty (30) days of commencement.
3. Rights of Holder Upon Default. Upon the occurrence or existence of any
Event of Default and at any time thereafter during the continuance of such Event
of Default, Holder may declare all outstanding Obligations payable by Company
hereunder to be immediately due and payable without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived. In
addition to the foregoing remedies, upon the occurrence or existence of any
Event of Default, Holder may exercise any other right, power or remedy granted
to it or otherwise permitted to it by law, either by suit in equity or by action
at law, or both.
2
<PAGE> 12
4. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of Company's Senior
Indebtedness.
(a) Insolvency Proceedings. If there shall occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization,
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution,
liquidation, or any other marshaling of the assets and liabilities of Company,
no amount shall be paid by Company in respect of the principal of, interest on
or other amounts due with respect to this Note at the time outstanding, unless
and until the principal of and interest on the Senior Indebtedness then
outstanding shall be paid in full.
(b) Subrogation. Subject to the payment in full of all Senior
Indebtedness, the holder of this Note shall be subrogated to the rights of the
holder(s) of such Senior Indebtedness (to the extent of the payments or
distributions made to the holder(s) of such Senior Indebtedness pursuant to the
provisions of this Section 4) to receive payments and distributions of assets of
Company applicable to the Senior Indebtedness. No such payments or distributions
applicable to the Senior Indebtedness shall, as between Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by Company to or on account of this Note; and for
purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness to which the Holder would be entitled except for the
provisions of this Section 4 shall, as between Company and its creditors, other
than the holders of Senior Indebtedness and the Holder, be deemed to be a
payment by Company to or on account of the Senior Indebtedness.
(c) No Impairment. Nothing contained in this Section 4 shall impair,
as between Company and Holder, the obligation of Company, subject to the terms
and conditions hereof, to pay to the Holder the principal hereof and interest
hereon as and when the same become due and payable, or shall prevent the Holder
of this Note, upon default hereunder, from exercising all rights, powers and
remedies otherwise provided herein or by applicable law.
(d) Reliance of Holders of Senior Indebtedness. Holder, by its
acceptance hereof, shall be deemed to acknowledge and agree that the foregoing
subordination provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.
5. Conversion.
(a) Conversion into the Conversion Shares. All of the principal and
accrued interest then outstanding on the Note shall be automatically converted
into the Conversion Shares at the earlier of (1) the closing of an underwritten
public offering of Common Stock pursuant to a
3
<PAGE> 13
effective registration statement under the Securities Act of 1933, as amended,
with a sales price per share of Common Stock (as adjusted for combinations,
stock dividends, subdivisions or split-ups) of at least $2.00 and with aggregate
gross proceeds to the Company, at the public offering price, of at least
$15,000,000 (the "IPO"), (2) immediately prior to the closing of an Acquisition
Transaction or (3) February 29, 2000. If such IPO has already occurred by August
31, 1999, the Company shall take all actions necessary to authorize shares of
its Common Stock in sufficient quantity to permit the conversion required by
this paragraph. If the IPO has not occurred by August 31, 1999, the Holder shall
at any time between August 31, 1999 and February 29, 2000 have the option to
convert the Note into shares of the Company's Series D Stock in accordance with
the provisions of this Section 5(a). If the IPO has not occurred by August 31,
1999 or the Company enters into a definitive Agreement providing for an
Acquisition Transaction, the Company shall take all actions necessary to
authorize shares of its Series D Stock in sufficient quantity to permit the
conversion required by this paragraph. If such conversion occurs as part of the
IPO, the price per share for the conversion shall be eighty percent (80%) of the
price per share of the Common Stock sold in the IPO. If such conversion occurs
without completion of the IPO or in connection with an Acquisition Transaction,
the price per share for the conversion shall be $1.53 per share, adjusted for
any stock splits, dividends or combinations made in the Common Stock of the
Company after the date hereof.
(b) Notice Regarding IPO. On the closing of the IPO, written notice
shall be delivered to the Holder of this Note at the address last shown on the
records of Company for the Holder or given by the Holder to Company for the
purpose of notice or, if no such address appears or is given, at the place where
the principal executive office of Company is located, notifying the Holder of
the terms and conditions of the IPO, the conversion price, the principal and
accrued interest outstanding on the Note, the date on which any such conversion
will occur and calling upon such Holder, to surrender to Company, in the manner
and at the place designated, the Note.
(c) Mechanics and Effect of Conversion. No fractional shares of
Common or Preferred Stock shall be issued upon conversion of this Note. Upon the
conversion of all of the principal and accrued interest outstanding under this
Note, in lieu of Company issuing any fractional shares to the Holder, Company
shall pay to the Holder the amount of outstanding principal that is not so
converted. Upon full conversion of this Note, Company shall be forever released
from all its obligations and liabilities under this Note.
6. Successors and Assigns. Subject to the restrictions on transfer
described in Section 8 below, the rights and obligations of Company and the
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
7. Waiver and Amendment. Any provision of this Note may be amended, waived
or modified upon the written consent of Company and the Holder.
8. Transfer of this Note. This Note may not be transferred in violation of
any restrictive legend set forth hereon. Each new Note issued upon transfer of
this Note shall bear a
4
<PAGE> 14
legend as to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the opinion of counsel for Company such
legend is not required in order to ensure compliance with the Act. Company may
issue stop transfer instructions to its transfer agent in connection with such
restrictions. Prior to presentation of this Note for registration of transfer,
Company shall treat the registered holder hereof as the owner and holder of this
Note for the purpose of receiving all payments of principal and interest hereon
and for all other purposes whatsoever, whether or not this Note shall be overdue
and Company shall not be affected by notice to the contrary.
9. Assignment by Company. Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by Company, without the prior written consent of
the Holder.
10. Treatment of Note. To the extent permitted by generally accepted
accounting principles, Company will treat, account and report the Note as debt
and not equity for accounting purposes and with respect to any returns filed
with federal, state or local tax authorities.
11. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the records maintained by
the Company. Any party hereto may by notice so given change its address for
future notice hereunder. Notice shall conclusively be deemed to have been given
when received.
12. Payment. Payment shall be made in lawful tender of the United States.
13. Expenses; Waivers. If action is instituted to collect this Note,
Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with such action.
Company hereby waives notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor and all other notices or demands
relative to this instrument.
14. Governing Law. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
5
<PAGE> 15
IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.
LAUNCH MEDIA, INC.
a Delaware corporation
By:
-------------------------------------
Title:
-------------------------------------
6
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Launch Media,
Inc. on Form SB-2 of the form of our report to be dated February 5, 1999 and
which will be issued upon completion of the one for five reverse stock split, on
our audits of the financial statements of Launch Media, Inc. as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998. We also consent to the references to our firm under the captions "Summary
Financial Information," "Selected Financial Data" and "Experts".
/s/ PricewaterhouseCoopers LLP
Woodland, California
February 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement, on Form SB-2 of our report dated January 18, 1999 on
the balance sheets of Areohvee Online Partnership dba Musicvideo.com as of
December 31, 1997 and 1998, and the related statements of operations, partners'
deficiency and cash flows for the period from inception (August 1, 1997)
through December 31, 1997 and the year ended December 31, 1998, which appear in
the Prospectus. We also consent to the reference to our Firm under the heading
"Experts" in the Prospectus.
/s/ MOSS ADAMS LLP
-----------------------------
Costa Mesa, California
February 15, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,734,864
<SECURITIES> 4,992,721
<RECEIVABLES> 890,309
<ALLOWANCES> 321,719
<INVENTORY> 124,476
<CURRENT-ASSETS> 8,010,790
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37,875,805
0
<COMMON> 935
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<SALES> 1,725,998
<TOTAL-REVENUES> 5,014,161
<CGS> 3,185,319
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<INCOME-TAX> 3,596
<INCOME-CONTINUING> (13,418,761)
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<NET-INCOME> (13,418,761)
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